A homebuyer approaches the largest single investment of his or her life with feelings of excitement and a bit of anxiety. The buyer selected a property, presented an offer that was accepted almost right away, and secured a loan to complete the transaction. Now the big day arrives and, amongst a stack of other papers, the buyer is presented with a copy of a appraisal report showing that the house was worth more than the contract price. Sure, there are some additional pages with codes like C2 and Q4. It looks like there are other paragraphs containing some standard language. But the important part is that the estimated value is higher than the contract price. What a win!
Several months later, the problems begin. There are some adverse conditions impacting the property and it looks like the buyer may have overpaid. The appraiser said the property was worth way more and now that appraiser won’t even answer any questions or return calls. It must be that the appraiser is hiding something. The buyer consults a lawyer and the process starts.
In my practice, I have defended appraisers against lawsuits and licensing complaints based on a variety of concerns, but almost all roads lead back to the same issue – a reader did not understand the contents of an appraisal report and they were ultimately dissatisfied with the outcome. A number of times, I have observed a buyer in a transaction initiate a license complaint or a lawsuit against an appraiser and others involved in the lending process because he or she later concludes that someone made a mistake. In these instances, a license complaint may proceed and the regulator may look at all aspects of the appraisal assignment, even if the buyer was incorrect in their gripe. More frequently, however, lawsuits against the appraiser are going nowhere, which is great for the appraisal profession from a dollars and cents standpoint but can also be harmful to the reputation of the profession and to the public trust. And much of this is due to a fundamental misunderstanding of the appraiser’s role in a transaction and who he or she serves.
Instead of less appraisals being utilized, maybe consumers (and the public trust generally) are best served by having more appraisals as a part of the process. Craig Capilla
In a mortgage backed real estate transaction, lenders utilize appraisals to provide an opinion of value of the transacted property in order to ensure the collateral can backstop the amount of the loan. Various levels of risk are associated with the different loan products marketed to the public and so different types of appraisal reporting options are available and appropriate. There is no one size fits all model. Since lenders are a sophisticated recipient of appraisal reports, the level of detail provided in the report and the manner of the reporting can be confusing to the average person. That said, law requires that a copy of this appraisal report must be provided to the borrower in a transaction. For many buyers, this is the only appraisal they will see in the process. In some cases, borrowers are being advised that they can waive the appraisal process entirely and so there may not be any appraisal to present to the buyer.
More frequently than in years past, sellers are engaging appraisers for a pre-listing appraisal to ensure the property will be offered and marketed properly. These types of assignments are private client work for the appraiser and allow the appraiser to work with the seller to craft a report that is useful, also allowing the appraiser to answer questions and further explain the process as necessary. Because this type of assignment is for the benefit of the seller, the report associated with the assignment will almost never find its way into the hands of the buyer. Here, the seller has the benefit of being able to understand the valuation process and how to best position the home in its market.
What is notably missing from the above examples is any real guidance for the buyer. In the event of a mortgage backed transaction, the buyer may or may not receive a copy of an appraisal report, and what is received may be something akin to hieroglyphs. In a cash purchase, there will likely be no appraisal at all. Even if the buyer has engaged an appraiser for pre-listing work, that appraisal will almost certainly not be made available to the buyer. In either instance where an appraiser may have been engaged, for either the lender’s appraisal or the seller’s appraisal, that appraiser may not be able to address the concerns of the buyer. In any event the other appraisal recipients may be perfectly satisfied with the reporting of the appraiser and/or may have had their additional questions or concerns addressed directly and that information may be neither available nor understandable to the buyer. And this is where the trouble often begins.
Many borrowers do not realize that the appraiser is often prohibited from discussing the results directly with the buyer. This confusion can lead to additional frustration in the process, sometimes leading to license complaints and lawsuits. Buyers are rarely informed that the appraiser is only allowed to communicate with his or her client regarding an appraisal assignment due to confidentiality requirements. Without the express permission of the client, an appraiser may not disclose confidential information to a third party (detailed somewhat in the Uniform Standards of Professional Appraisal Practice – the rules of the road for real estate appraisers and a part of licensing laws across the country). It is common for a borrower to assume they they have a right to access the appraiser and the information, because the cost of the appraisal has been passed through to the borrower. In reality, who paid for the report has little connection to who may rely on the report. In fact, in a number of states, courts have ruled that the borrower has no right to rely on the appraisal report and the facts or opinions contained within.
Various levels of risk are associated with the different loan products marketed to the public and so different types of appraisal reporting options are available and appropriate.
– Craig Capilla
In each of these scenarios, a buyer may benefit from directly engaging an appraiser to provide insight into the market and provide context to the value opinion. A buyer’s appraisal is an area of the valuation practice that is little discussed, but that appraisers are certainly equipped to handle and can provide significant comfort to the buyer. What’s more, a buyer who engages an appraiser directly can seek the necessary clarification and get a more digestible report once the appraiser is able to determine the level of detail necessary to provide a set of conclusions that are meaningful to the buyer. That additional layer of communication and understanding can greatly help to minimize confusion and lead to more positive outcomes in a real estate transaction.
For the better part of the past several years, I have read articles about eliminating appraisals from the transaction in order to reduce points of friction. Whether that friction point actually exists is a different debate. I’d instead caution against the general movement for getting things done fast to the detriment of getting things done right. Instead of less appraisals being utilized, maybe consumers (and the public trust generally) are best served by having more appraisals as a part of the process. In an era where information is king, it seems shortsighted to skip over opportunities to obtain more information, and in a more understandable format, for the sake of speed. Maybe, for the buyer, there is something more important than quick. And maybe, for the appraisal profession, there is an opportunity to educate the consumer about the value of the appraiser, and not just the property.