As a professional appraiser, it is simply not possible to eliminate liability entirely. Rather, the goal is to manage your liability. You can start by being aware of the level of risk involved in different types of appraisals. Some assignments come with higher liability risk than others—whether due to the type of client, the intended users, the number of requirements that must be adhered to, or other assignment conditions. Here are five types of appraisal assignments with higher-than-average liability risk.
1. Appraisals ordered by unethical clients
Appraisals ordered by dishonest or unethical clients should be avoided entirely. Your chances of becoming ensnared in a lawsuit increase dramatically when you are dealing with an unethical client. Remember that not all clients are ethical; some have bad intentions. Trust your gut if you encounter a client or a transaction that “smells fishy” or “feels off.” Clients who ask for value indications before the assignment is accepted or push for values (e.g., “we need the value to be as high as you can make it”) are obviously to be avoided.
Want more tips on how to recognize various types of fraud schemes? Enroll in our CE course: Managing Appraiser Liability.
2. “Rush” assignments
Less obviously problematic are the clients who push for “rush” assignments, or offer a higher fee to complete an assignment on a property that is outside of your normal coverage area. The client may state that their normal appraiser is on vacation or unavailable, and they need a quick turnaround on a property that is located two hours from your office. They may supply you with all the information and comparable sales you need, and even offer to pay you double your normal fee if you can just help them out. Sounds like a good idea, right? You can help out a client in need and perhaps cement a relationship for future assignments, plus you get paid double your normal fee.
The unfortunate fact is that the client might have bad intentions. They might be looking for an appraiser who does not know the area and does not have the time to do the necessary research. If this is the case, and you accept and perform the assignment as requested, this is a Pandora’s Box of liability risk just waiting to be opened somewhere down the road.
3. Fannie Mae and FHA appraisals
Are there any other intended users besides the client? This is crucial information. If the loan is going to be sold on the secondary mortgage market, then you will have to prepare the appraisal to meet Fannie Mae/Freddie Mac requirements and format it in the Uniform Appraisal Dataset (UAD). You will then be liable to Fannie Mae/Freddie Mac and also to the purchaser who buys the loan in the secondary market.
If the loan is an FHA-insured loan, you will be responsible for complying with FHA guidelines and requirements, including the requirement to operate the mechanical systems and make “head and shoulders” entry into the attic and/or crawl space. You will be liable for compliance with HUD Handbook 4000.1 and all other HUD/FHA guidance that is applicable to the appraisal.
Obviously we are not telling you to not accept appraisal assignments on Fannie Mae or FHA loans. But you need to know if there are any additional intended users—at the time of the assignment—so that you can make an appropriate scope of work decision and use the appropriate reporting format.
4. Residential mortgage lending appraisals
What do the client and intended users intend to do with your appraisal? Again, this is crucial information to consider when determining the scope of work. Remember: Some intended uses carry more liability risk than others.
Residential mortgage lending appraisals, particularly those that involve government insurance or guarantees, expose you to liability that does not exist in other appraisal assignments. Even within the residential mortgage lending arena, assignments may carry differing degrees of liability.
For specific examples of appraisal assignments with varying degrees of liability risk, enroll in our CE course: Managing Appraiser Liability.
5. Litigation assignments
Litigation assignments are another type of appraisal assignment that can expose you to additional liability. Why? Because in litigation assignments you already have two parties who are in opposition to one another (i.e., they cannot agree on something).
When you accept a litigation assignment, there may be expert witness testimony involved. Such testimony may involve cross-examination, which can be uncomfortable at best and excruciating at worst.
Sometimes, you may even get a lawsuit filed against you. The engaging party who lost the suit may sue you for malpractice, or the opposing party who lost the suit may sue you because he or she believes you were a “hired gun” who broke the rules of the profession in producing your valuation.
Civil suits against appraisers in situations like these are relatively uncommon, though. What is more common is that one of the parties files a complaint with your state licensing board or professional appraisal organization. Even though these types of actions do not generally result in a monetary judgment, they can be troubling and could have an effect on your appraisal career. Therefore they are to be taken seriously.
When you encounter higher-risk appraisal assignments, know what you’re liable for and proceed with caution and professionalism. Throughout your career, you may occasionally encounter assignment conditions that are flat-out unacceptable. Make sure you know how to recognize those assignments so that you can turn them down. For a review of unacceptable assignment conditions, plus many more tips and tricks to help reduce your professional liability risk, enroll in our CE course: Managing Appraiser Liability.