We live in one of the most litigious societies on the planet. Whenever we feel a wrong has been done to us we want to blame someone for it and make them pay. While this has caused a lot of controversy both in the media and the legal field, sometimes a topic comes along that stirs up all of our emotions. I am talking about the latest trend in real estate which is suing your real estate appraiser for over-estimating the value of your property when you bought it and thereby causing you to lose money when it's time to sell.
We all have heard the stories of how the banks are to blame for the real estate bubble burst. Loose lending guidelines and irresponsible underwriting caused people to be able to get loans when they really didn't qualify for them. But up until now other parties involved in the real estate industry have remained relatively unscathed. This is no longer the case for real estate appraisers. Recent court decisions have said that if a buyer can prove that an appraiser deliberately or negligently over-estimated the value of their property when they purchased it, and that property subsequently lost a large portion of its equity leaving the owner upside down, then the appraiser can be held liable for your loss.
The FDIC has instituted multiple lawsuits against both individual appraisers and appraisal companies for causing purchaser's or real property to lose money due to either the appraiser’s careless disregard for market trends and/or conspiring with a lender to over-inflate the value of a property. The FDIC has standing to bring these lawsuits as it insures the lenders who lost money on the loans made because of these false appraisals.
While fraud has always been prosecuted both civilly and criminally it is this liability for perceived negligence that has opened the floodgates for lawsuits against appraisers. The FDIC is also using the language of the USPAP to justify their lawsuits. Uniform Standards of Professional Appraisal Practice, commonly referred to by the acronym USPAP, can be considered the quality control standards applicable for real property, personal property, intangibles, and business valuation appraisal analysis and reports in the United States and its territories.
The FDIC's favorite alleged "USPAP violations" or other alleged errors in its most recent cases have been:
Some of the allegations of negligence against the defendant appraisers suggest that the FDIC is seeking to hold appraisers liable for things most appraisers would not normally expect. For example, in one lawsuit the FDIC is blaming the appraiser for failing to indicate that "the market was possibly slowing" at a certain price level in 2005 based on one of the selected comparable having been on the market for 91 days.
This has the appraisal community up in arms. Most of the errors and omissions policies appraisers carry do not protect them against this type of lawsuit. This means if you sue your appraiser and win, they are most likely going to be personally liable. To win you have to prove that the appraiser either conspired with the lender or mortgage broker to inflate the value of the property or was so negligent in their research of the property that you were damaged by their valuation.
This is a new and evolving trend in today’s real estate industry and it's one that many people will be following as it can lead to not only appraisers being sued, but any company along the chain of real estate being forced out of business such as the title companies, surveyors or possibly sellers.
Daniel Doran is a 20+ year veteran in the real estate industry. He is a previous owner of a law firm, mortgage and title company. Daniel has also written several books on mortgage modification, short sales and real estate investing. He currently specializes in Commercial Finance and Real Estate Development and is a graduate of Manhattanville College and Brooklyn Law School. You can contact Dan at Buildings By Owner.
I read the paper and I'm glad the legal research I did for you on it was helpful. It is an extremely in depth report and I recommend it highly.
I have always felt a real estate appraisers job was a no win scenario. Come in too low, too often and realtors and mortgage companies will not refer clients to you. Come in too high too often and lenders will remove you from their list of approved appraisers. I agree with you, it is at times a thankless and underpaid job.
Hopefully the appraisers who did their jobs correctly will not be grouped in with those who obviously took advantage of the rules.
As you no doubt anticipated I am alarmed over the FDIC allegations against appraisers, but on further reflections they simply echo those of the lenders operating in the secondary mortgage market. Those lenders are high risk clients of the kind that stimulate ever higher E&O premiums.
Appraisers who work in the secondary market must expect to defend ridiculous allegations, which begs the questions why and why for such low fees and untenable turn times.
Great article. I wanted to offer you a link to a white paper that a group of us just put out regarding land contamination and residential properties and many requirements that exist (many surrounding the appraisal/valuation process) that are largely being ignored. http://bit.ly/PDDckR
Thought you might find it interesting and topical.