Excerpt from the Journal of Advanced Appraisal Studies

Mark Grove, ASA, AAA wrote an article on ethics for the Journal of Advanced Appraisal Studies. The article entitled Standards of Protocol discusses the perpetuity principle, offhand opinions, advocacy, disinterest and self control.

The following is an excerpt from the article on the Perpetuity Principle. To order the Journal of Advance Appraisal Studies, click HERE.

The Perpetuity Principle

Appraisers, be advised: Any property that you appraise for a client cannot be acquired by you, or in your interest in perpetuity due to the inherent creation of a permanent conflict of interest. To be perfectly clear, “In your interest” means that you cannot have another party (i.e. friend, relative, etc.) acquire the subject property for the betterment of yourself. To take it a logical step further, the spouse, partner, or family member of the appraiser cannot acquire the subject property either because perception could be construed.

The Perpetuity Rule does have its limitations though. It desists once the subject property is consigned to public auction or if the ownership of the property has changed hands outside the dominion of the relevant client(s). To clarify, after the appraiser’s client has disposed of the subject property in the marketplace then that property is no longer constrained by the rule.
Any appraiser that does not adhere to the Perpetuity Principle is unprofessional, unethical, and culpable. The most common re-occurring difficulty with this particular ethical violation is that the public cannot distinguish the difference between a lay appraiser and an accredited appraiser. Appraisers can obviate this problem at the outset by including in their standard protocol the mention of the Perpetuity Rule.
In a perfect world all appraisers wear but one hat, but the world is not perfect. Many appraisers were antiques or art dealers long before earning the mantle of an accredited appraiser, and by habit or necessity continue their mercantilism. No one is suggesting that two-hat appraisers forego their primary livelihood as a dealer, but they need to be aware of the perception of the inherent conflict of interest if they wear more than one hat. No matter how literal the shopkeeper-appraiser might follow the rule, any reasonable mind will continue to perceive incongruity.

So what is a two-hat appraiser to do?

By mentioning the Perpetuity Rule on first contact with each pros-pective client, they distinguish themselves as impartial and apart from the riffraff of lay appraisers-shopkeepers by setting parameters for the client: sell it or have it appraised. Prospective clients should be informed that one or the other action is acceptable, but not both; this point must be made perfectly clear to limit the perception of a conflict of interest.

If the client’s ultimate decision is to sell the property, the client has the responsibility to set the price. When a seller does not know what price to ask, then he has two options: 1. do his own research, or 2. hire an appraiser. If he hires you, then you cannot buy the property.

Offering cash or bartering for a property is in effect an appraisal be-cause that action sets a value which is a de facto appraisal and thus a conflict of interest. Sophisticated clients will understand and appreciate the confines of this dilemma. Other clients will likely find resolution elsewhere because they are too lazy to do the legwork or too cheap to pay the appraisal fee. Naturally the dealer suffers a potential loss as a result of this ethical barrier and one of his competitors will benefit from what was initially offered to him, but alas, from this there is no escape.

The principled may, however, take comfort in the fact that they are not suffering the consequences of being ethical alone. By extension, consultants are also ethically restricted by The Perpetuity Principle if by no other reason than the incumbent fiduciary responsibility of a hired adviser. By definition a consultant is anyone that provides advice and an appraiser is anyone that renders a numerical opinion of value. Sometimes the two coincide. Most appraisers also function as consultants when the situation warrants.

So what is the worst that might happen if the Perpetuity Principle is violated?

Real property appraisers can lose their license, have their credentials revoked by their parent organizations, and lose the privilege to practice before the IRS. Although personal property appraisers are not licensed, they too can have their credentials revoked and be refused by the IRS.

And then there is always the threat of litigation.

In the present litigious climate it doesn’t seem to matter if the ac-cepted price is set by the seller or offered by the buyer, one can be sued in either case. According to an Associated Press report in October of 2000, an Ohio antiques dealer who sold a painting for $7500 to a New York City art dealer, filed a lawsuit when he discovered that the art dealer had sold the painting a short time later at major auction house for $140,000. The plaintiff sought $50,000 in damages claiming that the defendant had superior knowledge. Superior knowledge?

Isn’t that how all antiques dealers make their living, by their wits, their superior knowledge, memory, and a bit of luck? Of course it is, as it is with any trade or profession. Everyone is responsible for their own actions. Sellers must to do their own homework or pay someone else to do the research for them. This is particularly true for dealers. There are no excep-tions. The antiques dealer didn’t suffer hard luck. He suffered his own negligence. Any reasonable mind would think that a dealer would have the wherewithal to leave no stone unturned. Apparently that is exactly what happened; the art dealer hefted stone, the seller did not. As usual, superior knowledge leads to a superior return.

Unfortunately, sometimes it also leads to frivolous lawsuits. Perhaps this is a symptom of a general lack of accountability in our society and why so many have their hands outstretched for what they perceive to be their entitlement. Appraisers should take note of this: If a stressful, expensive legal clash like this can happen between established dealers, then surely such a pitfall is a potential hazard for those of us appraisers who also earn income from the sale of antiques or art.

In a perfect world appraisers would wear only one hat, everyone would take possibility for their own actions, and our only entitlements would be constitutionally based. Therefore we appraisers should adopt a standard protocol: mention to every prospective client on first contact that no appraiser is permitted to purchase what he appraises because it would be a conflict of interest to do so.