When I was researching this topic, our chief appraiser gave me a couple stories to illustrate it. I’ll use these stories as we go along.
A few weeks ago, he received an assignment to appraise a property for a pre-foreclosure. In the assignment conditions, it explicitly stated not to have contact with the homeowner.
He inspected the property from his car, so he wouldn’t draw unwanted attention. As he was finishing, the homeowner came out and asked Jared what he was doing. Instead of getting into it with the homeowner, Jared started his car and left.
That might have been the end of the story. But, the homeowner jumped in his car and followed Jared for several blocks before giving up the chase.
This is a reminder of the risks of appraising, especially in sensitive situations. It’s also a great illustration of confidentiality in appraising. If Jared had engaged the homeowner, he would have violated the terms of the assignment.
There are two reasons that must exist for appraisal data to be confidential. You must have both to be confidential.
- The client (the lender) specified that the appraisal was confidential. And although the homeowner is a party to the loan, he wasn’t part of the assignment; and
- The data is not available from a public source.
Confidentiality in USPAP
If you read through the FAQ for the Ethics Rule in USPAP you’ll see a section on what is confidential and what is not. The Appraisal Foundation issues guidance for appraisers. For a few years, they have included information about what appraiser can, and cannot, share.
Let’s review some of the information about confidentiality in appraising.
Physical Characteristics and Assignment Results
An easy way to determine what appraisers can (and cannot) share is to categorize the data. You can sort information into two buckets: Physical Characteristics and Assignment Results.
Let’s say you’re asked to provide a copy of a workfile to an attorney for a case. He wants you to work as an expert witness to strengthen his client’s valuation results. As you think about what he’s asking, you think through several implications of his request.
In your workfile, there could be confidential information from other assignments. You have an obligation to safeguard private information. As stated in the confidentiality section of the ETHICS RULE,
“An appraiser must protect the confidential nature of the appraiser-client relationship.“
(emphasis, The Appraisal Foundation).
But the question is which parts of your workfile are confidential and which can are not. Here’s a quick tip: Physical Characteristics are not confidential and Assignment Results are.
Physical Characteristics are usually not confidential because they can are observable or measurable. Physical Characteristics may even be available from a public source. Assignment Results are confidential because they involve professional judgment and analysis.
If you want to share a full workfile, you have to contact your client(s) to get permission. Otherwise, sharing your results violates USPAP guidelines. If you can’t get permission to share confidential information, you must decline the assignment. Or you can provide a sample report or a redacted version.
USPAP states you cannot disclose assignment results to anyone other than
- the client;
- parties specifically authorized by the client;
- state appraiser regulatory agencies;
- third parties as may be authorized by due process of law;
- or a duly authorized professional peer review committee except when such disclosure to a committee would violate applicable law or regulation.
What are some examples of physical characteristics?
Remember, Physical Characteristics can be observed or measured. For example, the number of bedrooms or square footage. Physical characteristics are “facts to be found,” which are not open to interpretation.
Other Physical Characteristics include
- square footage
- number and type of rooms
- dates of construction or improvement
- wall colors
- bathroom fixtures
- heat or air conditioning
Assignment Results are analyses, opinions, or conclusions based on appraiser knowledge. If you perform a study about the effect of a feature on a property, your conclusions are confidential. If a home has functional problems you determine affect value, it is an assignment result.
To illustrate the difference between Physical Characteristics and Assignment Results, here’s another story.
Jared received an assignment to appraise a home in a small town in Utah. When he got to the home for the inspection, he found that it backs to a busy railroad. It also had no covered parking. He finished his report and provided it to the lender. The appraisal concluded that the value of the property was less than the listing price.
Several days later, he got a call from the listing agent asking about the appraisal. He didn’t share any assignment results with the listing agent. But he did share that some of the property’s unique features could affect value. The fact that the yard backed onto a busy railroad track is an observable fact. As is the fact that there is no covered parking.
The listing agent chose the “comparables” in her CMA to justify the seller’s asking price. She didn’t take into account the obsolescences in the property. She knew the property was recently remodeled and priced it to recoup some of those costs. But she missed that the properties she chose all had covered parking. She also didn’t account for the railroad tracks.
Jared could share that the external obsolescence and functional obsolescence affected the appraisal. He could not share that the effect was negative and the extent to the negative effect. Those were the results of his analysis and were confidential. If the listing agent wanted to see the appraisal, she would have to get permission from the lender.
Sometimes, situations like this become a gray area. Participants [in the transaction] want to understand the steps you take. They’re interested in your analysis, the results, and the impact on the value opinion. But you need to safeguard the client’s confidentiality requirements.
It’s important to remember the Confidentiality section of the ETHICS rule.
- An appraiser must protect the confidential nature of the appraiser-client relationship.
- An appraiser must act in good faith with regard to the legitimate interests of the client in the use of confidential information and in the communication of assignment results.
- An appraiser must be aware of and comply with, all confidentiality and privacy laws and regulations applicable in an assignment.
You may be wondering how confidentiality affects appraisers in the same office. We will cover this topic in a future post. In the meantime, refer to FAQ 50 – 78 in the current edition of USPAP.
*The properties, agents, appraisers and situations depicted in this post are illustrations. Any similarity to actual persons living or dead, or properties, standing or demolished, is not entirely coincidental.