The big question
Mistakes happen, but which ones will most likely get an appraiser sued?
“what alleged mistakes will most
likely get an appraiser sued?”
That’s the big question asked at
every presentation concerning appraiser liability
— which makes sense because practicing fee
appraisers can better manage their risks when
they recognize the hazards.
The answers come from reviewing the data
of more than 8,200 claims filed against appraisers
over the past 30 years. I’ve organized the
alleged mistakes into two lists: one for lending
and the other for non-lending, such as litigation
or tax.
Lending (in order of frequency)
1. Value: The appraiser’s opinion of value was
alleged to be too high or too low because
incorrect information about the subject property
was used, inappropriate comparable sales
were selected or inappropriate adjustments
were made. (It’s not surprising that the
“wrong” value would be the top complaint.)
2. Measurement: The appraiser made an error in
determining or reporting the square footage
of a structure or the land area of the subject
property. (Yes, square footage and land area
mistakes are this common. If one item
deserves extra attention, this is it.)
3. Property: The appraiser allegedly failed to
discover or report a unique issue or problem
with the subject property. The most common
alleged issues and problems:
- The property suffers from a condition
problem, such as a leaky roof, mold, foundation
settlement, vermin infestation or
unrepaired damage from a fire or flood.
- Structures on the property were built without
proper permits or in violation of zoning
rules.
- The appraiser misreported that the property
is served by a public sewer when it’s
actually served by a septic system (or a
pipe running to a creek), and that system
has failed. (Again, a very specific mistake
that’s easily prevented by paying careful
attention.)
- The vacant land or other property slated
for development cannot be developed in
the manner or to the extent underlying the
appraiser’s valuation.
4. Income approach: The appraiser, utilizing the
income approach, developed or used faulty
information and overstated revenue or
understated expenses (mainly involving
multifamily
5. Construction: The appraiser overstated the
degree of completion or failed to identify
problems with construction in a construction
progress report for loan disbursement.
Non-lending (in order of frequency)
1. Miscalculation: The appraiser made an outright
error or computational mistake in a valuation
used for litigation or tax, and the appraiser’s
client suffered a negative outcome as a result.
2. Substandard work: The appraiser failed to produce
admissible expert testimony, or failed to
meet the minimum technical requirements
for the appraisal or the report. For example,
the appraiser failed to apply legally acceptable
methods or analysis in a condemnation case,
or failed to produce a “qualified appraisal”
that meets IRS requirements.
3. Credibility: The appraiser overreached and the
testimony or valuation was not credible and
was rejected by the court or taxing authority.
4. Disclosure: The appraiser failed to disclose alleged conflicts of interest or other matters
that undermined the credibility or usability
of the testimony or valuation.
5. Qualifications: The appraiser was not appropriately
licensed in the relevant jurisdiction
as necessary for the assignment.
Do any of these surprise you? Are you
rethinking how much attention you’re giving
or should be giving to a specific issue in your
day-to-day work?
Of course, knowing what the most common
mistakes are and working hard to avoid them
won’t entirely shield you from liability lawsuits,
nor will the obvious advice to just be diligent.
Mistakes can happen no matter how knowledgeable
and how careful an appraiser is. Also,
in many instances — I’d say the majority, but
I’m biased — claims alleging appraiser error are
baseless or they concern matters outside an
appraiser’s scope of work. In other words, a lot
of claims are frivolous.
Therefore, my general advice on liability prevention
goes beyond “follow applicable standards
and be careful,” and includes four things
appraisers should do to successfully fend off
many of the common legal claims listed above:
1. Be as precise as possible when describing
intended use and user(s) in your appraisal
reports, which can reduce the risk of third party
(“unintended user”) claims or claims
relating to unexpected uses of the appraisal.
2. When disclosing your scope of work in a
report, add extra detail and disclose research,
analysis and activities not performed, especially
if you think a user of the appraisal would
expect something to have been performed.
3. Use plain English in reports and, if applicable,
include photos to disclose and illustrate specific
issues or problems with the subject
property — things like detrimental conditions
or zoning or permitting problems.
Proofread and fact-check your work.
Additional coverage on this topic will be included in Christensen's book, Risk Management for Real Estate Appraisers and Appraisal Firms, to be published by the Appraisal institute this summer.
This article originally appeared in, and is reprinted from, the Appraisal Institute's Valuation (1st Quarter, 2019). © 2019 by the Appraisal Institute, Chicago, Illinois. Archives of Valuation magazine, including Peter's past columns, are available at http://www.appraisalinstitute.org/publications/valuation-magazine/