E-Appraisal Technology: High Tech or High Risk?

Emerging trends in appraiser technology present many new and exciting opportunities for appraisers in today`s Internet community. Tools such as on-line appraiser directories, Web-based appraisals, data resources, and Automated Valuation Models (AVM) help expand marketing efforts and increase speed and efficiency. However, it is important to understand that the effect on your liability exposure has yet to be fully recognized. Moreover, activities that are legally hazardous in traditional appraising, do not become less so just because they may be performed on-line.

Internet Affiliations

We have long advised appraisers to evaluate your clients and associates as carefully as you would the subject property. This holds true with Internet affiliations as well. Today there are several on-line appraiser directories and referral services. You may have already been contacted by an organization that wants to list your name in their directory or that wants you to provide appraisal services in exchange for a broader marketing base or affiliate service. Although this may be a viable business opportunity, be wary of associating with an unknown entity. Just because a company is doing business on-line does not automatically mean they are a reputable organization. Take the time to investigate a new company or business before entering into an agreement with them.

Be especially wary of any contract that requires you to indemnify or "hold harmless" a company with which you associate. Signing these types of agreements may create serious legal and financial obligations. For example, let`s say that Accurate Appraisal Company learns of a terrific Internet business opportunity. In return for a fee, Accurate Appraisal agrees to provide on-line appraisals to ReliableAppraisal.com. The standard services agreement contains a hold harmless clause. Unfortunately, when preparing a residential appraisal, Accurate Appraisal makes an error in calculating the square footage and over-values the property. The buyers make an offer based on the appraiser`s valuation; upon discovering the error, the buyers feel they paid too much and file suit against Accurate Appraisal and ReliableAppraisal.com. Accurate Appraisal is upset enough about the prospect of defending their lawsuit imagine their surprise when ReliableAppraisal.com demands Accurate Appraisal also pay the defense costs for their suit!

Such provisions are sometimes negotiable, but often they are not. Most errors and omissions insurance policies will pay to defend the insured appraiser, but not other parties whom the appraiser has agreed to indemnify. Appraisers should be aware that signing such contracts could create additional financial burdens and the potential exposure should be weighed against the revenue and benefits gained from the association.

On-line Appraisals

Another area of potential exposure results from publishing appraisals on-line, or posting your appraisal on the Internet for potential buyers of the property to view. It remains the appraiser`s duty to protect confidential information. Information that is posted on the Internet is no longer confidential, so the appraiser must obtain all necessary releases in order to publish the appraisal on-line. If the appraisal is being offered through an on-line service and the service agrees to obtain the releases, the appraiser should still follow-up to insure that the necessary steps are taken.

Aside from confidentiality concerns, posting data on the Internet vastly expands the number of potential claimants. Individuals and companies that never would have seen your appraisal in the past can now access and rely upon your data. A key loss prevention technique for appraisers is to limit the number of persons who have access to your report and to refrain from releasing the report without written authorization. Appraisers have fought hard to maintain that right. By providing your report on-line, you give up that right and run a much greater risk of a liability claim.

AVM's and On-line Data Sources

The use of technological tools such as Automated Valuation Models (AVM) and on-line data sources can be of great benefit to appraisers in the development of an appraisal. However, you should understand where the AVM or data source obtains its data before utilizing these tools. Public records are the primary source for many AVM`s; other sources include MLS data or information collected from other appraisers. Much has also been said about the reliability of information found in on-line databases, even if the data is provided by a professional appraiser. We agree that appraisers have the necessary skill and expertise to gather and report reliable data, but appraisers do sometimes make mistakes and report inaccurate information. You should take great care to verify all output from AVM`s or data sources to limit liability exposure.

According to the Appraisal Foundation`s Advisory Opinion 18, "the output of an AVM is not, by itself, an appraisal, and communication of an AVM`s output is not, in itself, an appraisal report." Therefore, care should be taken in communicating to your client that the value is based on an AVM and is not based on an appraisal. This may also entail explaining the difference between the two so that the client is not misled.

Some appraisers may look to on-line data sources as a way to prepare appraisals on properties located outside their normal geographical area. Rather than doing the "leg work", the appraiser can just access the necessary data from his computer. Appraising properties outside your regular area of expertise may be dangerous. When you are familiar with the area, you can probably tell immediately if on-line data is faulty or suspect. If you are unfamiliar with the area, inaccurate data may not raise any "red flags." You may unknowingly use bad data and then suffer the legal and financial consequences.

The appraisal profession continues to evolve, and lucrative business and marketing opportunities may be found on the Internet. While we encourage appraisers to explore these new avenues, we also caution you to be mindful of the risks involved in order to limit liability exposure whenever possible. It won`t be long before unforeseen claims arise from these emerging technologies, and the prudent appraiser will keep this in mind.

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