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Reduce your liability: Sample disclaimers/statements for your appraisals
Published 1-7-20 Most of the material below is from recent webinars by Peter Christensen, who formerly was with Liability Insurance Administrators for 14 years. His current law practice is Valuation Legal at www.valuationlegal.com. His recent book, “Risk Management for Real Estate Appraisers and Appraisal Firms” discusses many issues. I recommend buying it from the Appraisal Institute or Peter’s web site. Very easy to read and written in plain English for non-attorneys.
Note on samples provided below: Peter Christensen strongly recommends using “plain English”, in your own words. Why? When you have a claim or lawsuit, these are much more useful in court rather than a “generic” statement. Don’t just always copy and paste the disclaimers/statements below. Make them relate more to what you are doing or the situation.
I use the words disclaimers and statements. Disclaimers can be interpreted as you are disclaiming something when you are actually explaining it. A statement is what you did or how you handled the issue.
What is “plain English” for appraisals?
From Wikipedia: “Plain English (or layman’s terms) is language that is intended to be clear and concise. It attempts to avoid complex vocabulary. It attempts to be free of clichés and needless technical jargon and should be appropriate to the audience’s developmental or educational level and their familiarity with the topic. The term is commonly used when discussing government or business communication.”
It is far more effective to say something in plain English and to include a few photos within the report than to add more boilerplate, disclaimer-type language – in the form of general assumptions and limiting conditions or otherwise – at the back of the report.
From Peter’s book, Chapter 4: “An appraiser’s use of plain English and photographs in the report to identify and disclose special issues or problems affecting the appraisal analysis or the subject property are key tools for preventing liability. It is far more effective.”
Where to put your statements/disclaimers in your reports
Put the first borrower statement below in a prominent location in your reports (home inspector vs. appraiser). Per Peter, these issues are common appraisal complaints. Borrowers do not understand the role of the appraiser.
The most significant is the statement below that appraisers are not home inspectors. The intended user statement is also good to include in a prominent location, maybe at the top of the first addendum page.
Important statements/disclaimers for borrowers in all your appraisal reports
It is very, very important to make it clear to borrowers, using understandable plain English, what you do and do not do.
When the market is strong, about 40% of claims are from borrowers. When the market crashes, such as the Great Recession, this shifts to lenders. The statements below are relevant if you get a claim.
Don’t bury the other statements below in your appraisal. Put them in a prominent location, use boldface, etc.
Appraisers are not home inspectors – very important to include in all your reports – a significant issue for claims
“The appraiser is not a home inspector, and this appraisal report is not a home inspection report. It does not guarantee or imply that the property or any structures are free of defects or property condition problems.
It is suggested that the borrower secure a professional inspection of the property and take diligent steps to assure the house and property are acceptable to them prior to closing escrow.”
Intended user for lending assignments – also important for reducing claims
Also, include a statement about the intended user. Another issue confusing to borrowers, such as why they cannot use your appraisal for other purposes. Sample statement:
“The appraiser has not identified any purchaser, borrower, or seller as an intended user of this appraisal and such parties should not rely on the appraisal for their own purposes. Neither payment for the appraisal nor receipt of a copy of the appraisal by such a party or any other third party means that the party is an intended user of the appraisal. Such parties are advised to obtain an appraisal from an appraiser of their own choosing if they require an appraisal for their own use. This appraisal report should not serve as the basis for any property purchase decision or any appraisal contingency in a purchase agreement relating to the property.”
Construction progress reports – Number 4 reason for claims
In a construction progress report for loan disbursement, the appraiser overstated the degree of completion or failed to identify problems with the construction.
Sample disclaimer/statement: “This construction progress report is for the use and benefit of the lender to assist in making loan disbursements. It is not prepared for the use or benefit of the owner/borrower. The purpose of this inspection is to determine the approximate degree of completion and not the quality of construction, workmanship or materials, or adherence to applicable building or planning codes or requirements.” Source: Peter.
Explain what you did for external or desktop appraisals
It is very important for appraisers to use plain English in their reports to explain what they did, and did not do.
Sample: “In performing this assignment, due to conditions stemming from COVID-19 and in accordance with guidance received from the lender-client, I did not make a personal inspection of the interior of the home. I have relied on photos (and information software tool, if used) and information that was supplied by the borrower. The borrower has attested to the accuracy of the photos and information. The information supplied by the borrower about room counts and other physical characteristics is also consistent with information that I obtained from… (example: a 2015 MLS listing photo of the property – MLS #123456).”
Per Peter, The importance of using a few sentences of plain English in our reports to explain out of the ordinary matters or challenges to your appraisal really can’t be overstated. (Note: This is more useful than pre-printed conditions or statements if challenged. You wrote it yourself.
Reduce your liability: don’t use “boilerplate” and keep good notes in your files
“This is not the time to rely on just ‘canned’ or vague language… the same general language should not be dropped into every report. Saying the appraiser reviewed ‘existing public and private sources’ is not sufficient. There should be facts, information and details in plain English.”
“And supplement your files with good notes. What were you asked to do? What special discussions did you have with the client? Remember that claims are rarely made within weeks of a report being completed. Rather, you may be called upon to defend a report months or years after it was prepared.”
Sample “Covid-19” statement – market conditions
“This appraisal was performed following public awareness that COVID-19 was affecting residents in the United States. At the time of the appraisal, COVID-19 was beginning to have widespread health and economic impacts. The effects of COVID-19 on the real estate market in the area of the subject property were not yet measurable based on reliable data. The analyses and value opinion in this appraisal are based on the data available to the appraiser at the time of the assignment and apply only as of the effective date indicated. No analyses or opinions contained in this appraisal should be construed as predictions of future market conditions or value.”
Peter’s comments: “Of course, appraisers must adjust such language as market impacts begin to be observed and become measurable. It’s the failure to observe and report on those impacts when they become measurable that could be the underpinning to future legal claims (as they were for appraisers who failed to identify changing markets during the financial crisis 2007-2009).”
Peter also says, in a webinar comment, that putting “COVID-19” in a statement probably does not make any difference for liability. You don’t need to discuss CDC, WHO, etc. The issue will be mortgage defaults. The legal issue is how did you explain the effect on values of the crisis.
Per Peter: “It’s the failure to observe and report on actual market impacts when they become measurable that will underpin the most likely future legal claims.”
Editor’s comments: Even if COVID-19 is not affecting home market conditions much in your market, a statement may be expected by lenders and other clients. Also, tables and graphs are very useful.
If, or when, prices go down, your report done in the past will be investigated for any possible problems with what you wrote back then.
More importantly, it reminds you that everything is changing because of the virus and no one knows where we are going. As an appraiser providing current market value, you look at today. If you are doing forecasting, such as a relocation appraisal, you must explain what you are doing.
Lessons from the Financial Crisis – the most significant risks for today’s COVID-19 crisis
– Post-COVID-19 may be similar to the appraisals performed in 2007-2008 when data began indicating that real estate markets were declining in price and condition.
– The toughest appraisals to defend in claims following the financial crisis were those in which the appraisers failed to identify the changing markets and declining prices (typically, by utilizing older comparable sales).
– Don’t let that be you as an appraiser. Stay on top of markets and data. Identify and report the changing markets and price effects as changes become measurable.
At that time, about half of the claims were from borrowers and the other half from lenders, investors, and other financial parties.
Use of Extraordinary Assumptions – not allowed by Fannie and not very useful for claims
From Peter: “For purposes of liability reduction, is it critical for the appraiser to use an Extraordinary Assumption – such as, for example, that the appraiser has made an extraordinary assumption that the interior of the home is as depicted in the borrower’s photos? (Note: The instructions from the GSEs state that extraordinary assumptions should not be used for their alternative flexible appraisal approaches.”
Per Peter, “Based on extensive claims experience (over 8,000 claims by LIA), the reality is that this distinction in USPAP makes no discernable difference in real-world lawsuit claims.”
“The far more valuable protection is for the appraiser to explain in plain English what information from third parties they are relying on – whether an “extraordinary” assumption is stated has not shown to be relevant in liability claims.”
“Describing what you’re relying on and the source of the information in plain English works is the best “disclaimer”
What about appraisers getting sued for making an occupant sick with COVID-19 while going inside their home?
Questions Peter has had:
“Many lenders are still requiring interior inspections here, can the bank be held liable if I acquire the virus while doing an inspection and I die or one of my family members dies because I subsequently infected them?” “Can an appraiser, the bank, or an AMC be liable to a borrower if the borrower later claims the appraiser sickened them?”
An appraiser recently reported to me that on her way inside a home for interior inspection, the borrower threatened “If you make me sick, I’ll sue you.” On the other side, what if an appraiser got sick and sued the owner of the home?
Peter says: “I’m not a plaintiff’s lawyer, but to me – such claims are plausible if given good proof of compelling facts. The predominant claim would likely be for some form of negligence.”
Claudia Gaglione says: “In the context of home appraisals … the reality is that such claims would be difficult claims to prove. Most claimants would find it very difficult to establish that a specific person or business is specifically responsible for infecting them. There is a vast array of community exposures through which the virus may have been contracted. (And other defenses would apply too.)”
Large workplaces, such as meat processing plants, are much different, of course. Also, if you don’t know you have the virus, negligence would be very difficult to prove that you are violating a duty (legal explanation).
Pandemic related issues are not covered by your E&O insurance or any other insurance that I am aware of.
The only answer I have: If you are very worried about this, do not go inside homes. I don’t go inside homes because of the virus risk. Of course, I have a good income from my Social Security and my newsletters. I don’t have to choose between income and health, like so many other essential workers.
Real estate agents and their associations are concerned about this, so they are using forms similar to the one below. The forms make it less likely that sellers would sue.
Appraisers (and others) in California are being asked to sign “Coronavirus Property Entry Advisory and Declaration” (PEAD) Form from California Association of Realtors (CAR) 4/20. Updated 5/27/20. This form provides for the seller to give permission for vendors, inspectors & appraisers access to the property to conduct the needed inspections or services needed to market property.
In California, property visitors and service providers are being asked to sign this form. Peter says he does not have any reservations about appraisers signing the form below as it does not cause any more liability. It is basically an indemnification form for people going inside a home. To get a copy google CAR Form PEAD.
But, some appraisers, home inspectors, and agents/brokers in other states are being asked to sign other forms. There are much worse forms out there – mainly be watchful for indemnification language in those forms, such as being asked to pay other person’s legal bills. He has seen other risky forms being used by lenders and banks.
If you are asked to sign another type of similar form:
– Be watchful for indemnification language.
– Perhaps ask for copies of the forms signed by the seller and agent/broker.
– Contact your E&O provider.
“Risk Management for Real Estate Appraisers and Appraisal Firms” by Peter Christensen. Price: $60.00 AI Members: $50.00 Available from the Appraisal Institute and sometimes free if you take one of Peter’s classes. Reviewed in the 10-19 issue of this newsletter, available on the paid subscriber web page. My Recommendation: Buy This Book!! Well written and understandable.
Peter regularly offers free, or low cost, webinars. He regularly speaks at other webinars. Listen to what he has to say.