Real estate appraisers should be comfortable in a courtroom. They serve as expert witnesses in a variety of legal proceedings. But sometimes, appraisers find themselves in the wrong seat. Instead of sitting on the stand as an expert witness, an appraiser can end up at counsel’s table as a defendant to a lawsuit.
Appraiser liability risk has been a hot-button issue since the economy crashed in 2008. After the housing bubble burst, the value of securities tied to real estate prices plummeted. The result was the worst economic crisis since the Great Depression. As the dust settled, government authorities and private parties began looking for scapegoats. Real estate appraisers became targets.
Individuals and companies claiming to be victims of overstated property valuations have sued appraisers for negligence and professional malpractice, negligent misrepresentation, and even fraud. It may come as a surprise to some that the plaintiff is not always the appraiser’s client. The person suing the appraiser may be a third party with whom the appraiser had no direct relationship.
Unfortunately, there is no foolproof way for real estate appraisers to completely eliminate the cost and risk of litigation. But the following strategies can help appraisers manage their risk:
1. Incorporate your business.
Real estate appraisers should operate through a corporation, limited liability company or other entity that has a liability shield. When they enter into agreements and issue valuation reports, appraisers should sign as employees of the companies they work for. There is no good reason to conduct business as an individual without the backing of an incorporated entity.
2. Get liability insurance.
Real estate appraisers should invest in errors-and-omissions policies. Insurance can be expensive, but if you get sued, you would rather have an insurer pay your legal bills than pay the bills out of your own pocket.
3. Put your engagement agreements in writing.
A comprehensive and unambiguous written engagement agreement is the best way to counter a client’s claim that the appraiser made a promise he did not actually make.
4. Avoid conflicts of interest.
Appraisers should be objective. According to Ellen Herman, president of E.B. Herman Companies, appraisers get into trouble when they try to value properties based on what the client wants, instead of remaining disinterested. Chad Wiech of Chadwick Real Estate Appraisals agrees. “Appraisers are not advocates,” he says. Performing a biased appraisal is a good way to make mistakes and get sued.
5. Follow industry standards.
In addition to various state and federal statutes and regulations, appraisers should follow published industry standards. Licensed appraisers must comply with the Uniform Standards of Professional Appraisal Practice (USPAP). An appraiser licensed in multiple states must educate himself about local USPAP variations. “You need to know the rules in each state,” says Bob Strachota, president of Shenehon Company. “They’re different.” Appraisers that have the Appraisal Institute’s MAI or SRA designations must also follow special rules. Industry standards are not necessarily legal requirements, but courts often look to industry standards when deciding whether appraisers have satisfied their legal duties of care. An appraiser that follows the rules will have a stronger defense than one who violates them.
6. Use disclaimers.
USPAP requires appraisers to list assumptions and limiting conditions that qualify their valuation opinions. Clearly explaining the limitations of your report is also good practice. For example, if an appraisal report expressly states that it contains no opinion about the environmental condition of the subject property, someone reading the report will be hard-pressed to argue that it led them to believe the property was contamination free.
7. Identify the intended purposes and users of your appraisal.
In some cases, it may be foreseeable that a non-client will read an appraisal, even if he was not one of the intended users identified in the appraisal report. Still, expressly identifying the intended users and purposes of an appraisal should limit the number of third parties with standing to attack it.
8. Develop and apply internal controls.
For example, Shenehon Company has a dual-signature process that requires at least two officers to sign off on all valuation opinions before they are finalized and sent out the door. Appraisal firms that have more than one senior appraiser should consider similar checks-and-balances to protect the integrity of their valuations.
9. Do good work.
Obviously, a slapdash appraisal carries greater liability risk than a thorough and well-supported report. Do your homework. Use credible market data. Apply accepted methodologies. “The best defense is a credible opinion,” explains Chad Wiech.
An appraiser should only be in court when he wants to be. Following the above strategies can help an appraiser continue playing his preferred role in the courtroom: a disinterested expert witness, not a frustrated defendant. Philip J. Kaplan