One issue that continues to be litigated around the country is the extent to which an appraiser is liable to a borrower for a negligent appraisal prepared for a lender.  This issue was recently addressed by the Georgia Court of Appeals. 

In Adams v. DeWitt, 2014 WL 2609974, a purchaser of a property allegedly relied upon an appraisal in deciding to purchase the property.  However, the appraisal expressly stated that the appraisal was intended solely for the use of the lender.  This is generally standard language in appraisals for lenders.  The Court of Appeals held that the appraiser owed no duty of care to the borrower and that it was proper for the appraisal to contain limitations such as those contained in the appraisal.

The law on this subject varies by state and should be consulted if this is an issue.

The Appraiser Qualifications Board of The Appraisal Foundation released a new exposure draft of proposed revisions to the 2015 Real Property Appraiser Qualification Criteria. It includes a new requirement that all applicants for real property appraiser credentials have a background that does not call into question public trust.  Applicants would be required to provide state appraiser regulatory agencies with all information and documentation necessary for a jurisdiction to determine an applicant’s fitness for licensure. An applicant will not be eligible for an appraiser credential if they have been convicted of or pleaded guilty or nolo contendere to a crime that would call into question the applicant’s fitness for licensure.

Due to the original effective date of the background check requirements (Jan. 1, 2015, but now delayed until Jan. 1, 2017), some states already have implemented new laws, some of which contain provisions that go far beyond what is required as minimum criteria by the AQB.  

One frequent issue in eminent domain and other valuation cases is the admissibility of appraisals obtained by a party other than the appraisal they intend to actually use.  For example, in a case that will be heard by the VA Supreme Court, VDOT had two appraisals in an eminent domain case.  VDOT chose only to present the lower value appraisal to the jury and the judge prohibited any reference to VDOT’s higher appraisal.  VDOT has been criticized for this tactic and have been accused of bullying tactics by one newspaper.   http://hamptonroads.com/2014/11/states-high-court-should-put-vdot-its-place-unfair-property-appraisals

It is not uncommon for a property owner or a condemning authority to have more than one appraisal.  Condemnors have been criticized for paying property owners the lower of the appraisal amounts.  The VA Supreme Court will decide the admissibility of these appraisals.

It is also not uncommon for property owners to obtain more than one appraisal in eminent domain and other settings.  One way we try to protect these appraisals from being obtained by third parties is to retain the appraiser – or other experts – as “consulting experts.”  These experts’ work product can then be protected as confidential “work product.”

So, if you are considering retaining valuation experts, it is important to consider retaining these experts through an attorney.

Mortgage Daily has reported that there was no quarterly change in the risk of mortgage fraud, according to the 2Q 2014 National Mortgage Fraud Risk Index published by analytics firm Interthinx.  However, the risk of Valuation fraud was up for the quarter.

The mortgage fraud risk index, which is based on an analysis of loans processed through the FraudGUARD system. California has the highest fraud index. Florida and New Jersey are tied at second place for highest overall risk.  The national Property Valuation Fraud Index was higher than the first quarter and the same point last year.

The US House Financial Services Committee approved H.R. 5148 which would grant certain “high-risk” mortgages an exemption from having an appraisal performed in accordance with the Uniform Standards of Professional Appraisal Practice (“USPAP”).  USPAP – the Uniform Standards of Professional Appraisal Practice – is provided by the Appraisal Foundation and is described as “the generally accepted standards for professional appraisal practice in North America. USPAP contains standards for all types of appraisal services.”

Supporters of the bill, including the Appraisal Institute, argue that it could open up a range of valuation services and create flexibility for lenders to order an appraisal when the development and reporting requirements suit the needs of the assignment.  AI has stated that, “While Section 2 in the legislation would provide an exemption from evaluations in cases where the value of loans classified as ‘high-risk’ is below $250,000 and kept on the creditor’s balance sheet for at least three years, the number of loans that fit this criteria is expected to be very small. And despite the exemption . . .  many banks [are expected] to still obtain an appraisal because it’s good business practice.”

The Appraisal Institute has produced its Standards of Valuation Practice which may, in certain circumstances, be used as an alternative to “USPAP.” USPAP – the Uniform Standards of Professional Appraisal Practice – is provided by the Appraisal Foundation and is described as “the generally accepted standards for professional appraisal practice in North America. USPAP contains standards for all types of appraisal services.”

According to AI, the Standards of Valuation Practice:

  • Can be used as an alternative to the USPAP or the International Valuation Standards when the use of USPAP or IVS is not required and the use of the SVP would be appropriate;
  • Will serve as an alternative set of standards that could be used, not an additional set of required standards; and
  • Will not supplant USPAP or other national standards.

Effective Jan. 1, 2015, Appraisal Institute Designated members, Candidates for Designation and Practicing Affiliates will be required to comply with either:

  • The Standards of Valuation Practice, promulgated by the Appraisal Institute, and the Certification Standard of the Appraisal Institute; or
  • Applicable national or international standards, and the Certification Standard of the Appraisal Institute.

 

Data from commercial real estate firm Calkain Companies confirms that the demand for net lease assets remains strong.  Transaction volume for these properties increased 15 percent.  Retail net lease cap rates have compressed to below 7 percent.

“Net leases remain highly popular in 2014, averaging the lowest cap rates in the past three years despite interest rate increases over the same period,” Winston Orzechowski, research director with Calkain and co-author of its Net Lease Economic Report.   “Institutional investors are increasing their exposure as net leases become a significant part of general commercial real estate portfolios.”

According to analytics firm Interthinx, the risk of property valuation fraud increased during the first quarter.  The report noted that in addition to high property appraisals, individuals purchasing and listing multiple properties in the same neighborhood to artificially control prices to their advantage also is a contributing factor to the rise in property valuation fraud risk.

“This quarter’s report is a reminder that lenders need to be aware of emerging fraud risks,” Jeff Moyer, president of Interthinx, said in the report. “The rise in property valuation risk is troublesome because collateral values are a critical element in making sound lending decisions. To make lending decisions with increased confidence in the loan’s quality, we recommend that lenders use automated tools early in the valuation process to double check opinions of value, quality of work and regulatory compliance on issues such as licensing.”

In order, the top 10 riskiest states and regions during the first quarter are California, the District of Columbia, Florida, Maryland, Arizona, Connecticut, New Jersey, Maine, Arkansas and Colorado. For the first time since the inception of this report in 2009, Nevada is not in the top 10.

My partner, Abe Reich, recently successfully argued before the PA Supreme Court a case determining “whether the occurrence of a murder/suicide inside a house constitutes a material defect of the property, such that appellees’ failure to disclose the same to the buyer of the house constituted fraud, negligent misrepresentation, or a violation of the Unfair Trade Practices and Consumer Protection Law’s (UTPCPL).”  The Court held that “a murder/suicide does not constitute an actionable material defect.”  Although it is an unusual setting, the case has broader applications.

In Millliken v. Jacono, the Defendant purchased a house that was the location of a murder suicide by its prior owners.  After renovating the property, the Defendant listed the property for sale and informed their listing agents of the murder suicide.  However, after consultation with attorneys and representatives of the PA Real Estate Commission, she did not disclose the murder/suicide as a known material defect in the Seller’s Property Disclosure Statement.

The Plaintiff purchased the property and after moving into the house learned of the murder/suicide.  She claimed that had she known of the incident, should would not have purchased the house.  She sued the defendant and the listing agent for fraud, negligent misrepresentation and a UTPCPL violation based on the Defendant’s failure to disclose the murder/suicide.

Defendants’ moved for summary judgment arguing that the Plaintiff’s claim failed as a matter of law.  The trial court granted summary judgment dismissing the case, a three-judge panel of the Superior Court reversed the trial court and an en banc Superior Court, on reconsideration,  affirmed the trial Court.  Plaintiff appealed to the PA Supreme Court.

The PA Supreme Court affirmed.  It explained, “Regardless of the potential impact a psychological stigma may have on the value of property, we are not ready to accept that such constitutes a material defect. The implications of holding that non-disclosure of psychological stigma can form the basis of a common law claim for fraud or negligent misrepresentation, or a violation of the UTPCPL’s catch-all, even under the objective standard posited by appellant, are palpable, and the varieties of traumatizing events that could occur on a property are endless. Efforts to define those that would warrant mandatory disclosure would be a Sisyphean task.”

The Court further explained that, even if an event is such a majority of the population would find disturbing, and a certain percentage of the population may not want to live in a house where any such event has occurred . . . this does not make the events defects in the structure itself. The occurrence of a tragic event inside a house does not affect the quality of the real estate, which is what seller disclosure duties are intended to address.”

Therefore,, even though the underlying facts are unusual, there are applications to other settings.  For example, an aspect of a house that negatively impacts value does not necessarily need to be disclosed.  Further, it appears the Court is limiting required disclosures to “defects in the structure itself” and the “quality of the real estate.”

The PA Superior Court recently addressed issues regarding determining the fair market value of property in the context of a “deficiency judgment” proceeding.  In Liberty Philadelphia REO, LP v. EFL Partners V, L.P., the Superior Court held that it was proper in that case to fix the fair market value of condominiums based on the developer’s approach.  The appellee argued that the appraiser employing that approach used the “bulk sales” approach which it claimed was prohibited by Cheltenham Federal Savings and Loan Associations v. Pocono Sky Enterprises, Inc., 451 A.2d 744 (Pa. Super. Ct. 1982).  The Court held the appraisal was proper and that Cheltenham did did not reject the bulk sales approach in all circumstances.