grounds for suing an appraiser

Protect Against Any Grounds for Suing an Appraiser with Defensible Reports

Can you sue an appraiser? What are the grounds for suing an appraiser? What can I do if I am sued as an appraiser? These are common questions that many appraisers have. Unfortunately, there are no simple answers. They are all dependent on the specifics of the situation.

That being said, appraisers can be sued for several reasons, including negligence, errors and oversight, failure to notice underlying issues, or even fraud. While lawsuits against appraisers can be serious, they are rare when compared to the number of complaints to the state appraisal boards, which are much more commonplace and can also have serious consequences.

Therefore, the best defense for a real estate appraiser against a lawsuit or an appraisal board complaint is an accurate, defensible appraisal report. We spoke with Mel Black, a Certified Residential Appraiser, licensed real estate broker, McKissock Learning’s Director of Appraisal Innovation, and a practicing attorney who provides regular counsel on compliance matters and other industry-related law for appraisers and brokerage services, about creating defensible appraisal reports and why they are necessary in fighting legal battles or against appraisal board complaints.

Here are some of the key takeaways from our conversation.

1. Why is it important to create a highly defensible appraisal report?

Mel Black: Real estate appraisers need to be prepared when the bright spotlight comes shining down on their work. They need to be prepared for issues that arise in a board complaint or civil lawsuit.

To do that effectively, appraisers need to be able to show that their report contains sufficient information to enable the intended users(s) of the appraisal to understand the report properly. In their workfile, appraisers need to be able to point to data, information, and documentation that will support their opinions and conclusions and show compliance with USPAP.

Stay up to date on USPAP and earn your required education with our 7-Hour and 15-Hour USPAP courses.

In addition, the workfile could include anything that an appraiser could use to defend themselves in a variety of settings. This could be notes from parties contacted to obtain information, time-stamped photographs, notes on which sales were and were not selected as comparable sales, and more.

2. To ensure their report is defensible, what should real estate appraisers focus on at the beginning of an assignment?

MB: There are a number of things to consider at the beginning of an assignment. As an appraiser, you want to look at assignment selection. You want to look at your competency to handle the assignment. You want to make sure you are able to define the problem and create an appropriate scope of work.

The number one thing in so many assignments is competency. You must have the knowledge and experience to handle the assignment competently. Or be willing to have a conversation with your client about how you may gain competency along the way, and then you also must disclose that in the report.

Of course, some clients have assignment conditions that require you to be competent prior to accepting the assignment. If you accept an assignment with this condition and you do not have prior competency, that could be an issue.

For an appraisal assignment, determining competency may include these questions:

  • Are you familiar with the type of property?
  • Are you familiar with the analytical method(s) called for in the assignment?
  • Do you understand the nuances of the local market?
  • Do you have the knowledge and experience to feel comfortable in that type of assignment with that specific intended use?

The second thing you want to do is go through the six assignment elements in the Scope of Work rule.

  • Who is your client and are there any other intended users?
  • What is the intended use?
  • What is the effective date of the appraiser’s opinion and conclusions?
  • What is the type and definition of value, and what is the source of that definition?
  • What is the subject of the assignment and characteristics of the subject that the marketplace finds relevant?
  • What assignment conditions might there be?

3. Once you’ve accepted the assignment, what are some things to focus on when developing the appraisal?

MB: You want to set an acceptable scope of work – particularly, the extent to which the subject property is going to be inspected.

There are a variety of intended uses that lead to differences in the scope of work:

  • Maybe it’s going to be an interior/exterior inspection
  • Maybe it’s going to be exterior-only drive by
  • Maybe it’s a desktop
  • Maybe it’s a hybrid
  • Maybe it’s a bifurcated

So, understanding the extent of the inspection is important. If there’s not going to be a personal inspection by the appraiser, then how is the appraiser going to obtain reliable information on the relevant characteristics of the subject? I think that must be decided up front.

Advisory Opinion 2 titled “Inspection of Subject Property,” found in the USPAP Guidance and Reference Manual, is an excellent source for more information and guidance on this topic.

4. While you’re developing the appraisal, how do you find the best comparable sales information to include to ensure it’s highly defensible?

MB: The appraiser should focus on substitutions and what market sales substitute for that subject in a physical, functional way. The old test is: Would a buyer of the subject property also consider this other property? Would it substitute for the subject property?

When it comes to comparables or valid substitutions, there are a variety of factors. Is it the same market area? The same subdivision? Does it have the same number of bedrooms or bathrooms? You must have a good reason as to why you’re including something in your sales comparison grid.

5. How can you prepare your workfile or appraisal report for a question about adjustments for the differences between the comparable and the subject property?

MB: Ideally, you’d want something in your workfile that shows how you, the appraiser, derived that adjustment. Did you use the mythical, magical matched pairs that may or may not exist? Did you use groups of sales and data? Did you use regression analysis? How did you arrive at that number or that percentage adjustment?

You don’t want to default to the old answer of, ‘based on my judgment and experience, that’s just what I thought it was.’ You want to have some mathematical backup in your workfile.

6. Are there any important areas to consider when reporting your appraisal result to your client?

MB: Oh yes. You must make sure you understand which reporting option you’re using. Are you using an Appraisal Report with more detail, or are you using a Restricted Appraisal Report with less detail?

Certainly, the Appraisal Report is more common. Under USPAP, there are Standard 2 reporting requirements for the Appraisal Report. Appraisers want to make sure they meet all of the USPAP reporting requirements. It is very important for appraisers not to rely on a preprinted report form to meet all those requirements.

When reporting your appraisal result, you want to use USPAP as your checklist. Standards Rule 2-2 Content of a Real Property Appraisal Report starting on page 22 of USPAP sets forth the minimum requirements for each reporting option. I suggest that every appraiser read this section.

Also, I highly recommend Advisory Opinion 38 titled ‘Content of an Appraisal Report and Restricted Appraisal Report’ found in the USPAP Guidance and Reference Manual. This Advisory Opinion has a great chart starting on page115 that makes for an excellent checklist.

Years ago, I spoke with an appraiser who had a complaint and was in some trouble because they used a preprinted form. It was a vacant land form that they merely filled in the blanks without supplementing the form. When the complaint came along, it did not go well when the appraiser’s report was compared to the minimum reporting requirements.

Unfortunately, this appraiser was under the impression that if they filled in all the blanks of a preprinted form then they would meet all the requirements. This appraiser, sadly, entrusted a form to meet USPAP when it’s the appraiser’s job to meet USPAP by reading and studying USPAP.

7. To ensure the most defensible appraisal report, what do you need to have in your workfile?

MB: You want every version of the report to be saved in the workfile. Any change that you make; anything that you do, even a small change such as the correction of a typo. If the client doesn’t like the way you abbreviated an address, and you go in and change it, then make sure this amended report is in the workfile.

Unless there is a new assignment, you want to keep the effective date of the opinion of value, but you want to change the report date or signature date to the date that you actually issued that report.

In today’s world, sometimes there can be multiple reconsiderations of value or multiple requests to make a correction or to provide more information. Sometimes an appraiser can have several versions of an Appraisal Report and the workfile needs to have a clear trail of each version.

An appraiser wants to have the original letter of engagement and the resulting Appraisal Report. For subsequent versions of the report, the appraiser wants to have documentation in the workfile that shows why they produced any subsequent reports. Be sure to have a very clear paper trail that shows why additional reports were issued.

8. Is there anything about the workfile that might be important when defending against a lawsuit or appraisal board complaint?

MB: A detailed workfile is a thing of beauty, especially when the bright spotlight comes on your appraisal assignment a year or two or three or more from now and you are trying to remember what you did. With a detailed workfile, you can access your notes on what you were thinking on that location adjustment. You can go in there and find the sales that you chose not to use and your notes on why you didn’t use those sales.

You have data on your adjustments. You have notes from the inspection. Generally, a detailed workfile can be one of the best things an appraiser can have to protect against grounds for suing an appraiser.

9. Any final words of advice for an appraiser wishing to put together a highly defensible appraisal report?

MB: Assignment selection is really important. Not only from a competency level, but also from circumstances. Sometimes you get pushed timewise, and maybe you don’t have enough time to develop the needed level of analysis. Sometimes you get pushed result-wise from someone who wants you to move a number in a particular direction. Sometimes you might get asked to appraise a property in an area where you’re unfamiliar with the market.

Whatever the circumstances are that are giving you an uneasy feeling, trust your gut. Declining an assignment or withdrawing from an assignment is allowed.

I’ve talked to so many appraisers in the last several decades who have had a regulatory issue with their board or civil matter. So many of them have said something like, ‘I knew when I was doing this, that I shouldn’t have taken this assignment. I knew this was a problem, but I just went ahead and did it anyway.’

My advice is to listen to that voice. Do not be worried about declining an assignment or withdrawing from an assignment. Sometimes the most rewarding appraisal assignment you will ever have is the one you turn down.

Grounds for suing an appraiser: Be prepared with defensible reports

By following Mel’s advice to be extra detailed in your workfile, keep extensive notes, and ensure your paper trail is accurate, you will be better equipped to deal with any potential lawsuits or appraisal board complaints that may come your way.

Another excellent way to ensure you’re protected if the appraisal board comes calling or a lawsuit hits your doorstep is to stay up to date on the latest advancements in the industry through McKissock’s appraisal continuing education courses. Check out our course, “Learning From the Mistakes of Others: Appraisal Disciplinary Case Studies,” to get examples of rules violations and what the appraiser could have done to avoid them.