1. Failure to Discover or Disclose a Defect or Condition in the Property.

This claim is most often made by Borrowers. Just in the past year, we received claims that alleged an insured appraiser failed to discover, detect and/or report (1) water in the basement/crawlspace; (2) repairs, construction or additions done without proper building permits or not in accordance with local building codes; (3) problems with electrical, plumbing, heating and or cooling systems; and (4) some kind of insect or rodent infestation or damage caused by prior infestation.

These defect claims often arise from a misunderstanding of the appraisers' role in the transaction. We must often explain that the appraiser is NOT a home inspector...or an inspector of any kind. Further, the appraisal is not prepared for the benefit of the borrower (no matter who pays for the report). It is prepared to enable the lender to make an informed decision regarding whether or not to make the requested loan on the property.

2. The Appraised Value is Too Low.

Most of these claims are made by Sellers who are upset and angry that the potential buyers' appraisal did not meet the contract price. Sometimes, they have to lower their price to close the deal and sometimes they lose the sale and have to relist the home.

Low appraisal claims are also made by Borrowers. Maybe a borrower has built the custom home of their dreams, and they don't understand that the high-end finishes in their construction budget would not appeal to all buyers and don't always contribute to market value. Sometimes a refinance Borrower doesn't understand that the "improvements" they have made to their home have simply corrected deferred maintenance and brought their property in line with similar homes in their price range. When someone is angry about value, they will often make a claim.

3. Mistake in the Appraiser's Calculation of Square Footage.

Most of these claims are based upon a pure and simple misunderstanding. Many borrowers (and their counsel) have no idea that any finished space below grade, no matter how lavish or high end it may be, cannot be included in GLA or in the appraiser's bedroom or bathroom count. This misunderstanding can serve as the basis for many nasty demand letters, as well as some name calling..."how could the appraiser have been so blind and stupid that he completely overlooked the 2 bedrooms and 2 full bathrooms in the finished basement?"

Sometimes the claim focuses on confusion about how square footage factors into value. The appraiser may adjust bedrooms and bathrooms on the comp grid based upon how they are viewed in a certain market and they look at a variety of factors to determine a price per square foot. When the buyer has a chance to review the report, they accuse the appraiser of either playing games or not understanding basic math because the price per square foot multiplied by what they claim is the Gross Living Area does not add up to the Appraised Value. So the appraiser CLEARLY made a mistake....at least in the mind of the buyer they did.

From the Desk of Claudia Gaglione

What is important to remember is that third party claims can be defeated. The appraisal report is not prepared for the borrower or for the seller. There is case law in numerous states that specifically says the appraiser owes no duty to a third party that is not an intended user. The appraiser can help to strengthen that argument by adding some simple language (refer to our Claim Alert: Limitation of Liability) to every report that reinforces the fact that the report is an APPRAISAL NOT A HOME INSPECTION. It should be stated that no third party is entitled to rely on the report, even if they paid for it.

With supporting case law, and language from the appraisal report, we can often get a lawsuit dismissed in a matter of months.