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Editor’s Note: This story first appeared in Working RE’s print edition. (Am I a Working RE Subscriber?)
Disciplinary Process–How It Works, Your Rights & Likely Outcomes
by Robert Weinstock, JD, MBA, CBA, CVA
While the number of licensed real estate appraisers nationwide has decreased, the number of complaints filed against appraisers has increased. For example, in my home state of California, complaints against appraisers have increased by 40% even though the number of appraisers has declined, according to the California Bureau of Real Estate Appraisers (BREA).
It is now very easy for a member of the public who is unsatisfied with the results of an appraisal and loan process to blame the appraiser. After all, if the appraiser was competent (so they argue), he or she would have correctly valued the property and the transaction would have been completed.
Many states allow consumers to file complaints against appraisers online. While it takes only minutes to file a complaint, the process against the appraiser can take months or even years to resolve. Further, it can result in large legal fees, fines and even cost an appraiser his or her license.
In California, there were approximately 360 new appraiser licenses applied for in 2015. During this same time period, there were roughly 250 complaints filed against existing appraisers. Over 80 percent of the disciplinary outcomes involved citations and fines.
The most common violations appraisers are charged with relate to USPAP Rules 1 (development of an appraisal) and 2 (real estate appraisal reporting). Citations (no additional fine) are typically applied to violations that do not involve fraud, gross ethical abuse or significant lack of competency.
California allows fines of up to $10,000 per violation. However, most fines range from $500 to $3,000 per violation. Additionally, all cases seeking revocation of a license seek cost recovery from the applicant. There is no statute of limitations on collection and the citation could theoretically be filed as a claim against your estate.
The complaint process is a little different in each state. It’s important to learn how things work in your state. In California, any action filed against an appraiser is brought by the Department of Consumer Affairs. Cases are heard in front of an administrative judge, not a trial judge. You are entitled to be represented by an attorney, but that is not required. Since it is not typically a criminal matter, you are not entitled to a jury trial and do not have Miranda rights (the right to remain silent). Typically, the case is handled by an “investigator.” The investigator may or may not be an appraiser. If needed, the investigator can then have an appraiser review the appraisal, testify against the appraiser, or prepare their own appraisal.
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After the complaint is filed, the appraiser then has the right to respond to the allegations. Note that some of the complaints are upward of 50 pages in length and are extremely specific. The complaint may also include an analysis from a state-hired appraiser who explains what the appraiser did wrong and why it does not meet required standards.
After the response is filed by the appraiser, there is typically a conference scheduled between the appraiser and the state to come to some type of resolution. A “Consent Order” may also be offered. This Consent Order is essentially an acceptance of liability by the appraiser. Oftentimes, the state will pressure the appraiser by threatening to pursue greater sanctions if the appraiser does not sign a Consent Order and admit guilt to a lesser violation (Visit WorkingRE.com; search Consent Orders). If there is no resolution, the case will be heard in front of the administrative judge. The appraiser may bring his/her own experts, documents, etc. in order to mount a proper defense.
Types of Violations
As indicated above, most disciplinary actions against appraisers are for violations of USPAP Standards 1 and 2. However, USPAP is very general and a violation can be subjective. As an example of the problem, USPAP Standard 2-1 requires that…”all written reports, whether self-contained, summary or restricted clearly and conspicuously state ‘all extraordinary assumptions’ and hypothetical conditions used in reaching value conclusions.”
The term “all extraordinary assumptions” cannot be literally followed. As an example, “it is an extraordinary assumption that all real property appraisals performed for United States real property is being performed in U.S. dollars.” While that may seem silly, if you have to literally state all extraordinary assumptions, wouldn’t that and other equally ridiculous assumptions be required? Enforcing objective standards against a subjective set of rules such as USPAP is difficult. Who is to determine whether an extraordinary assumption should be included or not? The state licensing authority, that’s who!
Summary of Actual Disciplinary Action
The following is an actual 2015 disciplinary action against an appraiser in which the appraiser lost his license and was required to reimburse the state for its investigation and prosecution costs in the amount of $125,828. In addition, if the applicant should care to reapply for a new license, he shall be required to pay an additional $115,828.
While I will not refer to the appraiser by name, cases involving discipline are typically a matter of public record and are published for everyone to see.
Facts of the Case
The appraiser (let’s call him Mr. “Smith”) was a Certified General appraiser. He also holds an MAI certification and had been licensed continuously for nearly 25 years. He was said to be working on his law degree.
After complaints about the appraiser were received, nine of his reports were questioned regarding their compliance with USPAP. In the end, the judicial officer determined that this appraiser violated USPAP Rules 1 and 2. The process of reviewing each report was similar. Each of the appraisals in question was assigned to an investigator. These were different individuals who were all real estate appraisers working for the state in an official capacity. The state investigators/appraisers each concluded that there were deficiencies in all nine appraisals.
Each investigator submitted their own appraisal and their reports were incredibly detailed. The analysis of one investigator was nearly 200 pages in length. The state appraisers appear to have had free reign and no time budget. The investigators spoke to neighbors, brokers, city officials, verified sales data, and more. They also reviewed Smith’s workfile for each of the nine appraisals.
After the investigators performed their appraisals, an administrative hearing took place. In this instance, the licensee was not represented by counsel. Also note that appraiser Smith did not call any witnesses or experts and testified on his own behalf. Meanwhile, each investigator provided testimony to the court as to what the appraiser did wrong.
After the hearing, the administrative judge, in a 75-page (single spaced) document, reached the decision that all nine of Smith’s reports did not meet USPAP standards. As an attorney, I can tell you that the administrative judge applied incorrect law in his findings. While this likely did not alter the outcome, it is still worth noting.
The issue the administrative judge was asked to determine is whether any of Smith’s nine appraisals were “misleading or contained unsupported opinions.”
In finding that the appraiser did not comply with USPAP, the court noted that they had a problem with the response of the appraiser. They noted that he (1) admitted no wrongdoing, even when the violations were obvious, (2) offered little evidence of mitigation, and (3) offered no evidence that he tried to rehabilitate himself.
The findings of the court were:
1. Smith’s work file did not contain documentation to substantiate the facts.
2. Smith was not a credible witness.
3. There were typographical errors in Smith’s appraisals.
4. Smith failed to disclose and analyze relevant property and market characteristics which resulted in communicating the appraisal in a misleading manner.
5. Smith’s location adjustments were arbitrary and not supported (he made adjustments based on location, view, etc.).
6. Smith failed to disclose the existence of railroad tracks near the property, despite the fact that they were five miles away.
7. Smith did not mention that the properties were in an earthquake zone.
8. Smith did not analyze the price per hole of golf course properties in the area when one of the properties was located on a golf course.
After reading the facts of the case, the testimony of the state investigators and the conclusions made by the court, I have very mixed emotions. On one hand appraiser Smith definitely made some errors which caused his appraisals to be misleading and inaccurate. These were very complex residential appraisals. In one instance, Smith testified that his fee for the appraisal was $4,700.
The question is not whether Smith was negligent. What impresses me most is the extent to which the state investigators went out of their way to punish Smith and have his license revoked. The state investigators (with 20/20 hindsight) performed their analysis and took steps that were outside of the scope of typical appraisal practice. Examples of this include the fact that the court stated that Smith should have considered “as a benchmark” comparable, Donald Trump’s residence in Florida which sold for $95,000,000 (the subject property is in California). The investigator also retained an expert witness from a governmental agency to testify about potential zoning issues and why Smith did not accurately consider the potential future zoning of the property.
Additionally, the investigator interviewed other property owners. One of the investigators concluded that Smith did not learn of the “dirty little secret” regarding soil issues that other neighbors were aware of and this was a USPAP violation.
In determining whether Smith should lose his license and whether he should be responsible for the state’s fees and costs, the court looked to, among other things, two main factors: (1) since these deficient appraisals were submitted, did Smith seek to rehabilitate himself, and (2) did Smith correct his business practices. The court answered no to both questions. They found that there was no rehabilitation.
As indicated, Smith’s license was revoked. Further, since he did not make any attempt at rehabilitation, did not correct his business practices and admitted no wrongdoing, he would be responsible for all fees and costs.
State Investigator 1 spent 160 hours of billable time in investigating one of the appraisal reports. His state billing rate was $67.03 per hour for a total of $10,732 which Smith is required to pay. Note that Smith testified that his fee for the appraisal was $4,700.
State Investigator 2 spent 973 hours investigating the other eight appraisals. At his hourly rate of $67.03, Smith is required to pay $65,220.
Further, the Attorney General’s office billed $54,065 for legal services. These services were a combination of attorneys ($170 per hour) and paralegals ($120 per hour). The total fine was $125,828 and if Smith is to ever reapply for a new license, he is required to pay an additional $115,828 to reimburse the state for additional fees and costs!
Summary of the Smith Case
The lesson to be learned here is that when you have a complaint filed against you, it is a very real threat to your livelihood and you should prepare yourself as if it were any other type of litigation. First, you should report the complaint to your insurance company and seek the services of their attorneys or if you don’t have insurance, hire an attorney. This attorney would be the buffer for information and discussions between the state and the appraiser. The attorney will be in a better position to negotiate on your behalf. (You should also seek the help of experts such as Bob Keith, MNAA, IFA, Former Executive Director for the Oregon Appraisal Board. If you’re an OREP insured, the consultation is free.)
Further, and this is very important, put your best foot forward when communicating with the state. It is obvious from reading this case that no one seemed very fond of Smith. You and your attorney or consultant should provide any evidence you have to mitigate the damage. You should also consider hiring your own appraiser and expert witness to testify that if there were USPAP violations, such violations did not result in a misleading appraisal. Finally, the appraiser should be ready to accept punishment for any mistakes and should consider ahead of time what he/she can offer the court in exchange. This would include admitting wrongdoing in exchange for taking additional educational courses and paying a fine.
If appraising is your livelihood, you should take a complaint seriously. Be prepared to spend money on a lawyer (if you do not have insurance) and on experts. Also, be ready to accept the punishment because if a complaint is filed against you, you are likely to suffer some sort of consequences. Finally, take some additional educational courses on USPAP, ethics, etc. as this will be considered as mitigation and rehabilitation.
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About the Author
Robert Weinstock, JD, MBA, CBA, CVA is a licensed attorney and state licensed appraiser. He is the principal of the firm Strategic Valuation Group, LLC located in Calabasas, California. He has not only been active in real property appraisals, he has also been involved as litigation counsel in actions for and against appraisers. He has also been a temporary judicial officer for the county for nearly 10 years, hearing in excess of 1,000 cases.
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