While it’s difficult for a litigant to win a judgment against an appraiser, that doesn’t spare appraisers the inconvenience of being sued, which can be costly, time-consuming, and harmful to one’s reputation even if the suit fails. Attorney Peter Christensen, general counsel at the Christensen Law Firm in Santa Barbara, California, notes that lawsuits against individual residential appraisers, or small residential AMCs, are fairly rare, and successful suits rarer still. However, it’s a good idea to know where the risks lie—and how to avoid them.
“Liability is much more of an issue if you appraise large commercial buildings and you work for a large national firm,” he explains. “Those firms face a much higher risk of liability and more severe legal issues than a small residential appraisal firm in a Midwestern town. A commercial appraiser who works at a national firm is working with sophisticated parties who have lawyers, and the amounts involved are worth suing over.
“Residential appraisers or small commercial appraisers could be sued for professional negligence. In those cases, the most likely claimant in a suit is likely to be the borrower. That rankles many appraisers because they use the Uniform Standards of Professional Appraisal Practice (USPAP), according to which you’re supposed to ask yourself, ‘Who is going to use the appraisal?’ If you’re appraising for a home loan, the lender will be the client and the intended user, and that is the only party that should be able to sue.”
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USPAP and state laws
USPAP is not always in exact conformity to a state’s law regarding appraisals, and who has the legal standing to sue the appraiser varies by state, Christensen explains. In most states, the parties who can sue are those the appraisers knew would use the appraisal or ought to know would use it. A suit from a disgruntled borrower occupies a gray area.
It’s conceivable that a borrower could claim, years later when he’s trying to refinance the property, “I borrowed too much because the appraisal was too high.” Or more immediately, an aspiring homebuyer could assert, “I couldn’t buy the property because the appraisal was too low.” A buyer might want to bring a suit because the appraiser missed a termite infestation, for example. That, says Christensen, might not be considered a fair complaint since the appraiser is not a termite inspector.
“There might be a suit over some other physical condition or an easement on a property, or maybe the garage was built slightly over a setback or a property line,” he says. “But again, you have to remember that the appraisal for the loan is for the lender’s use. It’s not for identifying conditions or protecting a borrower. That doesn’t stop appraisers from getting sued, but still, borrowers account for a small percentage of suits against appraisers.
“If an appraisal is too high, and the lender makes an under-collateralized loan that it has to foreclose on, the lender might have a claim. The lender won’t sue if the appraisal is too low, or because the property has a pre-existing condition. The lender will sue only if there’s a foreclosure, and those don’t happen as much now as they did a few years ago. Suits from sellers are less common, but we do see them. If the appraisal comes in too low, the seller might sue because the low appraisal stymied the deal. But that’s a very hard claim for a seller to make, because who is rightfully using the appraisal? The courts would readily agree that it’s not the seller, so most seller suits are very weak.”
Types of lawsuits brought to appraisers
The majority of lawsuits against appraisers are at least somewhat frivolous, Christensen says. However, sometimes complaints of negligence are legitimate. These could include incorrect comps or mismeasuring the square footage of the property (which is a common actual error).
“Appraisers are supposed to measure a house but often they don’t,” Christensen notes. “They’ll often trust the measurement listed in public records, but the actual measurement might be significantly different. Appraisers do miss actual physical details. A common issue is stating that a home has more bedrooms than it has. That fourth bedroom might not have been a legal bedroom because it didn’t have proper egress or some other problem.
“As for allegedly failing to notice prior fire damage, a termite infestation, a roof that has serious leakage, substandard plumbing: Appraisers should have liability for that which they would reasonably find in a normal inspection. However, they should not be held to a standard of being expected to discover defects.”
A buyer might complain, “If the appraiser had only noticed that the building was on a septic tank, instead of being connected to a sewage system, I would not have bought.” That, says Christensen, is a fairly weak claim. But if the appraiser is appraising for a refinancing, and comes up with a fairly high number while failing to notice that the property had sold recently for a much lower amount, a legitimate complaint might exist.
Disclosures and disclaimers to reduce appraisal liability risks
Daniel Bradley, SRA, CDEI, author of the McKissock Education online course, Essential Elements of Disclosures and Disclaimers, says that it’s the appraiser’s responsibility to provide, in addition to a value opinion, other information that will help the user to understand that opinion. Withholding such disclosures could mislead the client. However, he notes, appraisers are not usually experts in other fields and should not be expected to perform the function of a home inspector, title attorney, or another real estate professional.
Review appraisers sometimes face higher appraisal liability risks and are more likely to be sued, since the review appraiser typically has a contractual relationship with the lender, while the original appraiser or AMC typically doesn’t. Review appraisers, therefore, need to go over their contracts carefully and weed out (if possible) any provisions that might prove unreasonable.
Appraisers in non-lending scenarios might face a greater risk of being sued because a greater number of parties might have the standing to sue them. These might include a homeowner who wants the property appraised for tax purposes, a divorcing spouse, or a landlord and tenant negotiating lease terms or a sale option. In these cases, the appraiser should be well acquainted with how their duties might differ from those of a common appraisal for a lender.
To learn more about appraisal liability risks, check out our online course: Essential Elements of Disclosures and Disclaimers.
Article by Joseph Dobrian. Joseph Dobrian has been writing about commercial and residential real estate, and real estate-related finance, for more than 30 years. His byline has appeared in The Wall Street Journal, The New York Times, The New Yorker, Real Estate Forum, Journal of Property Management, and many other publications. He is also a noted novelist, essayist, and translator. His website is www.josephdobrian.com, and he can be contacted at firstname.lastname@example.org.
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