Good Business: Engagement Agreements

Good Business: Engagement Agreements                          

by Bill King

Each real estate appraisal performed is an independent assignment. The Uniform Standards of Professional Appraisal Practice (USPAP) defines an assignment as a valuation service provided as a consequence of an agreement between an appraiser and a client. For an agreement to exist, each party has a set of expectations, and some reason to believe that their expectations will be met by the other party. Once an agreement has been reached, the engagement process is complete and the assignment begins.

The agreement between the appraiser and client can come about in a variety of ways. In residential appraisal practice, it is not uncommon for an appraiser to be engaged verbally, or by a simple handwritten note transmitted by fax. Depending on the nature of an existing relationship and the history that may exist between the appraiser and that particular client, this method of engagement may be perfectly adequate. But in a great many cases, this leaves open to question a great many important aspects about the assignment. In other words, one or more of the parties may have expectations that have not been made clear.

There is no requirement in USPAP that an appraiser be engaged in writing.  In fact, USPAP does not address the engagement process at all but it does address the scope of work (SOW) in great detail.

By definition, SOW is the amount and type of information researched and the analysis applied in an assignment. SOW includes but is not limited to the following:

1. the degree to which the property is inspected or identified,

2. the extent of research into physical or economic factors that could affect the property,

3. the extent of data research,

4. the type and extent of the analysis applied to arrive at opinions or conclusions.

USPAP makes clear that the burden of proof is on the appraiser to decide before accepting an assignment that the SOW applied will result in opinions and conclusions that are credible.

It certainly seems reasonable that setting out the requirements of the assignment in writing beforehand will result in the highest possibility of having a SOW that is consistent with what the client requires.

Many major financial institutions and other clients who use appraisal services often use a master engagement agreement or master services agreement that covers in great detail the expectations that are being placed on the service provider. Once a master services agreement has been reached, individual assignments are placed on a case-by-case basis, typically with a one-page assignment request that refers back to the master services agreement. For situations where an ongoing relationship has not been established or is not expected, a single page document is often used to engage the appraiser for a given assignment. Whether this agreement is drafted by the appraiser or the client, it should reflect the terms and conditions that have either been as discussed or that are typical practice in this kind of assignment.

What to Include

What should be included in the engagement letter at a minimum are the same elements identified in USPAP as being required for determining the appraisal problem to be solved and that then flow into the SOW decision.  These elements include:

1. Who is the client and what is their intended use of the assignment results;

2. Who are other intended users of the assignment results;

3. What is the type and definition of value to be sought;

4. What is that the effective date of valuation for the assignment;

5. What are the relevant property characteristics, including physical legal and economic characteristics that might affect the property;

6. What other assignment conditions including extraordinary assumptions, hypothetical conditions and other limiting conditions.

The first four items on this list are generally straightforward and don't often require further discussion or elaboration.  The last two items, however, can have a great deal of impact on the overall SOW in a given assignment. There can be as many variations in these two areas as there are properties, therefore it is critical to have a clear understanding with the client at the outset, as to what the relevant characteristics and other conditions are that will affect assignment results.

Let's take a brief look at each one of these items and break down the details that might follow in an engagement agreement.

Client, intended use and intended users

Client:  The engagement agreement should name the client and indicate the fact that the appraisal is prepared for the sole and exclusive use of that client only. You may also want to include a request that the clients seek the appraiser's written authorization before releasing the report to any other party. Other items to address in this section of the agreement might include:

a.   To whom the report will be delivered and where;

b.   What the method of delivery will be;

c.   The due date/date of delivery of the report;

d.   How many copies of the report are be to be provided;

e.   Who the primary point of client contact will be through the assignment;

f.    Name and contact information for gaining access to the property;

g.   The appraisal fee and how and when it is to be paid

                      i.    Late fees, collection fees, if any

                      ii.    Retainers

                      iii.   Additional expenses, if any

                      iv.   Cancellation fees

Some appraisers like to include a provision that ties the completion date of the assignment to the ability to gain access to the property within a specified period. If access is either delayed or denied, the due date will be extended.