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Legal IssuesAre appraisers responsible to borrowers?
Is an appraiser responsible to a borrower? Some courts have held that a buyer has no direct cause of action against an appraiser hired by a lender, concluding that because there is no direct relationship between the appraiser and the borrower, the appraiser is not liable. But that may be changing. Earlier this year, the Court of Appeals for Arizona held that an appraiser retained by a lender to appraise a home in connection with the granting of a purchase-money mortgage may be liable to the prospective buyer for failure to exercise reasonable care in performing the appraisal (Sage v. Blagg Appraisal Co., Ltd., 2009).
In 2004, Shari Sage bought a property appraised at $620,000. When she tried to refinance some 18 months later, she learned her home contained 569 fewer square feet than the original appraisal reported. Because the second appraisal was done at a time of rapidly increasing property values (perhaps as much as 38 percent in 2005-2006), she sued the original appraiser, claiming her home was really worth $350,000 at the time of purchase. In other words, she claimed that the appraiser was negligent.
The appraiser asked the court to dismiss the lawsuit because historically appraisers hired by lenders have not owed a duty to the buyer. Giving the buyer the right to terminate the agreement of sale if the appraisal was not equal to or greater than the purchase price materially changed things. The court decided that because the results of the appraisal were materially tied to the transaction — and because the appraiser knew (or should have known) that the buyer had the right to review a copy of the appraisal before settlement — the appraiser might now owe a duty to the buyer. The court was not concerned with whether the appraiser knew that the agreement was contingent upon the results of the appraisal. Rather, the court was impressed by the fact that the appraiser knew (or should have known) that the buyer had the right to review a copy of the appraisal before settlement. Thus, the buyer should have her day in court to prove that the appraiser was negligent in completing the appraisal and that the buyer “justifiably relied” on the appraiser’s conclusions.
It’s important to realize that this case doesn’t impose liability on an appraiser; it only states that the buyer has the right to bring the suit. She still has to prove the elements of her case before she wins. It’s also important to realize that this is a case from Arizona, so it has no binding precedent on Pennsylvania courts. It may only be instructive, however, Pennsylvania has adopted the same law that the Arizona court used and the Standard Agreement for the Sale of Real Estate will contain an appraisal contingency (there is currently a form for this very thing) when it is released later this year. Will this create a cause of action for buyers against appraisers? It’s too soon to tell – but times are changing and appraisers need to be more aware of those who may be relying on their work.
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Brett Woodburn, Esq. is an attorney with Caldwell & Kearns and serves as general counsel to PAR. A substantial portion of his practice is dedicated to providing advice and counsel to real estate licensees and representing and defending real estate salespersons and brokers in civil lawsuits and licensing claims across the Commonwealth. He routinely counsels employers on employee relations issues as one of the voices of the PAR Legal Hotline. |
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Great stuff as awlays from Brett, but you know, the purpose of the appraisal is very simple, to ensure the lender has adequate collateral in case of default. there is no other reason for a lender to order the appraisal. The fact that the buyer gets charged a pass thru fee from the lender doesn’t mean it’s the buyers appraisal. On the other hand, if a buyer makes the offer contingent on satisfactory appraisal, then I feel it is different and the appraiser may have a responsibility
The buyer should have every right to communicate with the appraiser since they are the ones who at the table end up paying for that fee, who cares that the banks pick and choose who the appraiser is? What matters is that the buyer pay for this and they should have the right to discuss the appraisal report with that individual.
Does the buyer have the right to review/see the appraisal prior to settlement in PA?
The existing appraisal contingency Brett references can be found on the PAR Web site at http://www.parealtor.org/content/form_samples.htm#ascont (Form ACA). The revised Agreement of Sale due late this year will also contain a mortgage provision guaranteeing a minimum loan-to-value ratio (LTV), which will work as an appraisal contingency.
Sorry Janice that’s not what USPAP says nor any of the schools of thought I have ever heard. The lender makes the appraisal a condition of getting the loan, so if you want to borrow money from the lender to buy the house you have to abide by their rules. Now if you don’t need the money and hire an appraiser independently you are the client.
However this still does not excuse the appraiser from being informed and professional and doing their job correctly.
In appraising, there is the scope of work which details the intended users and intended use. Since most lenders use the appraisal to determine if the property is adequate security for their loan (and most buyers don’t know or fully understand the definition of market value and appraisal protocols) the client and intended user is most often the lender who ordered the appraisal. Remember, Janice, that compensation and representation are two distinctly different issues. The buyer pays the lender (usually), and the lender pays the appraiser. However, even if the buyer pays the appraiser, if the assignment was ordered by the lender, the lender is the client (and confidentiality, among other responsibilities, applies). In a transaction where you represent the buyer, and the seller pays the commission, didn’t you represent the buyer even though your commission was paid by the seller? Having said that, I believe that the legal term is “third-party beneficiary”, in which case the appraiser should know that the buyer is relying on the competency of the appraiser, too. The bottom line is, if the appraiser complies with all relevant laws, rules, regulations, etc., and performs competently, everyone involved in the transaction benefits, and when they don’t, all lose.
INTENDED USE: the use or uses of an appraiser’s reported appraisal, appraisal review, or appraisal consulting assignment opinions and conclusions, as identified by the appraiser based on communication with the client at the time of the assignment.
INTENDED USER: the client and any other party as identified, by name or type, as users of the appraisal, appraisal review, or appraisal consulting report by the appraiser on the basis of communication with the client at the time of the assignment.
See Statement on Appraisal Standards No. 9, Identification of Intended Use and Intended Users
An appraiser’s obligations to other intended users may impose additional development and reporting requirements in the assignment. It is essential that an appraiser establish with the client a clear and mutual understanding of the needs of all intended users prior to accepting an assignment. An appraiser’s obligation to intended users other than the client is limited to addressing their requirements as identified by the appraiser at the time the appraiser accepts the assignment. A party receiving a report copy from the client does not, as a consequence, become a party to the appraiser-client relationship. Parties who receive a copy of an appraisal, appraisal review, or appraisal consulting report as a consequence of disclosure requirements applicable to an appraiser’s client do not become intended users of the report unless they were specifically identified by the appraiser at the time of the assignment.
Who pays the appraiser? The buyer. Who does he/she work for? The buyer. Who is he/she responsible to? The BUYER.