ALJDEC decisions subject to certification as final

08F-2452-BOA · Board of Appraisal · 2008-10-09

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

HEARING: September 23, 2008 at 9:00 a.m. APPEARANCES: The Arizona State Board of Appraisal appeared through Jeanne M. Galvin, Esq., Assistant Attorney General; Respondent Dana A. Miller appeared through Christopher J. Charles, Esq., Combs Law Group, P.C. ADMINISTRATIVE LAW JUDGE: Diane Mihalsky _____________________________________________________________________

FINDINGS OF FACT Background and Procedure 1. The Arizona State Board of Appraisal (“the Board”) issued Certified Residential Appraiser Certificate No. 20414 to Respondent Dana A. Miller in 1991. Certificate No. 20414 is due to expire on August 31, 2010.[1] 2. Ms. Miller prepared an appraisal review of an appraisal report originally prepared by Jaime Topete of a residential property located at 3801 E. Lincoln Drive in Paradise Valley (“the Lincoln property”), which review had an effective date of December 19, 2006. 3. Ms. Miller prepared an appraisal report of a property located at 44028 N. Spur Cross Rd. in Cave Creek (“the Spur Cross property”), which report had an effective date of May 7, 2007. 4. On July 26, 2007, the Board received a complaint from Roger E. Beagle, Sr. regarding Ms. Miller’s appraisal review of the Lincoln property. 5. Mr. Beagle is a certificated appraiser who on occasion works for the Board as a contract investigator. He is one of Ms. Miller’s competitors. Mr. Beagle alleged that Ms. Miller had violated the Uniform Standards of Professional Appraisal Practice (“USPAP”) by “ignor[ing] facts in the report that were misleading to the client,” including the Lincoln property’s MLS listing history, which had resulted in an overstated estimated value of the property. 6. On July 30, 2007, the Board received an anonymous complaint that Ms. Miller’s appraisal report for the Spur Cross property had ignored MLS listing history for the subject, included inappropriate comparables, and incorrectly used the cost approach. 7. The Board opened investigations into both complaints and designated the complaint concerning the Lincoln property as Case No. 2452 and designated the Spur Creek property as Case No. 2457. The Board assigned both complaints to contract investigator Linda S. Beatty, who has been a certified general appraiser since 1991. On December 18, 2007, Ms. Beatty submitted investigative reports in both cases. 8. On August 5, 2008, the Board issued a Complaint and Notice of Public Hearing, summarizing Ms. Beatty’s findings. The Complaint charged that Ms. Miller had violated A.R.S. § 32- 3635 by failing to comply with USPAP (2006 Edition) Standard Rules (“SR”) 3-1(c), 3-1(f), and 3-2(d) and Standards Ethics Rule – Conduct in the Lincoln property appraisal review and with violations of SR 1-1(a), 1-1(b), 1-1(c), 1-4(a), 1- 4(b)(ii), 1-4(b)(iii), 2-1(a), and 2-2(x), and Standards Ethics Rule – Conduct in the Spur Cross appraisal. 9. Ms. Miller filed a motion to dismiss under A.A.C. R4-46-301 because Mr. Beagle’s and the anonymous complaints did not identify the specific statutes or regulations that Ms. Miller allegedly had violated. The Administrative Law Judge denied that motion to dismiss but allowed Complainant a brief continuance to allow her to attend the scheduled hearing. 10. A hearing was held on September 23, 2008. The Board presented the testimony of its Executive Director Deborah G. Pearson and Ms. Beatty and had admitted into evidence 11 exhibits. Ms. Miller testified on her own behalf and had admitted into evidence two exhibits. Additional Evidence Case No. 3452 (the Lincoln property) 11. The Lincoln property was located in a neighborhood where lots are large, approximately an acre, in one of the more desirable and expensive neighborhoods in the Phoenix metropolitan area. The Lincoln property was located on the corner of Lincoln, an arterial street which carries approximately 35,000 vehicles per day, and 37th Place. The residence on the property was built in 1975. It has a flat built-up roof. 12. Ms. Beatty testified that a review appraiser has been retained to verify information in an appraisal report and to provide a second opinion on value. USPAP SR 3 governs appraisals. 13. Ms. Miller testified that an appraisal review requires the reviewer to accept certain assumptions and take the original appraiser’s work for certain things, such as square footage, measurements, interior conditions, and room count. The reviewer does not actually inspect the property. The review appraiser gets the same fee regardless of whether she agrees or disagrees with the original appraisal report. 14. Ms. Miller testified that most of her clients are appraisal management companies. The assignment to review Mr. Topete’s appraisal of the Lincoln property came from I-Mortgage Services. 15. Ms. Miller testified that I-Mortgage had a full-time review staff in March 2007, which completed the review of the Lincoln property appraisal. She had not meant to be misleading. Although the property was worth more than $1 million, it was not complex. 16. Ms. Beatty testified that lenders usually reviewed appraisal reports for compliance with underwriting guidelines, not with USPAP. Exposure Time on the Market for the Subject and Comparables 17. Mr. Topete’s appraisal report stated that marketing times for the neighborhood were under 90 days and that property values appeared to be increasing.[2] Ms. Miller’s review appraisal agreed with this assessment.[3] Neither the appraisal report nor Ms. Miller’s review appraisal estimated exposure time. 18. Ms. Beatty testified that appraisers typically base marketing time on the time comparable sales and the subject property had been on the market. The subject property had been on the market for more than nine months.[4] The comparable sales cited in the appraisal report had been on the market between 142 and 293 days. 19. Ms. Beatty testified that extended marketing time typically indicates an over-supply of properties on the market. A motivated seller usually will reduce his asking price if his property remains unsold for an extended period. 20. In the appraisal and review appraisal of the Lincoln property, Mr. Topete and Ms. Miller had stated that the subject property was under contract at the time of the appraisal for $1,750,000, after being listed for nine months at $1,375,000 and having been reduced to $1,200,000, and that the earlier listing had been canceled. Mr. Topete had merely stated in the appraisal report that “Purchase contract appears typical for market.” Neither he nor Ms. Miller had discussed the discrepancy between the purchase price and the canceled list price. 21. Ms. Beatty testified that it was unreasonable to think that a property will sell for $600,000 more than the seller had been asking. Although she had seen sales for more than the asking price in the hot market of 2004-2005, generally the sales had occurred the first day that the property had been placed on the market. In this case, the sale price that was $600,000 more than the price at which the property had been listed for months, without a sale, was a “red flag” for possible mortgage fraud. 22. Ms. Beatty testified that USPAP required appraisers to include exposure time on their reports and reviews. Exposure time is a retrospective value that states how long properties have been on the market. In contrast, “marketing time” is a prospective estimate of how long the property will take to sell. USPAP does not require appraisers to estimate marketing time. 23. Ms. Miller testified that her estimation of marketing time in the neighborhood of less than 3 months was accurate. She prepared the appraisal report at the time when “the housing market was really hopping.” Although bigger, more expensive homes may require slightly more time to market, it had been reasonable to say that marketing time was less than 3 months on her review appraisal report. 24. Ms. Miller could not point to anything in her work file that supported her characterization of the market as “really hopping” at the time the Lincoln property had been appraised. She testified that she had thrown out some documents and had replacements. She also admitted, however, that she was required to retain her original work file. 25. Ms. Beatty opined that, by failing to explain the difference between the contract and listing prices, Ms. Miller had violated USPAP SR 3-1(f).[5] Quality of Construction 26. The appraisal report described the improvements on the subject property as “good quality construction, good condition and highly upgraded.”[6] In the cost approach, the report cited the Marshal & Swift Residential Estimator 7 and rated the improvements as “xclnt.”[7] Ms. Beatty testified that a review appraiser was required to verify this information. 27. Ms. Beatty testified that the subject has a flat, built-up roof; if it had undergone significant interior renovations, she would have expected the façade to have been updated. Ms. Beatty testified that, based on her inspection of the exterior of the property and information from the prior and current listing agents, the subject was mostly original and in need of significant updating. The current listing agent reported an estimated cost of several hundred thousand dollars to update the property to current Paradise Valley standards. 28. Ms. Miller testified that, from the street, the Lincoln property was a stucco house with a built-up roof and a 3-car garage. Although the exterior was not updated, it was maintained. 29. Ms. Beatty testified that, if the subject had not been upgraded, the appraisal’s use of comparables, some of which had been upgraded, would overstate the subject’s value. She opined that, in failing to perform or document a data search for accuracy of the data in the appraisal report, Ms. Miller violated USPAP SR 3-1(c)[8] and the Conduct provision of the Ethics Rule.[9] Location on Lincoln Drive 30. Ms. Miller’s review noted that the appraisal report had made no adjustment for the subject being located on a busy street. She also noted that no adjustment had been made for having a view of city lights.[10] 31. Ms. Beatty testified that Ms. Miller’s notation was inadequate. Typically, a review appraiser should follow up on the effect of the noted condition, especially if it could lessen the subject’s value. For example, the reviewer should have noted that she had spoke to listing agents or verified the effect of traffic. Similarly, if the view warranted an upward adjustment, she should have noted further inquiry. Ms. Beatty testified that Ms. Miller’s failure to consider the effect of traffic on the subject property’s value violated USPAP 3-1(f). 32. Ms. Miller testified that the Lincoln property’s side was against Lincoln Drive. Its driveway was off 37th Place. There is a fairly low speed limit along this section of Lincoln Drive, 35 mph, which is strictly enforced. Although she should have mentioned this in her review appraisal, it did not affect value. Lenders request that factors that do not require more than 5% adjustment in value not be mentioned. In higher end homes, customers do not mind traffic so much because of the “show off factor.” 33. Ms. Beatty opined that, in failing to consider the subject’s location on an arterial street in the Sales Comparison Approach, Ms. Miller violated USPAP SR 3-1(f). Inconsistencies between and Deficiencies in Cost and Comparable Sales Approaches 34. The appraisal report estimated that the site value of the subject was $1,250,000. Based on the size of the site, the value in the cost approach was $29/square foot.[11] In the comparable sales approach, one of the comparable sales was situated on a significantly larger site, but the appraisal report had adjusted the price only $1/square foot.[12] 35. Ms. Beatty testified that different approaches should be at least somewhat consistent. If one of the comparable sales were significantly larger, an adjustment of $1/square foot was unsupported. One would expect the adjustment based on the site value of the comparable sale to be at least 50-70% of the subject’s in the cost approach. Ms. Miller had not addressed the disparity in her review. Her failure was a violation of SR 3-1. 36. With respect to Mr. Topete’s analysis on the cost approach, Ms. Miller testified that the homes in the neighborhood were on large acre lots. Many of the homeowners did not use their whole lot; for example, the subject had a block wall on its acreage. A discrepancy of 4-5,000 square feet was not all that important; buyers did not “go into a frenzy” if their lot was 3,000 or 4,000 square feet smaller than their neighbor’s. 37. In the cost approach Mr. Topete’s appraisal report estimates the price per square foot of improvements to be $374-$431. However, in the comparable sales approach, the prices of larger comparable sales are adjusted only $40/square foot. 38. Ms. Miller testified that the comparable sales used in the appraisal of the Lincoln property were similar in construction style and appeal. A $40/square foot adjustment was not out of line, although she conceded it might be a little low. Mr. Topete had adjusted the comparable sales based on whether they had a tile or built-up roof. 39. Ms. Beatty testified that, in addition, the external obsolescence of the subject being on a busy street was not addressed in the cost approach. 40. The cost approach in the appraisal of the Lincoln property indicated an effective age of 25 years and a remaining economic life of 45 years, which indicates a total life expectancy of 70 years. Mr. Topete and Ms. Miller estimated $167,947 for depreciation, which represents 25% depreciation. Ms. Beatty testified that, based on the 25 year effective age and the 70 year life expectancy, physical depreciation estimated on an age/life method should be 35.7%. Mr. Topete’s and Ms. Miller’s result was an overstatement of the depreciated cost of improvements. 41. Ms. Miller testified that, in the cost approach, it was not “set in stone” that an appraiser was required to calculate depreciation by multiplying the cost of construction by the percentage of effective age compared to economic life of the improvements. The property’s location near Lincoln Drive did not affect calculation of value under the cost approach. 42. Ms. Miller admitted that the cost manual included a depreciation table, which set forth the depreciation to be calculated based on a mathematical formula. Plugging the effective age and economic life of the property into the table resulted in a rate of depreciation. 43. Ms. Beatty opined that Ms. Miller had failed to state reasons or conclusions for items that were in disagreement with the appraisal report and had overlooked several USPAP violations in the appraisal, which resulted in her concurrence with a misleading report. These actions were in violation of USPAP SR 3-2(d)[13] and the Conduct provision of the Ethics Rule. Other Circumstances 44. When the Board informed Ms. Miller of the complaint, it required her to furnish a copy of her work file on the Lincoln property. Although Mr. Topete’s original appraisal was prepared in December 2006 and Ms. Miller’s review was prepared in March 2007, documents on the subject and comparable sales in the file that Ms. Miller had provided to the Board indicated that they had been printed out from the MLS service on August 22 or 23, 2007, which was after the complaint had been received. 45. Ms. Miller testified that she had fully researched everything and printed out all comparable sales for the Lincoln property. But her daughter’s doctor had called her while she had been out in the field and she had made notes regarding her daughter’s personal medical information on one of the printouts. Ms. Miller’s secretary had printed out all of the comparable sales for the Board, not just the ones with her personal notes on them. 46. Ms. Miller testified that, in the future, she would not make personal notes on printouts that she took to the field. 47. Ms. Beatty opined that the Comparable Sales data sheets from Ms. Miller’s file, which were dated after the date of her review, violated USPAP SR 3-1(c). Case No. 3457 (the Cave Creek property) 48. The Cave Creek property is a large custom-built Tudor style residence on nearly eight acres of land. The main house has three above-grade stories and a basement. The property also has a guest house. The residence is located at the end of Spur Cross Road, which is dirt for the last mile or so. 49. Ms. Beatty acknowledged that the Cave Creek property was unique and would have been a difficult appraisal. 50. Ms. Miller testified that the assignment for the Spur Cross property appraisal had come from Transunion, which also reviews all appraisals. She knows that Transunion reviewed the appraisal because it corrected the identity of the lender.[14] 51. Ms. Miller testified that the Spur Cross property was unique. It was a 3-story home with intricate details and design that looked “like a castle.” The owner had developed a lake and planned to use the home to host weddings. The appliances had been designed to look like antiques and the kitchen had onyx countertops and intricate carvings. There were no similar properties to compare it to. Hypothetical Condition 52. Ms. Miller’s appraisal report stated that the lender had requested that the subject be appraised as if it were on a 5- acre site. Ms. Beatty testified that a hypothetical condition is something that the appraiser is told to assume but that she knows is not true. The lender’s request was a hypothetical condition that was not disclosed or identified as such on the appraisal report. 53. On the report, the subject site was reported to be 346,861 square feet or 7.96 acres[15] in the site description and 5 acres in the Sale Comparison Approach.[16] Ms. Beatty testified that, if the appraiser uses a hypothetical condition, the reason for the hypothetical condition should be given in an addendum and the hypothetical condition should be used consistently throughout the report. Ms. Miller’s failure to identify or use the hypothetical condition consistently throughout the report was misleading. 54. Ms. Miller testified that Transunion had requested that the Spur Cross property be appraised as if its site had 5 acres. She disclosed this in her appraisal report. She did not mean to be misleading. The lender did not know which 5 acres it wanted included. Lenders generally consider anything larger than a 5-acre site to be excess land. 55. Ms. Beatty testified that USPAP does not require that a legal description of the property be included in the report. But Ms. Miller’s appraisal report did not identify which five acres of the nearly eight acre site were included in the appraisal. Ms. Miller’s report did contain a partial legal description, which did not describe any portion of the site.

56. Ms. Miller testified that her secretary prepares everything before she goes out. She operates an office out of her vehicle. In this case, she did not complete the legal description through an oversight. 57. Ms. Beatty opined that Ms. Miller had violated USPAP SR 1- 1(a) and (b)[17] and SR 2-2(x)[18] by failing to report that the five acre site size was a hypothetical condition.[19] According to her investigative report, the omission “indicate[d] a lack of knowledge of recognized methods and techniques.”[20] 58. Ms. Miller testified that, since Ms. Beatty such made a big deal about it, she would disclose a hypothetical condition in future reports. Size of House 59. Ms. Miller’s report also stated that the subject had “3,759 square feet of gross living area above grade” and noted a 520 square foot partial basement.[21] 60. Ms. Beatty’s investigative report pointed out that the “URAR form requires a separation of the main floor livable and below grade furnished rooms.”[22] She testified at the hearing that the separation is a federal requirement for financing under Fannie Mae. 61. Ms. Beatty testified that the County assessor’s records showed that the subject had 3,260 square feet with an additional guest quarters. A prior MLS listing reported that the subject included a 3,250 square foot main house with a 725 square foot guest quarters. 62. Ms. Miller testified that the finished basement was similar in quality and condition to the rest of the house. The county assessor may include basements in total square footage. The forms are used in all parts of the county; a basement in Wisconsin is very different from a basement in Arizona. 63. Ms. Beatty testified that Ms. Miller’s file included floor plans, which apparently had been provided by the property owner. Although the floor plans included the rooms’ dimensions, they did not include a total for each level. 64. In the sales comparison approach, Ms. Miller had adjusted for livable area based on the 3,759 square foot area and made a separate line item adjustment to comparable no. 4 for lack of a guesthouse at $50,000. Ms. Beatty testified that this calculation effectively doubled the subject’s livable area. 65. Ms. Miller produced that copies of the plans that showed each floor’s total square footage, which had been inadvertently omitted in the copying of the file. With the basement, according the plans, the subject’s total square footage was 3,759. Ms. Miller had not included the guesthouse in the subject’s total square footage. 66. Ms. Beatty testified that the county assessor usually did not include a finished basement in livable total square footage. 67. Ms. Beatty testified that the 3,759 square feet in the appraisal report appeared to include the guesthouse and, in any event, was not consistent with appraisal practice. Such inclusion was misleading and a violation of USPAP SR 1- 1(c),[23] 1-4(a),[24] and 2-1(a).[25] Effect of Flood Hazard Area 68. Ms. Miller’s appraisal report had stated that the subject is located in a Flood Hazard area,[26] but did not discuss any impact on the property value. 69. Federal regulations prohibit building improvements in a flood hazard area. If a significant portion of the 5 or nearly 8 acres of the site were in a floodway, the site could not be divided or built on. 70. Ms. Miller testified that it is not unusual for large properties in Cave Creek to need flood insurance. It does not deter anyone from purchasing property. 71. The flood control district determination from the Maricopa County Flood Control District from Ms. Miller’s work file was dated September 4, 2007, several months after Ms. Miller’s appraisal. The report stated that the property was partially within a floodway zone, which meant that flood insurance was required. Although no development was permitted in a floodway zone, the structure was “on property . . . outside 100 yr flood zone.[27] 72. Ms. Miller’s description of the site in the report was that “subject’s lot is atypical and nonconforming to the neighborhood. Site improvements are typical for the area.” Ms. Beatty testified that, if most improvements in the neighborhood occupied 5 to 8 acre lots, the flood hazard status of the site may not have affected its value. But Ms. Miller did not discuss what was atypical about the site or typical about the improvements. Ms. Miller violated USPAP SR 1-1(a) by failing to employ the correct technique to make a credible appraisal. Inconsistencies between and Deficiencies in Cost and Comparable Sales Approaches 73. Ms. Beatty testified that, under the cost approach, Ms. Miller had referred to the 2005 edition of Marshall and Swift. This reference could have a typo; the correct reference would have been the 2006 edition. The quality of construction was “good.” Ms. Miller calculated value under the cost approach by multiplying the 3,759 square feet in the house by $300.[28] 74. Ms. Beatty testified that the value for “good” quality construction in the 2006 edition of the Marshall and Swift estimator was $100/square foot. The $300/square foot price was in a totally different area. Ms. Miller’s calculation inflated the value of the property, in violation of USPAP SR 1-4(b)(ii) and SR 1-4(b)(iii).[29] 75. Ms. Miller testified that her citation of an older edition of Marshall & Swift was a typographical error. In addition, the quality of the improvements should have been “excellent” or “excellent+.” The description “good” was a typographical error. 76. Ms. Miller admitted that her appraisal report described the condition of the improvement’s foundation walls, exterior walls, roof surface, floors, walls, and trim as “Good.”[30] 77. Ms. Beatty testified that, if the property cost $300/square foot to build, the adjustments from larger comparable sales should be more than the $45/square foot that Ms. Miller used in her comparable sales approach. The inconsistency was a violation of USPAP SR 1-4(a) and 1-1(a). 78. Ms. Beatty testified that depreciation under a cost approach should be strictly a mathematical calculation and, in this appraisal, should have been 10% of the cost to build. This was based on Ms. Miller’s statements in the appraisal report that the effective age of the improvements was 5 years[31] and the remaining economic life was 45 years.[32] Instead, Ms. Miller had simply deducted $5,000 for depreciation, which understated the amount and resulted in an overstated value. The calculation was a violation of USPAP SR 1-4(b). 79. Ms. Miller testified that the depreciation for the Spur Cross property could not be based on a mathematical formula because it was so unique. Instead, it should be based on the appraiser’s experience and how she feels about the property. That was even truer for a “castle.” 80. Finally, Ms. Miller’s appraisal had estimated the exposure time for the subject’s neighborhood to be 3-6 months.[33] Ms. Beatty testified that 3 of the 5 comps had been on the market between 8 and 18 months. Ms. Miller’s estimate understated the exposure time. Nothing in Ms. Miller’s work file had supported a 3-6 months exposure time. Ms. Beatty testified that the subject was a unique property; if anything, it would have required more time to sell. 81. Ms. Miller testified that the marketing time estimate was based on Comparable Sales #2 and #3. The property was so unique that, if a buyer were found who wanted it, he would buy it right away. A marketing time of 3-6 months was reasonable and not misleading. 82. On the appraisal report, the value of Comparable Sale #2 was adjusted upwards because it was located on only one-half acre. But Comparable Sale #2 was located in a gated community. Even though the parcel on which Comparable Sale #2 was located was smaller, the land was worth more. Because of the difficulty in finding comparable properties, Ms. Beatty testified that Ms. Miller should have researched land sales in the area. 83. Ms. Beatty testified that the MLS listing for Comparable Sale #4 indicated that the sale price included an adjacent vacant lot.[34] Ms. Miller had not considered that Comparable Sale #4 involved the sale of two parcels and had adjusted the value downward for the smaller parcel size.[35] Ms. Beatty testified that, because Comparable Sale #4 involved the sale of 7¼ total acres and two lots, the value of the subject should have been adjusted downward. The effect of Ms. Miller’s omission was to overstate the subject’s adjusted value, in violation of USPAP SR 1-1. Effect of Unpaved Access Road and Remote Location on Value of Land 84. Ms. Beatty testified that Ms. Miller’s report did not account for the effect on value of the subject’s inferior unpaved access road and its remote location in the Comparable Sales analysis.[36] 85. Ms. Miller testified that it is also not unusual for houses in remote areas to have dirt driveways. If you buy a house in the “boonies,” you expect an unpaved driveway, just as you expect a septic tank. 86. Ms. Miller admitted that none of the comparable sales had dirt driveways and that she had not made any adjustments for this condition. 87. Ms. Beatty admitted that unpaved driveways in rural areas are not uncommon. But Ms. Miller’s failure to discuss the impact of the unpaved driveway in the comparable sales approach was a violation of SR 1-1(b), 1-1(c), and 1-4(a). Factors in Mitigation and Aggravation of the Penalty 88. Ms. Miller has been married to her husband for 22 years. She and her husband have three teenaged daughters. Although her husband works full-time, she earns two-thirds of the family income. 89. Most of Ms. Miller’s appraisal work is for appraisal management companies. Her clients require that she produce a complete appraisal report within four or five days of the assignment. If a mentor were required to sign Ms. Miller’s reports, she fears that she could not meet her clients’ requirements for timeliness and would go out of business. 90. Ms. Miller testified that the appraisal management companies act as a buffer between the appraiser and the owner or lender. She can be completely independent and is subject to no undue pressure. She did not intend for either of the reports to be misleading and had no interest in the final estimated values. 91. Ms. Miller is the sole principal of D & H Appraisals, which she operated with her father before his death. She has a secretary. When she receives an assignment, the secretary does the initial preparation. Ms. Miller pulls comparable sales from the MLS and the county assessor before she inspects a property. Sometimes the appraisal review companies return a report if they find an error or want additional explanation. 92. On October 22, 2001, in Case No. 1123 the Board sent Ms. Miller a letter of due diligence, informing her that it had determined that she had violated USPAP SR 2-2(b)(i) and (ii) by failing to identify the intended use and user in an appraisal report.[37] In lieu of further litigation, the Board accepted Ms. Miller’s agreement “to exercise greater due diligence in appraising similar properties in the future,” which did not require any admission of wrongdoing. 93. On October 2, 2002, in Case No. 1337 the Board sent Ms. Miller a letter of due diligence, informing her that it had determined that she had violated USPAP SR 2-2 by failing to properly identify the reporting option in an appraisal report.[38] In lieu of further litigation, the Board accepted Ms. Miller’s agreement “to exercise greater due diligence in appraising similar properties in the future,” which did not require any admission of wrongdoing. 94. The two letters of due diligence are Level I discipline, which under the Board’s policy involves “[e]rrors or violations . . . that do not materially impact the purpose intended use or final conclusion of the assignment” and “do not involve ethics or competency.”

CONCLUSIONS OF LAW

These matter lie within the Board’s jurisdiction.[39] The Board bears the burden of proof and must establish that Ms. Miller violated applicable standards, as adopted by statute and regulation, by a preponderance of the evidence.[40] “A preponderance of the evidence is such proof as convinces the trier of fact that the contention is more probably true than not.”[41] A preponderance of the evidence is “[t]he greater weight of the evidence, not necessarily established by the greater number of witnesses testifying to a fact but by evidence that has the most convincing force; superior evidentiary weight that, though not sufficient to free the mind wholly from all reasonable doubt, is still sufficient to incline a fair and impartial mind to one side of the issue rather than the other.”[42] The Arizona legislature created the Board to prescribe and enforce standards of professional appraisal practice.[43] The Arizona legislature charged the Board with investigating complaints against licensed appraisers and, if violations of applicable statute, regulation, or standard are established, disciplining appraisers’ certification.[44] A.A.C. R4-46-301(A)(1) requires the Board to investigate complaints, including anonymous complaints, if the complaint includes the following information: a. The name of the respondent against whom allegations are being made;

b. The action that is the basis of the complaint;

c. The time frame in which the action occurred;

d. Each violation alleged to have been committed by the respondent; and

e. A copy of the report, if the complaint includes allegations concerning an appraisal, consulting assignment, or property tax appeal.

Complaints from the public do not need to contain the same detail as the Board’s contract consultant’s complete investigative report or the specific statutes and USPAP provisions that were violated. The complaints from the public in these matters named Ms. Miller, identified the suspect appraisals and the time frame in which they had been prepared, and conveyed specific suspected misconduct. The Administrative Law Judge recommends that the Board deny Ms. Miller’s motion to dismiss and determine the merits of the case. The Board has established that Ms. Miller’s appraisal review of the Lincoln property failed to explain why the sale price was $600,000 higher than the price at which it had been listed for nine months, failed to verify the condition of the improvements relative to the comparable sales, failed to discuss the impact on value of the subject’s location on an arterial street, and failed to adequately explain or support the calculations of value in the comparable sales and the cost approaches. The Board has therefore established that, in reviewing the appraisal of the Lincoln property, Ms. Miller violated USPAP SR 3-1(c), 3-1(f), 3-2(d), and Standards Ethics Rule – Conduct. The Board has also established that, in her appraisal of the Cave Creek property, Ms. Miller failed to state as a hypothetical condition that the size of the site was five rather than nearly 8 acres, incorrectly stated the size of the house by including the basement, failed to consider the effect on value of at least a portion of the subject’s site’s location within a flood hazard area, failed to adequately explain or support the calculations of value in the comparable sales and the cost approaches, and failed to consider the effect of the unpaved driveway in the sales comparison approach. The Board has therefore established that, in preparing the appraisal report for the Cave Creek property, Ms. Miller violated USPAP SR 1-1(a), 1- 1(b), 1-1(c), 1-4(a), 1-4(b)(ii), 1-4(b)(iii), 2-1(a), and 2-2(x) and Standards Ethics Rule – Conduct. Licensed appraisers’ appraisals in Arizona must comply with USPAP.[45] A.R.S. § 32-3635(A) and (B) requires state certified appraisers to comply with the standards of appraisal practice that have been adopted by the Board and appraisal standards and rules adopted by the Board. A.R.S. § 32- 3631(6) authorizes the Board to impose discipline against the certificate holder who has violated any of the standards that the Board has adopted. With respect to the penalty, there is no evidence that Ms. Miller intentionally defrauded or misled anyone in preparing the review appraisal and appraisal at issue. Her prior discipline is for relatively minor errors that were not repeated in either of the appraisals at issue. But the review appraisal and the appraisal were riddled with errors. Ms. Miller’s explanations at the hearing that that the size of the site is not a consideration for purchasers of high-end or rural properties and that the purchasers of high end properties do not care about their property’s location on an arterial street was not included in the reports at issue. Such explanations are not credible and appear to be post hoc justifications. Ms. Miller’s hearing testimony that a review appraiser must accept the factual assertions of the original appraiser, that the rate of depreciation is simply a number that an appraiser plucks out of the air, based on her feelings, that the market was “hopping” at the time she prepared both appraisals, and that a basement can be counted in total livable space, as well as a basement, also was not credible. There is no evidence in the record that Ms. Miller’s clients’ requirement of a short turn-around time cannot be met under a mentor. Even if there were, the Board was created implement reforms that followed the turmoil in the financial and real estate markets due to the savings and loan crisis of the late 1980’s,[46] which was similar to the turmoil being experienced today. The Board would not serve this purpose if it did not take steps to make sure that Ms. Miller did not repeat the significant errors and omissions that the Board established that she committed at the hearing. RECOMMENDED ORDER Based on the foregoing, it is recommended that the Board place Ms. Miller’s Certified Residential Appraiser Certificate No. 20414 on probation of for a term of six (6) months under the following terms: 1. That Ms. Miller’s appraisal practice shall be under a Board- approved mentor, who must sign off on any appraisal reports or appraisal review reports that she prepares, at her own cost; 2. That she shall undergo education in addition to the continuing education hours required for her to keep her appraisal certificate current, consisting of 1. Seven (7) hours in the cost approach; 2. Seven (7) hours in appraisal review; 3. Six (6) hours in mortgage fraud; and 4. Fifteen (15) hours in qualifying education with an examination; 3. That, during the six-month probationary term, she shall be required to complete at least twelve (12) appraisal reports or review appraisals; 4. That, during the term of her probation, Ms. Miller shall maintain a log of her appraisals and appraisal activities, which she must provide to the Board; and 5. That her mentor shall submit to the Board a monthly report on the quality of Ms. Miller’s appraisal work. Done this day, October 9, 2008.

______________________________________ Diane Mihalsky Administrative Law Judge Original transmitted by mail this ____ day of October, 2008, to:

Arizona State Board of Appraisal Deborah G. Pearson, Executive Director 1400 West Washington, Suite 360 Phoenix, AZ 85007

By ___________________________ ----------------------- [1] A state-certified residential real estate appraiser can appraise and review residential real properties having one to four units without regard to value or complexity. A.R.S. § 32-3612(A)(2). In contrast, a licensed real estate appraiser can appraise and review noncomplex one to four having a value of less that $1 million and complex one to four residential units having a value of less that $250,000. A.R.S. § 32-3612(A)(3). A state- certified general appraiser can appraise and review all types of real property. A.R.S. § 32-3612(A)(1). [2] Ex. 3 at 116. [3] Ex. 3 at 140, #3. [4] Ex. 3 at 180. [5] SR 3-1(f) requires a reviewer to “develop an opinion as to the appropriateness of the appraisal methods and techniques used, given the review’s scope of work, and develop the reasons for any disagreements.” All references to USPAP are taken from Ms. Beatty’s investigative reports, Ex. 9 and 10. [6] Ex. 3 at 116. [7] Ex. 3 at 118. [8] SR 3-1(c) requires a reviewer to “determine the scope of work necessary to produce credible assignment results in accordance with the SCOPE OF WORK RULE.” [9] The Conduct provision of the Ethics Rule provides: An appraiser must not communicate assignment results in a misleading or fraudulent manner. An appraiser must not use or communicate a misleading or fraudulent report or knowingly permit an employee or other person to communicate a misleading report. [10] Ex. 3 at 140. [11] Ex. 3 at 118. [12] Ex. 3 at 117. [13] SR 3-2(d) requires a reviewer to “state the opinions, reasons, and conclusions required in Standards Rule 3-1(d-g), given the reviewer’s scope of work.” [14] Ex. B. [15] Ex. 5 at 373. [16] Ex. 5 at 374. [17] SR 1-1 requires: In developing a real property appraisal, an appraiser must:

(a) be aware of, and understand, and correctly employ those recognized methods and techniques that are necessary to produce a credible appraisal;

(b) not commit a substantial error of omission or commission that significantly affects an appraisal . . . . [18] SR 2-2(x) requires: Each written real property appraisal report must, at a minimum . . . clearly and conspicuously

• state all extraordinary assumptions and hypothetical conditions; and

• state that their use might have affected the assignment results. [19] Ex. 9 at 350-51. [20] Ex. 9 at 350. [21] Ex. 5 at 373. [22] Ex. 9 at 349. [23] SR 1-1(c) requires that, in developing a real property appraisal, an appraiser must:

not render appraisal services in a careless or negligent manner, such as by making a series of errors that, although individually might not significantly affect the results of an appraisal, in the aggregate, affects the credibility of those results.

[24] SR 1-4(a) requires that, “in developing a real property appraisal, an appraiser must collect, verify, and analyze all information necessary for credible results. . . [W]hen a Sales Comparison Approach is necessary for credible assignment results, an appraiser must analyze such comparable data as are available to indicate a value conclusion.” [25] SR 2-1(a) requires each written or oral real property appraisal report to “clearly and accurately set forth the appraisal in a manner that will not be misleading. [26] Ex. 4 at 420. [27] Ex. 5 at 393. [28] Ex. 4 at 423. [29] SR 1-4(b) requires that, “[w]hen a Cost Approach is necessary for credible assignment results, an appraiser must”

(ii) analyze such comparable cost date as are available to estimate the cost new of the improvements

(iii) analyze such comparable data as are available to estimate the difference between the cost new and the present worth of the improvements (accrued depreciation). [30] Ex. 5 at 373. [31] Ex. 4 at 420. [32] Ex. 4 at 423. [33] Ex. 4 at 420. [34] Ex. 5 at 405. The realtor remarks on the MLS listing stated that “property includes Lot 29 * House is on Lot 30 * .” [35] Ex. 4 at 422. [36] Ex. 4 at 421, 422. [37] Ex. 7. [38] Ex. 7. [39] See A.R.S. § 32-3605. [40] See A.R.S. § 41-1092.07(G)(2); A.A.C. R2-19-119; see also Vazanno v. Superior Court, 74 Ariz. 369, 372, 249 P.2d 837 (1952). [41] Morris K. Udall, Arizona Law of Evidence § 5 (1960). [42] Black’s Law Dictionary at page 1220 (8th ed. 1999). [43] A.R.S. § 32-3605(A)(1). [44] A.R.S. § 32-3631(A)(2) and (6); see also A.A.C. R4-46-301 and R4-46- 302 (concerning formal hearing procedures, investigations, and penalties). [45] A.A.C. R4-46-401. [46] See Laws 1990, Ch. 313, §§ 1 and 6.

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Office of Administrative Hearings 1400 West Washington, Suite 101 Phoenix, Arizona 85007 (602) 542-9826