Broker opinions are not qualified appraisal says IRS

If you have been a real estate appraiser for any length of time, you have likely done appraisals for estate purposes such as date of death, gifting or trust.  Not long ago, the IRS accepted valuations from any “qualified” source including real estate brokers or salespersons who provide the infamous Brokers Opinion of Value (BPO.)

The BPO used to be accepted as an “appraisal,” but after the housing market crash someone at the Feds (finally) looked up the legal definition of  what an appraisal is!  Funny this has existed since 2006 and many are just not realizing this regulation exists.

The key IRS regulation is Internal Revenue Bulletin:  2006-46 

Here are a few accepted definitions of the term “appraisal”

• , , , “conducted by a qualified appraiser in accordance with generally accepted appraisal standards” , , , ” Internal Revenue Bulletin:  2006-46
• “A valuation or an approximation of value by impartial, properly qualified persons; the process of determining the value of an asset or liability, which entails expert opinion rather than express commercial transactions”   West’s Encyclopedia of American Law, edition 2. Copyright 2008 The Gale Group, Inc.
• “A determination of the value of something, such as a house, jewelry, or stock. A professional appraiser — a qualified, disinterested expert –” , , , Nolo’s Plain-English Law Dictionary
• “a written statement independently and impartially prepared by a qualified appraiser setting forth an opinion as to the market value of an adequately described property as of a specific date(s), supported by the presentation and analysis of relevant market information”   FDIC Law, Regulations Part 323 appraisals 

The above are just a sample of what can be found in a Google Search of “appraisal”.   Accepted definitions of “appraisal” contains three key points:

• The appraiser must be qualified (by experience and education) *
• The appraiser must be a neutral third party
• The appraisal must meet some accepted standard (most often Uniform Standards of Professional Appraisal Practice USPAP.)

Why Isn’t an experienced broker qualified to provide an appraisal?

Good question. Fair question. I have broker friends who can provide a very well supported opinion of value; by most measures the broker can be a qualified appraisal and provide a qualified appraisal. According to the IRS the BPO is not performed in any “acceptable standard” such as USPAP, and the real estate brokers are often not impartial.

Why can’t a broker be impartial?  The real estate broker or brokerage may at some point have provided a commission based service for the principles or property of the estate, or may do so in the future.  Its a sign of the times; the entire regulatory industry is building firewalls between commission based sales and risk management in property valuation.    According to regulators, you can’t provide a commission based service and be impartial.   There are some exceptions for direct lenders that have significant “skin in the game”, but that is not what were talking about in estate appraisal work.

Can I be an appraiser and a real estate broker?

Yes.  I know a few very good real estate appraisers who are also very good real estate brokers.  No problem here, if they are smart enough to never, ever, to mix up appraisal clients with brokerage clients.  If an appraisal performs a broker service for the principles of a transaction, the smart broker will decline to provide any appraisal services, and vice-versa.

The “official” USPAP rule (born from the current banking crisis) is that an appraiser must disclose any transaction that involved the principles or property within the prior 3 years. The smart play is to never mix clients or properties between appraisal and brokerage, and my smart broker / appraiser buddies follow this golden rule.

But humans are not always smart, are they?  I just recently had a fairly new appraiser mention to me he hands out his real estate sales person cards while at the property doing an appraisal.  Is there a definite, black and white rule against doing this?  Most people at the regulatory agencies say “no, but its not a good idea.”   Just realize that many licenses have been suspended and revoked for the appearance of impropriety.

If you work in the real estate industry, and are (truthfully) not sure if you are doing something wrong then you need more training from experienced brokers and appraisers who work in main-stream companies (not your uncle John’s buddy at the corner appraisal and real estate shop!)  Join the National Association of Realtors or the Appraisal Institute and spend some time networking with these folks.

If these experienced, quality people tell you that something you are doing is not a good idea, and you argue with them and ignore them, , , I can’t help you.   But, I am reminded of comedian Ron White statement: “you can’t fix stupid!” 

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