Appraisers and Appraisals: Dodging Civil and Criminal Landmines

While not the only culprit, fishy appraisers have caused a tidal wave of predatory lending, mortgage foreclosure and real estate litigation, and, more recently, blistering criminal prosecutions.

Understanding appraisals’ parameters, methodology and time value, appraisers’ licensure and standards, and what is meant by “intended use” is critical to consumer finance litigation.

Real Estate Appraisals and Appraisers

An “appraisal” is an opinion of value of a parcel of land and any structures and improvements.

Although the “actual value” cannot be ascertained until the lot is sold, appraisals should be independent, impartial and objective opinions of market value based upon facts and circumstances known to the appraiser at the time.

Some appraisers specialize in residential or commercial properties, some value both, while others offer comprehensive business valuations including valuing personalty and intellectual property.

Standards for Appraisals

Appraisal practice is governed by the Uniform Standards of Professional Appraisal Practice, (“USPAP”), and any appraisal done in connection with any federally related transaction must be in accordance with USPAP.

USPAP is overseen by The Appraisal Foundation, a private nonprofit organization establishing appraisal licensure‘s minimum qualifications, which, in turn, is overseen by the Congressionally created Appraisal Subcommittee.

Although requiring appraisers to arrive at an opinion of value using a methodology consistent with these standards, industry practice and the appraisal assignment, USPAP does not dictate exactly how an appraisal must be performed.

Methodology for Appraising

Appraisals commence with information gathering - - including a site visit and taking photographs - - to ascertain recent sales of other comparable market properties, any income and expenses the property is generating, and cost of repairing any damage.

Next, appraisers determine an opinion of value using “sales comparison approach” (analyzing past comparable sales in the market), “income approach” (analyzing value based upon income the property produces), or “cost approach” (analyzing cost of rebuilding premises).

The task’s scope, intended user’s identity and nature of intended use factor into which approaches is used. For example, the sales comparison approach is heavily used in valuing single-family residential real estate, while the income approach is employed to value rental properties or businesses.

Time Value of Appraisals

Just as a picture only depicts its subject at a moment in time, an appraisal’s opinion of value may become stale immediately after its effective date.

For example, because both the market and property’s condition may rapidly change, a cluster of area foreclosures, extensive wind and water damage, or skyrocketing labor and/or building materials costs may quickly moot an otherwise valid opinion of value.

Similarly, hidden or latent defects unknown to the appraiser which are not visible upon inspection may also diminish the appraisal’s validity.

What is Meant By Intended Use

Because USPAP requires that each appraisal is performed with a specific, stated use in mind, an appraiser may utilize, ignore or weigh differently any of the approaches to value depending on the intended use.

For example, valuing a building for insurance purposes versus an outright sale may lead to applying different methodologies, which may produce differing opinions of value.

USPAP also requires that an appraisal identify its intended users. For example, in a traditional residential real estate financing setting, an appraisal is commissioned by the lender, who is the intended user for purposes of ensuring that if a mortgage default occurs the loan is sufficiently collateralized.