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Another situation that is out of your control is fraud committed by the mortgage broker. In this case, there is a good chance that the lender would have a “blanket” lawsuit suing everyone involved in the loan.  This includes the mortgage broker, “straw” buyer, seller, real estate agent representing the buyer, title company and the appraiser.  It might be only one person or several who are in on the fraud but everyone might be implicated. You may be implicated if the appraisal request states: “estimated market value of $...” or “call me if the value is less than $...” or something similar. Not only is it a violation of USPAP, either one of those two statements gives the appearance of your collusion with the mortgage broker.

Why Appraisers Get Sued
I recently taught a continuing education class on mortgage fraud.  I conducted a survey as to why appraisers think they get sued and who they believe sues them. The results of the survey, as to why appraisers think they get sued, in descending order are: (1) value issue, (2) loan goes into default, (3) appraiser has E&O insurance, (4) mistake in the appraisal report, (5) falsified information in the report and (6) using non-MLS comparables that were not verifiable.  The results of the survey as to who appraisers think sues them, in descending order are: (1) buyer or seller, (2) lender or the GSE (government sponsored enterprises such as Fannie Mae, Freddie Mac, FHA or VA) and (3) spouse in a divorce case. Well, the fact is that appraisers get sued for all of these reasons. In any of these cases, your only defense is a supportable appraisal report. A bad appraisal report is not supportable. A good appraisal report that has good comparable sales, reasonable adjustments and a good text addendum that explains the important aspects of your findings and conclusions is considered supportable.

Having a complaint filed against you by your state appraisal board is bad enough; being sued by the lender, Fannie Mae or other purchaser of the loan, however, can seriously affect your livelihood as well as your pocketbook. The number-one reason why a lender might sue you is if the borrower defaults on the loan.  If the loan goes into default, the lender or GSE might hire an appraiser to perform a “retrospective” valuation of the subject property without going inside the house, with the date of the valuation being the effective date of your appraisal.  It’s ironic, isn’t it, that the lender typically doesn’t hire a review appraiser when the loan is made but is eager to do so after the loan is in default.

Fraud, Incompetence & Bad Appraising
What constitutes a valid reason to sue?  One is fraud.  What constitutes fraud?  Fraud occurs if you falsify your comparable sales or intentionally ignore an attribute that the comparable may have that your subject does not have or vice versa. A good example is if the comparable is on a lake or golf course but you ignore that and your subject is not on a lake or golf course.  If you claim that your failure to indicate that your comp is on a lake or golf course is a “mistake,” your mistake still misleads your client and that is a valid reason to be sued, especially if you failed to make an adjustment for the view difference or if the waterfront or golf course property would appeal to an entirely different type of buyer than a house not on a lake or golf course.  But fraud is hard to prove and most likely a lender will not sue you for fraud. A good reason is that your E&O insurance coverage excludes fraud.

Intentional or Unintentional - Oops!
Instead of your appraisal being considered fraud, the report might be considered just a bad appraisal due to incompetence if it violates Standards Rule 1-1 (a) and/or (c).  Standards Rule 1-1 (a) states that the appraiser must correctly employ those recognized methods and techniques that are necessary to produce a credible appraisal.  Standards Rule 1-1 (c) states that a series of errors, in the aggregate, affects the credibility of those results.  Read up on appraisal theory and proper appraisal techniques.  Take classes that relate to the sales comparison and cost approaches.  You may have initially taken an accelerated appraisal course in order to obtain your trainee license and then were taught poorly or in too short a time to know the proper way of making adjustments or determining if the subject is an over improvement or at its highest and best use.

What to do When Notified of Potential Lawsuit
Notification of a potential lawsuit might begin with a phone call or certified letter that puts you on notice of a potential lawsuit.  It may be a form letter with generalities only, such as the property address. Or it may be specific, indicating that the value you indicated in your appraisal report is in question or your selection of comparable sales.  No matter what the situation is, if you have E&O insurance, notify the company right away once you get official notification that you are going to be sued.  I don’t believe that an angry phone call to you, even coupled with a threat, is sufficient to notify your E&O insurance company or for that matter, to engage an attorney to represent you.

So what do you do first when you receive notification of a lawsuit?  First, save all correspondence.  Do not reply back immediately.  Start a paper trail by recording in a journal any phone calls or letters you receive regarding the potential lawsuit, including the date, time and who you spoke to. Second, look for your workfile on the appraisal in question.  If you are diligent in keeping records, you would have arranged your workfile so that all correspondence is in the beginning of the file, followed by the appraisal report (a true copy of the report you sent to your client), followed by your selected comparable sales, analysis performed and supportive data that relates to findings indicated in your appraisal report, including land sales and/or market extraction for the site value, replacement cost, new cost figures and finally any other data that you considered but did not use (other improved sales and rental information if the property is two units or more). 

Once you retrieve your workfile, contact your E&O company.  If you don’t have errors and omissions insurance, consider retaining an attorney on your own to represent you.  Some attorneys don’t charge for the initial consultation, others might charge a flat fee to represent you while others charge an hourly fee with an initial retainer to start correspondence.

Board Complaints
For a complaint filed against you by your state appraisal board, get an attorney who is very familiar with administrative law.  For a lawsuit, get an attorney who is a good litigator.  Having a good litigator representing you is more important than his/her familiarity with real estate law.  Also, have the attorney obtain an appraiser expert witness who teaches appraisal courses, is knowledgeable about USPAP and has courtroom experience.  An expert witness who is knowledgeable about USPAP, such as an AQB-certified USPAP instructor, but has little or no courtroom and/or classroom experience, would not be an effective expert witness.  Why is classroom teaching experience important? Your expert witness has to educate the “trier of fact,” whether it is a jury or judge.  If your expert witness is unable to explain the appraisal process, scope of work and how you did your research and applied appropriate methods and techniques in preparing your appraisal report, and the opposing expert witness is better at convincing the trier of fact, then no matter how correct your report is, your case becomes ineffective.

Can Insurance Company Settle?
During the course of discovery and depositions, the E&O company has the right to settle even if you strongly believe you have done nothing wrong.  Check with your E&O company to see if they have consent to settle provision in your policy. This is neither an admission of liability nor an admission of wrong doing.

Past Reasons for Getting Sued
Most lawsuits by lenders based on appraisals prior to 2010 involved a property in a declining market.  One potential reason for a lawsuit is that an appraiser failed to make a negative time adjustment when there was a declining market (for most areas this was between 2007 and 2010).  Sometimes the lender sues if you stated that the property values were “stable” when the One Unit Housing Trends area should have been checked “declining.”  A good response to that charge is that when the appraisal was performed, evidence of a decline in value could not have been supported and was not conclusive until many months later. 

Another instance is using developer sales and ignoring re-sales or sales outside of the development.  An appraiser who uses developer sales but fails to find out the date of the contract can cause an overinflated value in a declining market.  Many developments were under construction in 2005-2007.  The peak of the market was probably sometime between 2005 and 2006.  If you were appraising a unit in 2007 through 2009 and the developer’s sales were the only sales in the development, did you get a copy of the contract that showed the date the contract was entered into?  If the contract date was in 2005, there is a good possibility that the market had declined by the time the property closed, which may have been sometime between 2007 and 2009.  Therefore, that sale would have reflected a sales price much higher than if the unit was put on the market close to the time you performed your appraisal.

Current Reasons for Getting Sued
Appraisers for lending institutions follow three guidelines: (1) USPAP; (2) Fannie Mae - if the report is on a Fannie Mae form; and (3) lender or AMC guidelines.  The lender might restrict the appraiser to using only sales within one mile and within three to six months.  This limits comparable sales that could be more similar to the subject, even if in a substitute neighborhood but further than one mile.  Or a sale could be older than six months and be more comparable to the subject than those sales that are less than six months.  Consider using additional sales that support your value even if they are outside of the lender’s restrictions, in addition to those within the lender’s guidelines.  If the sales support a lower or higher value on comparables that you truly believe are better comps than the only ones allowed by your lender’s restriction, use them and give them a greater, weighted average for your concluded market value.

Liability for Bad MLS Data
How many times have you found mistakes in the Multiple Listing Service (MLS) and if it weren’t for the fact that you verified that sale, which means picking up the phone and calling the listing agent, you would not have known there was a mistake.  This includes sales concessions indicated in the MLS.  Some questions to consider include what are the requirements for relying on third party information versus the real estate agents, buyers and sellers, who have a vested interest in the property?  No matter who you rely on, Standards Rule 1-1 (b) under the comments section states, “Diligence is required to identify and analyze the factors, conditions, data, and other information that would have a significant effect on the credibility of the assignment results.”  Do you have evidence in your workfile regarding the verification of information you relied on?  Perhaps you might want to consider making a statement in your appraisal report that you relied on the information from these reliable sources and if found to be incorrect, may affect your market value.

Should You Retain Workfiles Longer than Five Years?
USPAP states that “an appraiser must retain the workfile for a period of at least five years after preparation or at least two years after final deposition of any judicial proceeding in which the appraiser provided testimony related to the assignment, whichever period expires last.”  Rather than throwing out your file after five years, consider the possibility of having it scanned and saved in an external hard drive.  It won’t take up office space and in case you are notified of a potential lawsuit, even if it is after five years, at least you have the necessary backup data to support your value conclusion.

In conclusion, no matter how good you think your appraisal report is, there is always that possibility of being sued.  While it may never happen, it is always good to have a plan of action just in case.  If you have E&O insurance, contact your insurance company and see if you can request the attorney of your choice, depending on the situation.  Keep a cool head and make sure you have a good support group.

About the Author
Philip G. Spool, ASA, is a State-Certified General Real Estate Appraiser in Florida, appraising since 1973.  Formerly the Chief Appraiser of Flagler Federal Savings and Loan Association, he has been self-employed for the past 19 years.  In addition to appraising, he is an instructor with Miami Dade College, teaching appraisal courses and continuing education.  He is also the Vice President and Chairman of real estate programs with the Greater Miami Chapter of the American Society of Appraisers.  He can be reached at pgspool@bellsouth.net.

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