Alleged Overvaluation
The single most common claim asserted by borrowers is that the appraiser overstated the value of the subject property. These claims come mostly from borrowers who purchased or refinanced properties near the peak of the bubble and are now in financial distress. Quite simply, more mortgage defaults mean more claims by distressed borrowers hoping for a financial payoff.
Most overvaluation claims by borrowers fit a common pattern: borrowers typically allege that they borrowed or paid too much because the appraiser overstated the property’s value and often also accuse the appraiser of conspiring with the lender to make sure the loan would close. There is always more to the story with these claims, however. The appraiser’s defense counsel typically discovers that the lender overlooked its underwriting guidelines or the borrower’s inability to pay or that the borrower lied to get the loan. And, in many cases, the borrower never even looked at or considered the appraisal until his or her lawyer started coming up with parties to sue and therefore did not legally “rely” on the appraisal.
Alleged Undervaluation
On the flip side, a noticeable new trend in the last year has involved complaints by borrowers that appraisers have undervalued properties. This trend unfortunately means that appraisers are being attacked from all sides. Claims alleging undervaluation are usually made soon after the delivery of a report and are often intended by the borrower to intimidate appraisers to change valuations or to strike back at appraisers who have reported lower than desired values.
A typical scenario involves a homeowner seeking to refinance a loan on a property purchased at the peak of the real estate bubble. The appraiser will accurately report a current value that in many cases is 20% to 30% less than what the homeowner paid. When the loan officer informs the homeowner that the loan cannot be made and provides the appraisal to the homeowner as required by the HVCC, the homeowner or his or her attorney sends a demand letter to the appraiser threatening to sue the appraiser or report the appraiser to the state unless the appraiser raises the value or somehow “retracts” the report. Often, there is a threat that if the homeowner does not obtain the loan he wants, he will sue the appraiser for the interest that the homeowner theoretically would have saved if the homeowner had received his or her desired loan. In our opinion, most of these claims are frivolous, and we view them as an indicator that appraisers are doing their job and providing accurate information to their lender clients.
Square Footage
The third most common borrower claim we see involves square footage. These claims usually involve appraisals performed for purchase loans. The borrower typically alleges that the appraiser overstated the square footage of the subject property and thereby caused the borrower to pay too much for a home. The borrower will usually demand an amount for the “missing” square feet (e.g., $200 per square foot times 300 square feet). Alternatively, a borrower will claim that he or she would never have purchased the home at all if he or she had known it was 300 square feet smaller and then demand payment from the appraiser for the entire purchase cost. In square footage claims, the appraiser has sometimes not even made an error in the report – the homeowner may be relying on inaccurate information from another appraisal, the owner’s personal measurement or public records. Other times, the appraiser did err and the error results from measuring incorrectly, relying on plans or public records without identifying that reliance, or counting areas that should not be included in gross living area.
Sewer versus Septic
Year in and year out, claims about appraisers misidentifying whether a home is on a septic system or public sewer continue to roll in. A common scenario here occurs when several years after purchasing a home, a homeowner encounters a waste blockage and is informed that his or her septic system must be repaired or replaced. The homeowner is shocked by the cost and notices that the appraisal identified the home as being on a public sewer. Now, the homeowner makes a claim against the appraiser for the cost of the septic system repair or seeks the cost of connecting to a public sewer, if available. Of course, the homeowners who make these claims never appreciate the fact that they never had to pay monthly sewer fees.
Other Borrower Claims
The other claims that borrowers bring against residential appraisers taper off from here into a creative shopping list. The more frequent of the claims on this list include:
1. Problems with the condition of the structure like leaking roofs, electrical problems or undisclosed damage;
2. Erroneous flood zone determinations;
3. Property line/boundary issues and unidentified easements; and
4. Nearby nuisances such as retention ponds or factories.
A Suggested Claims Prevention Strategy
It should go without saying that the first rule in reducing the risk of claims from any source is to do good appraisal work and to disclose and analyze the effect of any specific conditions or anomalies affecting a property. The best disclosure and analysis uses real world language tailored to the specific issue with the property, not canned phrases from a macro key entry.
Leaving aside that general advice, the common thread woven into nearly all borrower claims is that the borrower is almost always not the appraiser's client or intended user. This fact can serve both as a tool for appraisers to decrease their risk of becoming the subject of a borrower claim and as a viable defense when such claims are pursued. The appraiser should not do or say anything either verbally or in the report suggesting that the appraiser expects the borrower to use or rely on the report or that the borrower may use or rely on it.
Most appraisers, of course, include a short explanation in their reports clarifying who the intended user of the report is and limiting the intended user to the identified lender/client. The typical language limits use of the report by the identified lender/client to evaluation of the subject property for a mortgage finance transaction. The language we see in most reports and that I definitely recommend keeping is:
The Intended User of this appraisal report is [name of the Lender/Client]. The Intended Use is for the identified Lender/Client to evaluate the property that is the subject of this appraisal for a mortgage finance transaction, subject to the stated Scope of Work, purpose of the appraisal, and Definition of Market Value. No additional Intended Users are identified or intended by the appraiser.
The inclusion of this standard language – acceptable to Fannie Mae – is without question a good idea and does assist in the successful defense of many borrower claims.
The other very important language that we see and expect in most reports is:
The appraiser is not a home inspector and this appraisal report is not a home inspection, the appraiser only performed a visual observation of accessible areas and the appraisal report cannot be relied upon to disclose conditions and/or defects in the property.
This very standard language also has assisted the defense of many borrower claims. Generally, all of this kind of language addressing similar subjects is often valuable in defending against claims.
Nevertheless, disclaimer-type language in a report is not a complete strategy. Borrowers, lawyers and courts routinely find ways to ignore an appraiser’s carefully crafted standard language. In many cases, the language will just be cast aside as “fine print” or “boilerplate.” For example, in a recent case in California, the court of appeal strained to reverse a summary judgment that had been granted against a borrower who claimed he paid too much for a property because he relied on the opinion of value contained in a report prepared for a lender. To overturn that decision, the appellate court needed to find a way to support a conclusion that the appraiser reasonably could have expected the borrower to rely on his appraisal despite the exact disclaimers above. The court stretched and reached that conclusion by observing that the borrower was identified in the report:
While the disclaimer contained in [the appraiser’s] appraisal report is evidence that he did not intend third parties to rely on the report and his opinion as to the value of the property, [the borrower] presented evidence from which intent may be inferred. [The borrower]'s name appears repeatedly on [appraiser]'s appraisal report, identified as "borrower" . . .
For that court, just having the borrower’s name in the report was enough evidence to support a finding that the appraiser could reasonably expect the borrower to rely on the report and to disregard the traditional language limited use of the report
to the lender/client. With decisions like that, there is little wording that can be placed into a report that will fully insulate the appraiser from borrower claims.
To take risk avoidance to the next level, an appraiser might consider the twofold approach suggested below – which does require some extra effort. An appraiser should also be ready to customize and add to the following suggestions to better fit the appraiser’s individual practice and context.
Refinance Loan Appraisals. For appraisals performed for refinance transactions, I suggest that the appraiser who wants to further reduce the risk of a borrower claim develop a routine procedure of providing the borrower with a standard form on the appraiser’s letterhead informing the borrower of certain key matters or, even more ideally, develop a very short questionnaire for borrowers to fill out while the appraiser is conducting his or her inspection and have the homeowner sign the questionnaire. This strategy works with refinance appraisals because the borrower is typically present for the appraiser’s inspection.
Some possible language for the appraiser’s information sheet to the borrower is:
I have been hired to appraise your property for the lender. Even though you may pay an appraisal fee or later receive a copy, the appraisal report that I will prepare is for the lender’s use only. You should not use or rely on my appraisal for your own purposes. If you require an appraisal for your own use or are concerned about your property’s value or any conditions which may affect your property, you may engage an independent appraiser of your own choosing. The Appraisal Institute, the National Association of Independent Fee Appraisers, and the American Society of Appraisers [other resources can be named] are professional appraiser organizations and have on-line resources to help find an independent appraiser in this area. Because of my duties under the Uniform Standards of Professional Appraisal Practice and other regulations and guidelines, I cannot speak with you about the results of my appraisal assignment. If you later have any questions or comments regarding my appraisal you should contact the lender. Thank you.
The appraiser can adjust or tailor this language to fit the appraiser’s own practice. If language like this is used in an appraisal information sheet, the appraiser should try to be consistent in following that practice with every refinance appraisal and keep a copy in the work file with a notation that the appraiser delivered it at the time of the appraisal. An even stronger approach might be to include the language in a short questionnaire filled out by the borrower with a few “easy” questions like “has the property been listed for sale in the last 12 months” or “have any additions been made to the property without building permits?” The advantage to this approach is that the appraiser will then have a document signed by the borrower indicating the borrower’s receipt and also have another source of backup in his or her file (though the borrower’s responses should not be relied on exclusively). In the near future, we may have a proposed questionnaire.
Purchase Loan Appraisals. The challenges are greater in developing a similar approach with appraisals for purchase loans. Here, the appraiser typically does not meet the borrower and I do not suggest that the appraiser separately send or make contact with the borrower. To do so only invites misunderstanding and miscommunication. Thus, the appraiser is limited to language contained in the report itself (including addenda) and to any extra attachments. Finally, the appraiser is challenged by the fact that AMCs or lenders may oppose the appraiser’s attempt to include non-standard language or extra attachments.
I do not suggest that the language of the above advisory be incorporated into the report itself or into any formal addendum that is part of the appraisal report. Fannie Mae and certain lenders would likely object to this. Instead, I suggest that appraisers seek to include similar language as a separate attachment to the appraisal report in the same way that an appraiser may attach his or her license or resume. It may be entitled “Appraisal Information for Borrower” and printed on plain paper and attached at the end. Some lenders and AMCs may object and ask the appraiser to remove it – the appraiser can adjust his or her practices in view of such business realities and try to keep the page in reports for other clients. A few lenders and AMCs may even remove it from the report themselves, but that will not decrease its effectiveness entirely. If the appraiser has a record in the work file of transmitting it with his or her report, that information will be strong evidence that the appraiser had no intention or expectation that the borrower would rely on his or her report.
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