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Avoiding Claims – Appraisers

Avoiding Claims – Appraisers

Risk Management and avoiding claims are as integral to maintaining a sound, professional and successful appraisal business as developing a diverse client base and referral system, and producing accurate appraisals in a timely manner.  One of the basic tenets of risk management and avoiding claims is having a basis understanding of the conduct and context within which services rendered result in claims against appraisers.  Cervantes famous quote, states a basic premise in avoiding future trouble, and containing risk –  “Forewarned, forearmed; to be prepared is half the victory.”  Being aware of the source, and type of claims typically filed against appraisers allows one to implement practices to avoid the dissatisfaction so often at the heart of a claim.

A review of the statistics and data available on claims being filed against appraisers with enforcement agencies on a sampling of these websites reveal the sources and  types of claims being filed against appraisers was consistent throughout the jurisdictions sampled.  A compilation from public sources of the complaints being filed, source of those complaints and types of appraisals involved are set forth in the following table.

Type of Appraisal

Complaints Filed

Single Family Residential

By Borrowers/Homeowners

  • Property description errors
  • Misrepresentations of site and building improvements
  • Errors in comparable sales information
  • Failure to accurately analyze market conditions
  • Errors in valuation
  • Inaccurate zoning, and legal conformity
  • Failure to analyze improvement additions (Permits)
  • Failure to analyze current listing or past sales history
  • Payment dispute
  • Non-delivery of pre-paid appraisal
    • Obnoxious behavior/rudeness

Narrative Reports

By Regulators, Lenders and Other Appraisers

  • Highest and best use
  • Discounted cash flow analysis
  • Failure to properly analyze bonds or market demand
  • Incompetence
  • Inappropriate comparable selection
  • Fraud
  • No support for adjustments
    • Failure to include license number with signature

Single Family Residential

By Mortgage Brokers

  • Untimely delivery or non-delivery of report
  • Unwillingness to correct errors in report
  • Altered license
  • Failure to provide operating income statement
    • Failure to return phone calls

Other Issues

By Miscellaneous Sources

  • Misrepresentation of errors and omissions insurance
  • Litigation
    • Monetary disputes

Typical complaints are filed against appraisers by clients, homeowners, lenders, state and federal regulators and other appraisers.  Typical allegations include violations of USPAP, technical errors, inaccurate value conclusions, fraud, failure to provide services as contracted and inappropriate conduct related to an appraisal assignment.  Violations also included land attributes misrepresented for larger or complex parcels, out buildings not addressed and a failure to analyze leased fee attributes of sales comparables which properly relate to the subject property.

The statistics demonstrate that the majority of claims arise out of dissatisfaction by a homeowner, lender, mortgage broker or other person or entity authorized to rely on appraisals, who perceived a failure on behalf of the appraiser to comply with the minimum standards as set forth at USPAP, as well as errors in one direction suggesting a lack of objectivity or impartiality.  Statistically, it is not the technically challenging, unique projects which trigger the highest percentage of claims, rather it is the failure to comply with basic standards, lack of attention to detail, a failure to identify information sources and not maintaining an awareness of the intended use and intended user results in a majority of claims.  The constructive guidance to be drawn from this review is that avoiding claims can be accomplished by sound appraiser practice, and does not require any fundamental, time consuming change in means and methods.

A second basic tenet in avoiding claims is to adhere to established practices and procedures in the preparation of every assignment, which serves to ensure the client receives the service they expect.  A non exhaustive list of these practices include:

1.         Adhere to sound appraisal practice

2.         Always comply with USPAP

3.         Practice due diligence

4.         Be cognizant of physical defects

5.         Practice technical and geographic competency

6.         Properly use extraordinary assumptions and hypothetical conditions

7.         When in doubt, disclose

8.         Practice effective record keeping

9.         Incorporate the tenants of the conduct section of ethics which include:

a.         objectivity

b.         impartiality

c.         independence

10.       Avoid Advocacy

Subsequent articles will expand on these principles.  Generally, implementing these practices starts with identifying both the intended user, and intended use.  This will directly impact the scope of work and define objectivity for that assignment.  For each appraisal, appraisal review and appraisal consulting assignment, an appraiser must identify the problem to be solved, determine and perform the scope of work necessary to develop credible assignment results and disclose the scope of work in the report.  Furthermore, always identify the characteristics that are relevant to the type of definition of value and intended use of the appraisal which include its location, physical, legal and economic attributes.  The failure to identify these types of characteristics often are a result of lack of focus on due diligence, basic competency and failure to identify an accurate scope of work.

An appraiser must identify any extraordinary assumption necessary in the assignment cognizant that one must have a reasonable basis for an extraordinary assumption and its inclusion must result in an incredible analysis.  One must also identify any hypothetical conditions necessary in the assignment, which again must also result in a credible analysis and comply with USPAP disclosure requirements.

Where required by the assignment, identify and analyze the effect on use and value of existing land use regulations.  As related to zoning, an incorrect analysis renders an appraisal a claim waiting to be filed, and also represents significant potential exposure to the appraiser.  Where general plans and market trends are not developed, an incorrect analysis may result in an unsupported highest and best use and therefore a misleading report.

In developing a real property appraisal, an appraiser must collect, verify, and analyze all information necessary for credible assignment results.   It is also important to analyze (and not merely disclose) all agreements of sale, options and listings, including all sales of the subject property,  because an omission of key data can also be a basis for an ethics violation.

As a  final consideration, it is fundamental to the practice that an appraiser must perform assignments with impartiality, objectivity and without accommodation of personal interest.   Be aware that errors in one direction raise a red flag and may be viewed by enforcement as evidence of a lack of  impartiality, objectivity or independence in an assignment, and may rise to the level of a violation of the conduct section of the ethics code.  An appraiser’s lack of objectivity may also include pre-determined values due to client pressure, misrepresentation of relevant property characteristics, failure to disclose sales and listing history and intentional misrepresentation of sales comparables.

Avoiding claims is a function of being aware of what triggers claims, forewarned; forearmed, and using practices and procedures in completing assignments which actively include steps designed to minimize the chance that any of the claim triggers occur.  Adhere to USPAP, remain aware of the source and nature of claims typically filed, and you will be well on your way to enjoying a claims free practice.

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