"Double Jeopardy" Appraisals the Second Time Around
Don’t Assume You Did it “Right” the First Time.
(article updated March 2020)
It is not unusual for an appraiser to be asked to appraise the same property on more than one occasion. Sometimes, it is a coincidence. The client may have no idea the appraiser had a history with the property and the appraiser might not even remember until he or she inspects the property and recalls having been there before.
In other cases, an appraiser might be retained, specifically, because they did appraise the property in the past. Since that appraiser already has some knowledge, and familiarity with the property, the client might think it makes sense to retain them over someone else.
Each appraisal assignment should be approached as a “new” assignment, and NOT as a “do over.” Problems can arise if the appraiser simply duplicates information from an old report into a new report without taking the time to verify or to double check what was contained in the old report.
If an error was made in the first report, the appraiser compounds the problem when that error is repeated, sometimes multiple times. We have seen this scenario give rise to several claims. The majority of those claims involve incorrect square footage figures. Here are two examples of claims that were made when an original mistake was carried over into subsequent reports:
In 2015, a Kentucky appraiser was retained to prepare a purchase loan appraisal for a lender/client. The property was a small, 2-story office building. The appraiser measured the property to be about 3200 square feet. The listing showed 3300 square feet, so the appraiser assumed his measurement was accurate.
The appraiser discovered, however, that the local assessor’s office was showing the property as only having about 1500 square feet. This discrepancy caused the appraiser no concern. He knew that assessor records were often inaccurate. The appraiser completed his report with no mention of the contradictory assessor’s records. He estimated value to be $525,000.
In 2017, the same appraiser was hired by the same lender/client. This time, the assignment was to prepare a refinance appraisal. When the appraiser inspected the building, he found that the owner had it leased out to a single tenant, a small accounting firm. The appraiser remembered inspecting the building 2 years prior. He carried over most of the information from his old report into the refinance appraisal, including his original square footage figure.
The assessor’s office was still showing the property as having only 1500 square feet. The appraiser said nothing about this in his second appraisal.
In 2019, the owner wanted to sell the building. The tenant decided to exercise the option to purchase, set forth in the lease agreement. The tenant hired an appraiser to help determine a purchase price and that report indicated that the property was worth less than $400,000, based upon square footage of about 1600 square feet. The tenant’s appraiser assigned a significantly lower value to the second floor of the building than he assigned to the first floor.
The property owner was confused by the tenant’s appraisal, so he hired his own appraiser and that appraiser said the property was also worth less than $400,000 based, in part, on the fact that the second story could not be used as office space.
It was discovered that a prior owner of the building added the second story without permits. While the quality of the construction was good, the ceiling height was too low. The second story could only be used for storage. It could not be used as office space.
The tenant could not exercise their option and terminated the lease. The owner could not rent out the property and defaulted on the mortgage. The lender/client has a loan balance of about $450,000 and the property is worth less than $350,000. The lender has put the insured appraiser on notice that it will be pursuing a claim against the appraiser for the losses suffered after the property is sold.
The appraiser had two chances to investigate the square footage discrepancy. At the very least, the discrepancy should have been highlighted in the appraisals to put the client on notice. Now the appraiser will have to spend his time defending this claim.
An Ohio appraiser was hired to appraise a small commercial building divided into 6 separate suites. The appraiser valued the property for the first time in 2012 in connection with a purchase money loan. The property was measured to have 10,184 square feet and the estimated value was $1.3M.
The appraiser was contacted in 2015 by the building owner. The owner had paid off his loan and he owned the building, with no encumbrances. The owner had also made some modifications to the building and provided the plans to the appraiser.
When the appraiser asked the purpose of the appraisal, he was told the owner wanted it for “Asset Management”. This was also the “Intended Use” noted in the report. The owner was the only stated “Intended User”.
Unfortunately, the appraiser misread the construction plans he had been provided. He stated that the improvements had added 7500 square feet to the property for a total square footage of 17,684. In reality, the construction had only added 3500 square feet to the property, so the total square footage was 13,684.
In 2017, 2018 and 2019, the appraiser was called to appraise the building for the property owner. Each year, he was told the reason for the report was “Asset Management”. In each report this was the stated “Intended Use”. In each report, the total square footage was reported to be 17,684.
The appraiser never measured the property after he had originally done so back in 2012.
When the 2019 report was delivered, the appraiser got a call from the owner asking for a meeting. The appraiser was advised that earlier in the year, one of the tenants had acquired a partial ownership interest in the property. The purchase price he agreed to pay was based, in part, on the insured’s 2018 appraisal.
The new partner had not looked over the 2018 report, in detail, but he did read the recently prepared 2019 report and he had some concerns. The new partner pointed out that the appraisal overstated the square footage of the building by 4000 square feet. That meant the appraised value was also overstated by, at least, $500,000.
The appraiser also learned that, since 2015, the building owner had been using the appraised value as a basis for setting the tenants’ rental amount. That meant the owner had been overcharging tenants for years and this was all the fault of the appraiser. The new owner also claimed that he paid more for his partial interest based on the inflated appraisal.
The owners said that they would be meeting with the company lawyer and their accountant to figure out their damages and they were hopeful the appraiser’s insurance company would agree to settle so that a lawsuit did not have to be filed.
A demand was forthcoming in an amount in excess of $750,000. The appraiser insisted that he did not intend for his reports to be relied upon to determine rental amounts for the tenants or to set a partial interest purchase price. Unfortunately, the “Intended Use” and “Intended User” language in the appraisals was pretty vague. When asked, the appraiser could not define “Asset Management” which was the stated “Intended Use” in his reports.
It clearly appears that the appraiser made a mistake back in 2015 when he misread the plans he had been provided. He exacerbated that mistake by not measuring the property in 2015, or in subsequent years. With that said, we think a defense can be raised that the property owner should know the size of the property they own. It was the owner that oversaw the construction project in 2015. If they had read the appraisals closely, they could have seen the erroneous square footage figures, and they could have brought it to the attention of the appraiser.
The owners argue they were relying on the appraisal reports to determine how much rent to charge the tenants, yet at the same time they claim they did not read the reports closely enough to see that the square footage was overstated. This claim has not been resolved so we do not know how the credibility of the owners, or the appraiser, will be judged.
Conclusion
It is important to treat each appraisal as a new assignment. Inspect each property. Measure each property. Check prior reports for typos or math errors. The time it takes to verify your prior findings could be well worth it if a claim is avoided or minimized.
Remember that you can’t just assume you did it “Right” the first time!
Copyright 2020. LIA Administrators and Insurance Services. All rights reserved.