Environmental Due Diligence

In 1994 Fannie Mae formally introduced environmental due diligence to the appraisal industry- so what has changed?

The Appraisal Journal (January 1995), published by the Appraisal Institute, included an article that reviewed what was then new environmental reporting requirements put in place by Fannie Mae and the new Uniform Residential Appraisal Report (URAR) form (effective January 1, 1994). It described the newly revised comment section that requires appraisers to report on “adverse environmental conditions such as, but not limited to, hazardous wastes, toxic substances, etc., present in the improvements, on the site, or in the immediate vicinity of the subject property.” The article says the section “clarifies an appraiser’s responsibility to report what he or she discovers during the inspection of the property and the normal research.”

The article identifies an appraiser’s due diligence, stating it must be “more than answering ‘none noted’ and relying on a limiting condition.” It cites USPAP and the G9 provision for guidance, sounding a cautionary note: “There are tens of thousands of known hazardous sites. Don’t be the appraiser who overlooks the site next door, or worse, the subject property.”

It is my opinion that when that story was written in 1994, before the digital revolution, it was nearly impossible to gather the data necessary to meet the Fannie Mae guideline if interpreted literally. Almost two decades have gone by since that article was written. In 2011, Fannie Mae revised its appraisal reporting requirements with the UAD (Uniform Appraisal Datasets) but not much has changed in reporting environmental conditions; appraisers are still hoping that they have limited their liability with the Limiting Conditions in the URAR, regarding not being an environmental expert. Appraisers are still making comments like, “not apparent,” “none obvious,” or “not applicable.”

Better Lucky than Good?
There is an old sports adage that it’s better to be lucky than to be good. When it comes to protecting ourselves from the liability associated with reporting environmental conditions, real estate appraisers have been more lucky than good. In an era where Fannie Mae and lending institutions are doing retro appraisals going back to 2005 and 2006, to recover money from appraisers and their insurance companies for errors made to value, can we continue to count on our luck? According to Environmental Data Resources (EDR), “Approximately 85 percent of the subject properties appraised in United States will have potentially sensitive environmental sites within a half mile.” Over the years there have been scores of court cases against real estate appraisers who have failed to effectively report environmental contamination that resulted in loss in value.

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