This article was written in 1993.
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Ways To Reduce Your Liability Exposure
This article was previously published in Appraisal Today newsletter
in October, 1993 and was written by Ann
O'Rourke. For more information on the newsletter, go to Appraisal
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In today's litigious environment, worrying about being sued is a reality. A delivery person stumbles and falls on the front porch of your home. You're involved in an auto accident. One of your long-term lender clients is taken over by federal regulators, or just gets into financial difficulties. Sure, you probably have insurance that will cover any claims and pay for your defense, but who needs the aggravation and worry of a long, drawn out lawsuit?
Risks of lawsuits are facts of daily life. You can be sued at any time, for almost anything. Even "nuisance" lawsuits, without any merit, are a hassle. You can be "added on" to a much larger lawsuit, even though you did nothing wrong.
But you can reduce your risk exposure by using loss prevention techniques.
Reasons for claims
According to Robert Wiley, of Liability Insurance Administrators in Santa Barbara, CA,
a major basis of claims is square footage. For example, using builder's plans on a large commercial property which physically checking any dimensions. Or, difficulty reading a flood map, and not verifying the flood zone with the city or including a copy of the map stating that it was difficult to read. Other top reasons are poor comparables, inaccurate flood zones, and non-disclosure of defects in the subject property.
There are many more residential than commercial claims because there are more residential appraisals. However, it's the big dollar commercial claims that have scared off many insurers from the appraiser's E&O insurance market.
The majority of lawsuits are instituted by lenders.
Techniques to reduce risks
We all make mistakes. It's impossible to always produce "perfect" appraisals! But, there are ways you can reduce your liability risks:
- Client selection and communication
- Assignment selection
- Associate selection
- Strict quality control and review procedures
- Independent verification of data provided by client or borrower
- Good documentation
- Reporting any visible property deficiencies
- Use disclaimers, but don't count on them totally
- Don't give advice or opinions
- Keep up on the latest changes in appraisal practices
Client selection and communication
Have you ever had "funny feelings" about a potential client? Maybe they're really pushy about "coming up" with a certain value, or try to get you to lower your fee. Or maybe they're vague about the purpose of the appraisal. Have you ever taken the assignment anyway and later regretted it? We've all had that experience. The only solution is to turn down the work, or don't accept the assignment until the client has been checked out by calling other appraisers, the Better Business Bureau, etc.
Keep vigilant with your current clients also, even if You've been doing business with them for years. Financial problems or a change in management can cause your potential liability to increase.
Always be sure you have the correct information about the assignment, such as the property to be appraised and any assumptions. In one case, the appraiser didn't obtain the complete appraisal assignment in writing from a long-term, lender client. The lender requested an appraisal of a site with a commercial building. A few days later, the lender verbally requested that the adjacent 12,000 sq. Ft. Lot be included in the appraisal. But the appraiser didn't know that the lot was on a separate parcel. The borrower defaulted and the lender sued the appraiser, saying the property was grossly overvalued and he never asked that the lot next door be included.
Select your assignments with care
Just because someone calls you Doesn't mean you have to accept the assignment, or even bid on it! As a fee appraiser, you're free to accept or reject any assignment.
Many appraisers get into trouble by accepting an assignment to appraise a property type they have little or no experience with. Residential appraisers are sometimes asked to appraise small commercial properties or mixed-use properties. Experienced commercial appraisers often don't like to do them because of low fees and difficulty of the assignment.
Residential appraisers with little commercial experience get in "over their heads" and fail to get adequate assistance from experienced commercial appraisers.
Or perhaps you're a commercial appraiser but have never appraised a low-income housing project. Business is slow, so you agree to a low fee and a quick turn around. But, a few days into the assignment, you realize it will take you much longer than you thought, and there's no more experienced appraiser available to help you with the appraisal issues.
What are your options? There's no reason why you can't "turn back" an appraisal assignment, even if You've spent some time on it already. Try to find someone else to refer the client to. You won't get paid and the client may get angry, but at lease you'll be able to sleep at night!
Make good choices in your associates
When hiring an appraiser as an associate or independent contractor, be sure to find out if he or she has had a claim in the past, or is currently in litigation. Don't jeopardize your E&O insurance. If the appraiser has had a claim, check with your insurer before hiring the person.
Investigate how much experience the candidate has. An inexperienced person tends to be a higher risk, and will require more supervision.
Is the experienced applicant able to see problems, or have they been trained to not look for them? When there is a problem, does he or she thoroughly research and document it, or just skim over it so that production time isn't lost. Set up sample scenarios for the job interview.
Exercise quality control and review regularly
Avoiding making mistakes, whenever possible, is the key to risk reduction. Always have someone else check all appraisal reports before sending them out. Even a low-level clerical employee can check for correct addresses! If you're a one-person fee shop with no employees, maybe a spouse or older child can help, or you can exchange reviewing with another one-person fee shop.
Checklists are very important, as they not only make sure you don't forget to look at something, reducing the chance of error. They are also written documentation. Use checklists for field inspections, comp verification, lease and absorption data, client/assignment requirements, clerical reviews, and internal reviews.
Verify, verify, verify!
Most claims based on lack of verification of data are for homes, primarily because of the low fees. However, commercial appraisers don't always verify everything, such as square footage or lease data. We all take short cuts sometimes.
Failure to independently verify data is a common cause of claims. In one case, the appraiser used the square footage provided by client, 2,000 sq. Ft. Later, it was determined that the square footage was well under 2,000. In another case, the appraiser of a 4-unit property used the rents supplied by the seller, who said the rent exceeded $2,000. It was later determined that the seller misrepresented the actual rental income.
Appraisers are being asked to re-appraise, re-certify, or update appraisals done in the past. Be sure to re-verify pertinent data, so you don't repeat mistakes in the old appraisals. In one claim, the appraiser first appraised the property in 1989, and re-appraised it in 1991 and 1992 for re-fis. The appraiser didn't re-measure the square footage in 1991 or 1992. The owner listed his home for sale. Relying on his copies of the three appraisals, he said the house had 3,800 sq. ft. The buyer, upon finding out the correct square footage, sued the seller. The seller sued the appraiser.
Other examples of unverified information that resulted in lawsuits are: septic tank/sewer hookups, foundation, and comparable sales figures.
Don't neglect to document
Some attorneys say, "Those who have the best documentation win." It is an essential component of successful defense in a professional liability lawsuit.
Since a claim is, on average, made 30 months after the effective date of the appraisal, maintaining good files is important. Good documentation allows the defense attorneys to determine easily how the value was determined.
Document the assignment including changes, phone conversations, in-person interviews, etc. Having pre-printed forms available is useful, as it makes taking written notes easier.
Report problems and unusual conditions
Always report any obvious deficiencies, or unusual conditions. Put it in an obvious location, not buried in a narrative report, or on the 2nd page of addendum pages in a residential form report. For example, "The ceiling has sprayed acoustical material that may contain asbestos." Or, "The rear part of the warehouse was built many years ago, and does not appear to be built to modern building code standards."
Many mortgage brokers want appraisals without any "problems," such as reporting property defects such as drainage problems or proximity to commercial uses. If you accept work from a mortgage broker who will not give you any more work if you accurately report the property information, you will have greatly increased liability exposure.
You do have other options, however. If you really want to continue to work for the broker, "turn back" the assignment if there's a problem. You may be able to collect an inspection fee.
You also increase liability by trying to "come up with" the highest possible value, as requested by the mortgage broker, by using inappropriate comps.
There are commercial mortgage brokers who also are "shopping for a number," but they usually have less obvious techniques than residential mortgage brokers, such as promising you more work "if this deal goes through", by trying to develop a personal relationship with you.
Limiting conditions: do they really work?
It's better to have limiting conditions than not, but they often won't protect you from a lawsuit. They are included to inform the client of the report's limitations. Of course, that's assuming the client reads and understands them!
For example, a standard limiting condition is: "The appraiser assumes there are no hidden or unapparent conditions of the property, subsoil, or structures, that would render it more or less valuable. The appraiser assumes no responsibility for such conditions, or for engineering which might be required to discover such factors."
This common clause has proven to be ineffective in court. Actual claims have included failure to discover and disclose extensive termite infestation, and failure to detect a drainage and moisture problem which resulted in extensive mold and mildew. Do you crawl under the house to check for termites, or check all the windowsills for signs of drywood termites? Have you ever failed to mention standing water because "it's the rainy season and everyone has standing water this time of year."
Another limiting condition is: "Information furnished to the appraiser, and contained in report were obtained from sources considered reliable and believed to be true and correct. However, no responsibility for accuracy of such items furnished by the appraiser can be assumed by the appraisers."
Failure to confirm data is a common basis for a claim. Examples of "real" claims are: failure to verify rental income data supplied by the Realtor, and use of inaccurate sales data provided by the builder seller. Sound familiar? Have you ever relied on lease data provided by a commercial property owner without verifying with another source, such as the tenants? Have you ever used sales data on new homes provided by the sales office, without independently verifying price, terms, and discounts?
Keep up on the latest changes
Since the USPAP has been adopted as the industry standard for appraisal ethics and standards, be sure you keep up on the changes and interpretations. Also keep up on standard appraisal practices in your area by attending local meetings of your appraisal association and keeping in touch with your appraisal network.
Is everyone "out to get" appraisers?
All types of business are facing increased liability risks, not just appraisers. The recent savings and loan crisis made appraisers much more visible and more of a target for potential lawsuits.
In the "good old days" when most people though appraisers were real estate agents, we were much less visible.
In court, in a liability lawsuit, you will be judged by whether or not you exercised reasonable care in investigating and reporting relevant facts on the property, and whether all the relevant facts were reported correctly, usually not whether or not the value was "correct".
Warning signs of potential problems
Taking on too much work can cause errors and sloppy reports. Not having enough work can tempt you to take on work you're not qualified to do, or accept assignments with very low fees, tempting you to skimp on the appraisals.
Some warning signs of potential problems are:
- Complaints about your appraisal or appraisers from clients
- Problems meeting deadlines
- Understaffing of support personnel
- Complaints from collection agencies on past due accounts
- Appraisers are "too busy" to attend meetings and seminars
- Declining markets
- Sloppy work product, declining standards on internal review
Where to get more information
There are several books available, but they are from an attorney's position and can be difficult to wade through! Real Estate Appraisers' Liability, by Mark Levine (1991, Clark Boardman), is useful for appraisers wanting to know all the legal rules, background, and cases. But there's not much information available specifically discussing loss prevention.
The primary source for the practical information on risk reduction in this article was articles and speeches by Robert Wiley, President of
Liability Insurance Administrators
in Santa Barbara, CA, and other published articles.