COVID-19 Appraisal Risk Management
by Isaac Peck, Editor
Five months into the Coronavirus pandemic, it’s beginning to feel like this is the new normal. Fannie Mae, Freddie Mac, and the Federal Housing Finance Agency (FHFA) have extended their appraisal flexibility guidelines through August 31, suggesting that the new alternative appraisals, such as the desktop and exterior-only assignments, will continue to be accepted as long as COVID-19 remains a significant safety concern in the U.S.
Amidst this new appraisal environment and with a very uncertain economic outlook on the horizon, one of the (many) questions on appraisers’ minds is how to practice good risk management during these unique and somewhat volatile circumstances.
Despite what many pundits have predicted, so far residential real estate has not declined nationally, with many local markets experiencing limited inventory and even seeing price increases. But what does the future hold? Consequently, appraisers are wondering what, if any, disclosures and disclaimers should be included in their reports, as well as how best to navigate the risks inherent in appraising during a pandemic.
Here’s what the experts are saying.
Safety Best Practices
For starters, appraisers should follow the health protocols in their state/locality to ensure the safety of themselves and those they interact with. This not only protects the appraiser’s own health, but also helps limit their liability as they are following proper safety protocols in line with industry standards.
In California, for example, the California Department of Public Health (CDPH) and Cal/OSHA issued guidelines for real estate transactions that stipulate how real estate agents should operate, including the establishment of a COVID-19 Prevention Plan on all listed properties. The guidelines require the plan to include instructions for all property visitors, including appraisers, to use personal protective equipment (PPE) such as face masks and gloves, carry hand sanitizer, maintain physical distancing and avoid touching surfaces of the shown property.
Because the Cal/OSHA guidelines stipulate that all visitors to a property must confirm their understanding of the rules, the California Association of Realtors (CAR) has developed a Coronavirus Property Entry Advisory and Declaration (PEAD) form that many appraisers are being asked to sign before being allowed access on to the property. The PEAD form advises the appraiser/visitor that visiting properties may be unsafe and it requires the signer to attest that they will maintain social distancing, wear gloves, a face mask and shoe coverings, and that they do not currently have any symptoms or have been in contact with someone who has symptoms of COVID-19.
Some appraisers have been worrying about facing lawsuits alleging that they spread COVID-19 to the property’s inhabitants or to others visiting the property. While positions on this point vary, the North Carolina Association of Realtors® addresses such concerns in a Q&A posted to its website, writing: “A hold harmless agreement protects a party from liability if another party is injured on their property or is injured during an inherently dangerous activity. In the case of a pandemic, where the risks associated are not only widely known but is also widespread, easily transmittable and may not show symptoms for days after exposure, proving causation would be nearly impossible from a legal standpoint.”
David Brauner, Senior Broker at OREP.org, a leading provider of appraiser E&O insurance nationwide, says that “virus spread” claims might be legally possible but from his research, including insurance company guidance, it would be difficult to prove the facts needed to demonstrate direct causation. “We are looking for certainty at a time when certainty does not exist,” Brauner said. “The best precaution appraisers can take in this regard is to follow the local safety protocol, wear PPE, maintain social distancing, and stay home if you’re not feeling well.”
Given the concerns about virus-spread, Brauner reports that many appraisers insured by OREP have asked about whether they should sign the PEAD form or other forms like it. “The recently released PEAD form is now being used widely throughout California following CAR’s strong recommendation of it as well as the guidance issued by CDPH and Cal/OSHA. We don’t see a problem with our insureds signing it as long as you can sign it in good faith, i.e. you are following the safety standards in your locality and you don’t have any symptoms,” says Brauner.
However, the state and local laws, as well as the forms appraisers are being asked to sign, can vary widely. Brauner advises appraisers to be careful when signing any agreement that requires the appraiser to indemnify a bank, Realtor®, or third party in the event a claim were to arise alleging damages due to COVID-19 spread. “It makes sense, and it’s in every appraiser’s interests to meet or exceed their local safety protocols, but you shouldn’t be indemnifying anyone or agreeing to pay their legal claims just to visit a property. E&O typically does not provide third-party coverage. Make sure that you read any agreement you’re asked to sign carefully and be on the lookout for hold-harmless and indemnification language,” advises Brauner.
Another very important question is what kind of disclosure or disclaimer should appraisers include addressing COVID-19 and market conditions. Is COVID-19 going to crash the real estate market?
When the pandemic first started, appraisers began using canned disclaimers that included statements: “COVID-19 is a national pandemic, but the effects of COVID-19 on the real estate market in the area of the subject property are not yet measurable based on reliable data.”
However, now that the country has been in the midst of the pandemic for over six months, such statements are no longer sufficient. COVID-19 has had an effect on the market and the question is, what is that effect?
The solution, according to Appraisal Institute Director of Screening Stephanie Coleman, MAI, SRA, AI-GRS, AI-RRS, is to not address the uncertainty of the market using limiting conditions, extraordinary assumptions, or disclaimers, but to instead report what is happening to the market right now. “We come up with not what we think the value of a property is, but what we think the market thinks it is. To figure out what the market’s opinion of what a property is worth, we start with market analysis. Market analysis is a lot easier when market participants feel confident they know what’s happening. When there’s a great deal of uncertainty in the market, market participants become confused, and figuring out what ‘typical, reasonable and knowledgeable’ buyers and sellers think, and how they would react, becomes complicated,” writes Coleman.
So what is to be done? “The best we can do is talk to market participants—buyers, sellers, brokers. What’s happening with active escrows? Are buyers backing out? Are sellers holding off on listing properties? Reducing prices? Offering concessions? What’s happening with days on market? What are brokers hearing? Are tenants renewing leases? Are businesses closing and vacating? Are vacant spaces getting leased? Are developers going ahead with development plans, or have they put them on hold?”, Coleman asks.
In other words, instead of making an extraordinary assumption that the market is stable, or that the market is declining, appraisers should report what is happening in the market today. And this speaks volumes about why the research, experience and ultimately the opinion of an appraiser is so important.
Richard Hagar, SRA and a popular appraisal education instructor, reminds appraisers the most important question is what is happening locally. “Fannie Mae’s form is not asking for national information or even regional, they want to know what’s happening in the NEIGHBORHOOD, right now in the last week or two, if not yesterday. Good MLS systems have this information available. Where I appraise here in western Washington, I can drive down to an individual county, city, MLS area and even a one block area and I can report on what is happening now. If there’s a negative impact on value, it’s up to the appraiser to measure and report it, not default to a statement that it may impact value,” says Hagar.
In Hagar’s local market of western Washington, he says the market is actually going up. “We have higher prices than we did last year at this time. The listings are dramatically down and it is creating a shortage driven market. In northwestern Washington, we’ve had 2,200 new listings come on the market in the last week, but over 4,000 homes have changed to ‘Pending’ during that same time period, so homes are going under contract almost twice as fast as they’re being listed. Listings are staying active for an average of four days in some neighborhoods. I was actually very surprised to see prices increase during COVID-19, but my job is to report what the data says, not what I thought was going to happen. I’m not a fortune teller,” reports Hagar.
Brauner echoes that in addition to reporting what is happening in the appraiser’s immediate market, the appraiser should include a statement in their report that they are not predicting the future. “Some of our OREP insureds are concerned about the future of the real estate market and want to include statements that their market may decline or even include an extraordinary assumption that the market will decline. However, on a typical assignment, the appraiser is providing an opinion of value that is a snapshot in time and reflects what is happening in the market as of the effective date. You should absolutely be on the lookout for changing market conditions, but in terms of appraiser risk management, don’t try to predict the future. Make it clear that your appraisal is not a guarantee or prediction of future market conditions, but instead report and analyze the data that is available to you about what is currently happening in the market,” advises Brauner.
The most effective way to limit your liability, according to Brauner, is to provide up-to-date data and analysis in the appraisal report. “Appraisers should be on the lookout for the effects that COVID-19 is having on their local real estate market. As soon as those effects are measurable, you should report on them, whether it’s positive or negative. Describe what you are seeing in the market,” says Brauner. “If you are unsure about how to do this effectively, there is plenty of online education from OREPEducation.org and other well-respected providers that will help you manage your liability and make you more valuable to your clients.”
A standard disclosure that OREP has offered its insureds is the following:
This appraisal was performed during the COVID-19 pandemic which has begun to have widespread economic and health impacts throughout the United States. The analyses, conclusions and value opinion in this appraisal are based on the data available to the appraiser at the time of the assignment and apply only as of the effective date indicated. No analyses or opinions contained in this appraisal should be construed as predictions of future market conditions or value.
The Appraisal Institute has published additional guidance on how to report on Market Conditions, including Guide Note 10: Appraising in the Aftermath of a Disaster, Guide Note 11: Comparable Selection in a Declining Market and Guide Note 12: Analyzing Market Trends. To find links to these Guide Notes, visit OREP.org/marketconditions.
Another potential risk appraisers are facing is the use of third-party data when completing an appraisal report. Even though the new Fannie Mae forms include statements that the appraiser has “relied on data provided by third parties,” Brauner advises to include an additional statement that reiterates that you did not personally inspect the interior of the subject property. The goal is to describe in clear, plain English what information you received, what you observed, and ultimately what you did for the assignment. “If you got the data from the real estate agent, or interviewed the property owner, or used a specific type of software to collect the data, be sure to save notes, transcripts, and details of those conversations in your workfile,” Brauner said. Describe the details of what you did and how you did it and most importantly—why you did it, clearly in your report, and save the proof to your workfile. Most claims happen years after a report is completed, so be sure to make detailed notes and save them to your workfile so you don’t have to try to reconstruct what you were thinking years after the fact.”
It should go without saying that if you didn’t personally inspect the interior of the property, don’t say that you did. Fannie Mae, as well as The Appraisal Foundation (TAF), have issued guidance clarifying the point, with TAF writing that: “It would be misleading for an appraiser to indicate that an interior inspection of the subject property was performed, when, in fact, the appraiser only viewed interior photos, video, or other data from technological solutions.”
In a Q&A published in Fannie Mae’s Selling Guide on June 3, 2020, Fannie clarifies that extraordinary assumptions are NOT allowed on any exterior-only or desktop product, indicating that: “If adequate information about the subject property is not available from a credible source, then the desktop or exterior-only inspection appraisal is not acceptable. Appraisers must have data sources they consider reliable.” However, Fannie adds that the “assumption that data sources are correct is not considered an extraordinary assumption.”
Hagar advises appraisers to accurately disclose what they did and didn’t do. “If you didn’t drive by, don’’t say that you did. If you relied on information, then say so. And even though Fannie doesn’t allow extraordinary assumptions, you can still put that you assume that the information provided to you is accurate. But, just like Fannie says, if you don’t think credible information is available, don’t do the assignment,” says Hagar.
Risk and Disclaimers/Disclosures
The reality of the current situation, not only for appraisers, but for all Americans across the country, is that the future of the real estate market and the U.S. economy remains uncertain. There are some similarities between the recession of 2008 and what is happening now, such as wide-scale unemployment and turmoil in the financial markets, but there are also stark differences. Residential real estate has held its own so far and there remain many sectors of the economy that are healthy.
No one has a crystal ball. All appraisers can do is be diligent in their reports, and take the necessary precautions to protect themselves.
According to Brauner, over 50 percent of claims filed against appraisers are from borrowers. Such claims usually involve a degree of buyer’s remorse, but often allege measuring errors, inaccurate or negligent analysis in the appraisal report, incorrect zoning, undisclosed defects in the construction/condition of the home, and so on.
To protect against those claims, appraisers can use the following statement in their reports: The only purpose the appraiser intends for this appraisal report is to communicate a credible opinion of the market value of the subject property, as defined in this report, to the above referenced client. That client is the only user the appraiser intends of this report. The only use the appraiser intends for this appraisal is to assist the client, as its sole intended use, with the client’s internal decision-making purposes relative to placing a mortgage on the property. Because the appraiser has not identified any borrower, purchaser, or seller as an intended user of this appraisal, such unnamed parties should not rely on the appraisal for their own purposes, or for any purposes whatsoever. Payment for the appraisal, either directly or indirectly, or receipt of a copy of the appraisal report by any other third party does NOT means the party is an intended user of the appraisal. If such parties require an appraisal for their own use, the appraiser advises them to obtain an appraisal from an appraiser of their own choosing. This appraisal report shall not serve as the basis for any appraisal contingency in a purchase agreement relating to the property or any property purchase decision.
Along those same lines, Brauner/OREP advises appraisers to include a statement in their reports indicating that the appraisal is not a home inspection and the appraiser is not qualified to diagnose or identify defects or hazards present at the home.
Appraisers can include the following two statements in their reports:
- This appraisal report is not a home inspection and should not be relied on to disclose faults, defects, or property condition problems present at the subject property. The appraiser is not a home inspector. A formal home inspection for the subject property was not provided to the appraiser. The appraiser does not guarantee or imply that the property is free from defects. A professional home inspection is recommended on all property purchase transactions.
- Due to the limited extent of the appraiser’ s observation of the property, it is assumed that all major components of the subject, and comparables, are built to community standards typical of the era when the improvements were built or updated. We do not research building permits, well or sewage disposal information. I/We do not know if building permits were obtained or what building codes were in effect at the time of the improvement’s construction or modification. No verification of building or land use permits is performed. We assume that all hidden components (including but not limited to framing, foundation, plumbing, electrical, insulation, HVAC systems) exist, were built to local standards and are in working order. Typically, crawl spaces and attics are not entered or viewed. It is assumed that there are no structural defects hidden by floor or wall coverings and that all mechanical equipment, appliances, electrical components, and roofing are functional. If the client has any questions regarding these items, it is the client’s responsibility to order the appropriate inspections. The appraisal does not serve as a warranty on the complete condition of the property.
Brauner reminds that E&O insurance is THE underpinning of any appraiser’s risk management strategy. “You will always hate paying for it until you need it,” says Brauner. “Then when you need it, you’ll be very grateful you have it. It’s the best sleeping pill there is.”
Because many appraisers are choosing this time to step away from appraising for a bit or to retire early, he advises them to pay some attention to their E&O. “If you take a break from appraising, close up shop and join a larger firm, or retire, you will want to make sure you get Extended Reporting Period (ERP) coverage (also called ‘tail coverage’).” This needs to be done at the time your policy expires, Brauner says. “It protects you into the future for all your previous work completed during the years you were covered and within the policy period. It’s something that we always remind our insureds of because it’s so important. Call us or your agent if any of this is not clear.”
Some appraisers try to trim expenses during downturns by letting their E&O policy expire. Because all professional (E&O) policies are Claims Made, the risk is that an unreported claim arising from an old appraisal may not be covered if the policy has expired. “The way to stay protected is to maintain continuous E&O coverage or purchase ERP coverage,” Brauner says. “For those OREP insureds are retiring and qualify, you get free lifetime ERP,” reports Brauner. Call OREP or your agent for more. Stay safe out there! WRE
Information for this story reproduced from Appraiser Liability and Risk Management (7 hours approved CE) offered through OREPEducation.org. (Available Q2 2021 and available free to OREP insureds/members.)
About the Author
Isaac Peck is the Editor of Working RE magazine and the Vice President of Marketing and Operations at OREP.org, a leading provider of E&O insurance for appraisers, inspectors and other real estate professionals in 50 states. He received his master’s degree in accounting at San Diego State University. He can be contacted at firstname.lastname@example.org or (888) 347-5273.