Engagement Letters

Not just a quaint display of business etiquette, the Engagement Letter can be an effective tool to protect your liability exposure. Many claims against real estate appraisers arise because of misunderstandings between the client and the appraiser about various aspects of the appraisal assignment. The Engagement Letter can provide you with vital documentation that key elements of the report were considered and accepted in advance by the client.

In one claim reported to our office, the client alleged the appraiser valued the incorrect parcel of land. Unfortunately, the appraiser only had his handwritten notes of verbal instructions received from the client. Written confirmation of the exact description of the property would have greatly aided his defense.

In another case, the lender hired the appraiser to estimate the value of a hillside lot and specifically requested that the appraisal not take into account geological or construction feasibility factors. The appraiser wisely noted this unusual instruction both in the report itself and in an Engagement Letter. Subsequently, the loan was sold to another lender who received a copy of the appraisal. When the borrower defaulted, the new lender sued the appraiser claiming the property had been undervalued because the appraisal failed to consider serious geological and percolation problems. Along with the fact that the appraiser owed no duty of care to the second lender, this claim can be strongly defended because the appraiser confirmed his original instructions both in the appraisal and in the Engagement Letter.

The Engagement Letter may also strengthen your defense against third-party claims. Along with specifics of the appraisal assignment, the Engagement Letter should include a statement that the appraisal is prepared for the sole and exclusive use of the client. You should also request that the client seek your written authorization to release the report to any other party.

One of our insureds was sued by a borrower who claimed he had a right to rely on the appraisal. Although the appraisal was ordered by the lender, the appraiser listed the name of the borrower in the "Borrower/Client" field on the report. Sometime later, the borrower sued the appraiser for failure to discover and disclose defects of the property. The appraiser tried to argue that the report was prepared for the use of the lender, not the borrower. The borrower pointed to the appraisal to support his position that he, too, was the client. An Engagement Letter confirming that the appraisal was for the sole and exclusive use of the lender/client would have been very helpful to the defense.

To enhance the effectiveness of any additional language you may have added by addendum, we recommend that you include a copy of them with the Engagement Letter for your client`s review and approval. It may become important to be able to demonstrate that this additional language were more than mere boilerplate language buried in the back of the report. Ideally, you should ask the client to review and initial each page and return a copy to you, thereby demonstrating the client`s acceptance of these provisions.

Essential Elements That Might be Addressed in the Engagement Letter:

  • The address and/or legal description of the property to be appraised.
  • The name of the client.
  • The fact that the appraisal is prepared for the sole and exclusive use of that client.
  • A request that the client seek the appraiser`s written authorization before releasing the report to any other party.
  • The purpose of the assignment.
  • Estimated report completion date.
  • Confirmation of information regarding the property already provided by the client.
  • Request specifically what information will be needed to adequately complete the assignment, such as construction plans, current leases, etc.
  • Stipulate that the appraisal can be completed only upon receipt of this requested information.
  • Clarification of the fee arrangement, including any additional expenses.

We recommend that an Engagement Letter be generated for each and every appraisal assignment, regardless of your familiarity or relationship with the client. Although we believe it to be an effective means of loss prevention, we cannot guarantee that the use of an Engagement Letter will provide protection in all circumstances.

We have included a sample Engagement Letter for your review. You may incorporate any or all of the suggested language. We regret that our office is not in a position to review or render an opinion on your own particular Engagement Letter. We recommend that you periodically consult with a local attorney for advice on the effectiveness and suitability of your Engagement Letter and Statement of Limiting Conditions and Appraiser`s Certification.

Sample Engagement Letter

(date)

(client name & address)

RE: Appraisal of ________

Dear ________,

Pursuant to your request, we are happy to submit a proposal for the appraisal of the property located at ________.

The appraisal shall be prepared for (client named above) and is for the sole and exclusive use of (client named above). We request that you seek our written authorization before releasing the report to any other party.

The purpose of this appraisal is to estimate the market value of the property. The legal property appraised would be the (fee simple/leasehold/etc.) interest. The property will be valued as of (date).

The appraisal will be prepared in accordance with the Uniform Standards of Professional Appraisal Practice. Attached to this letter you will find a copy of our Statement of Limiting Conditions and Appraiser`s Certification which are attached to all appraisals prepared by this office. Please review and initial each attached page and return the executed copy to us indicating your acceptance and approval of our Limiting Conditions and Appraiser`s Certification.

The estimated completion date of the appraisal is ________. We can only complete the appraisal by this date if we receive from you in a timely manner any relevant information needed for the preparation of the report. In order to complete this appraisal, the following information will be needed: (list of such information).

We will furnish you with ________ copies of the appraisal report. Our fee for this appraisal will be $________. This fee (does/does not) include the cost of certain expenses that may be incurred in the preparation of the report. (If expenses not included) A bill for these expenses will be provided to you upon completion of the report.

A retainer in the amount of $________ must be paid to this office before we can commence the preparation of this report. (or) A bill for the $________ appraisal fee will be presented and immediate payment will be requested at the time the report is completed. (or) A bill for the appraisal fee of $________ along with any other expenses incurred will be presented to you along with the completed report.

We will proceed with the preparation of this appraisal upon receipt of a signed copy of this letter and an initialed copy of the Statement of Limiting Conditions and Appraiser`s Certification. If you have any questions about anything contained in this letter or in any of the attachments, please give us a call.

Sincerely,

(appraiser signature)

Engagement Letter Accepted:

___________________________________________________
(client signature) (date)

Copyright 1996. LIA Administrators and Insurance Services. All rights reserved.