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Limiting Liability for Exterior Only and Desktop Appraisals

On March 23, 2020 Fannie Mae issued a Modified Set of Instructions, Scope of Work, Statement of Assumptions and Limiting Conditions, and Certification for Desktop Appraisals and for Appraisals with Exterior-Only Inspection. (Forms 1004, 1073, 1025, 1004C, 2090, 2055, 1075, 2095). See our COVID-19 Resources page.

The bulletins provide detailed instructions that appraisers must follow when completing reports. Further, appraisers are required to copy the specific text provided by Fannie Mae so that it can be pasted into every report.

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Fannie Mae has also instructed appraisers to enter the word “exterior” or the word “desktop” in the Map Reference field in the report.

At this time, focus is clearly on COVID-19 concerns; however, it is important to remind appraisers that they also need to pay attention to the same liability issues that existed before the COVID-19 pandemic became a priority.

Restate the Obvious

When preparing a Desktop or Exterior Only appraisal it is important to restate the obvious within the report, that being that the appraiser:

"...did not perform a personal visual inspection of the interior or the exterior of the subject property...", or

"...performed a personal visual inspection of the exterior of the subject property from the street and did not conduct any interior visual inspection of the subject property, whatsoever..."

It is true that similar statements are contained within the Fannie Mae required Appraiser’s Certification language that must be pasted into every report. It is also true that Judges have oftentimes considered such language to be “boilerplate” and have minimized the importance of such language and instead look to unique language added by the appraiser that is specific to the particular assignment.

Many appraisers are being asked to prepare an Exterior-Only appraisal on a Fannie Mae 1004 form. In that situation it is especially important for the appraiser to reiterate that he or she:

"...performed a personal visual inspection of the exterior of the subject property from the street and did not conduct any interior visual inspection of the subject property, whatsoever..."

Third parties might expect that a report prepared on a 1004 form would reflect the results of both an interior and an exterior inspection. The appraiser must include explanatory language to clarify this ambiguity and the possible confusion and misunderstanding that might result.

Explain and Support the Work File

When preparing the Desktop or the Exterior-Only appraisal, the appraiser does no personal inspection of the property or only a limited visual inspection from the street. In order to report the condition of the property the appraiser must gather information from third party, public or private data sources, that are deemed to be reliable.

This is not the time to be lazy or to cut corners. This part of the assignment is important. The credibility of your opinions depends upon the diligence of your investigation. How can you value a property that you may not have seen, at all...or that you only viewed from the curb?

Perhaps the property is currently listed for sale, or was listed in the recent past. There could be interior photos or even virtual tours available on realtor web sites or on MLS. It is possible the appraiser might have appraised the property in the recent past and he or she might have fairly current photos.

The appraiser may be able to gather information from public records or from phone interviews with the property owner or with local real estate agents. The appraiser is supposed report the condition of the improvements in factual, specific terms. The sources utilized should be stated within the report with some degree of detail. The appraiser must decide how much detail is appropriate based upon the subject property and the nature of the assignment.

This is not the place to insert “canned” or vague language. The same general language should not be dropped into every report. Saying the appraiser reviewed “existing public and private sources” is not sufficient. There must be facts and details.

It is recommended that the appraiser further supplement this part of the assignment with any needed work file notes. Remember that claims are rarely made within weeks of a report being completed. Rather, you may be called upon to defend a report months or years after it was prepared. No one can rely on their memory. The well documented work file can be an invaluable resource in the defense of a claim. Notes might include who the appraiser spoke to about a property and what was said during the various conversations that took place.

When asked how much detail or support should be kept in a work file, the answer always is as much as possible. We have never encountered a work file that contained too much information.

Remember that you must utilize reliable information when reporting upon and describing the improvements. If the property is in a county that is known for having assessor records that are rarely accurate, then you must take into account that the assessor records are not a reliable source.

If the Facts Reported are not "Facts"

No matter how hard you try, there is a real possibility that some of the property information you uncover might turn out to be wrong, inaccurate and/or incomplete. This is a risk inherent in any report that does not include an interior inspection of the property. If the appraiser did their best to uncover and report accurate information they should not be blamed if this turns out not to be the case.

The appraiser should confirm that the condition details could not be verified and if it turns out that any of the facts reported are not correct the appraiser assumes no responsibility for this.

These are extraordinary times with respect to having to deal with COVID-19 but appraisers have been asked before to provide an opinion of value even if they did not inspect the subject property.

In recent years, many lenders have been utilizing Hybrid appraisals. In these reports, the appraiser is asked to estimate value using inspection information and photos provided by a third party. The appraiser can base opinions and conclusions on this third-party information; however, the appraiser cannot verify accuracy and should not be held accountable if the condition information reported turns out to be wrong.

Again, restating the obvious, in plain language, is always beneficial to the appraiser and it is highly recommended that such wording be included in every report in the event the appraiser is being blamed for inaccurate information provided by what was deemed to be a reputable source.

Preparing for Risk

It must be remembered that the appraisal reports are going to be used by various lenders to make a mortgage finance decision. The reports might contain some extraordinary language and they might be prepared under some extraordinary circumstances, but they are still appraisal reports that could be the basis of a claim in the future.

An appraiser is far more likely to get a claim made by a third-party than a claim made by a lender/client. It is important that the appraiser continue to include specific language in every appraisal that addresses that third-party risk head on.

For years appraisers have been advised to reiterate that the only intended user is the lender/client and that the only intended use is for evaluating the subject property as security for a loan.

The appraiser should also remind anyone reading the report that an appraisal is not a home inspection and that it should not be relied upon to disclose actual or potential problems with the property.

The implications of COVID-19 are on the minds of everyone. Appraisers are trying to complete assignments under difficult conditions and considering the framework and "flexibilities" outlined by the GSEs. It is important to remember that there are liability risks inherent in every report and that appraisers need to remember those risks and to make sure they are well armed to undertake that fight should it arise.

Appraisal Report Language Examples

Highlighted below is language taken from appraisal reports we have seen as well as language quoted in published opinions.

It is not suggested that anyone include in their reports all of the language noted below. Many of the examples are duplicative and simply provide alternate ways to say essentially the same thing.

No one can guarantee that having this language in an appraisal means any third-party lawsuit will be defeated. What we can say is that it will certainly provide your defense counsel with more ammunition with which to argue in favor of that dismissal.

General example:

"The only intended user of this appraisal is the client ________. There is no other intended user. No purchaser, seller, or borrower are intended users of this report. No party, other than the intended user, should rely upon this appraisal for any purpose, whatsoever. The fact that some party, other than the client, paid for the appraisal, either directly, or indirectly, does not make them an intended user."
"The intended use of this report is to assist the client when deciding whether or not the subject property would be sufficient security for a requested loan. The report was prepared specifically to address, and to meet, the needs of the client. The report should not be relied upon for any other purpose. The report was prepared solely for the specific use of the client. No other use of the appraisal is intended, contemplated, or authorized by the appraiser."

This language addresses the borrower head on:

"The only intended user of this appraisal is the client_______________. This report was not prepared for use by the borrower. The borrower should not rely upon this report when deciding whether or not to purchase the property. The borrower should not rely upon this report to determine value. The borrower should not rely upon this report to determine whether the subject property is a good investment. The borrower should not rely upon this report to determine the condition of the property, whether it is free from defects and/or whether it is in need of any repairs. The borrower should not rely upon this report to disclose the presence of any environmental hazards that might exist at the property. The borrower should not rely upon any sketch that may be attached to this report nor upon the appraiser’s statements pertaining to Gross Living Area. The borrower should not rely upon this report to disclose if the subject property is located in a flood zone and/or if flood insurance should be purchased. The borrower should not rely upon this report when deciding how much insurance to purchase. The borrower should not rely upon this report to determine what it might cost to rebuild the property if it was completely, or partially, destroyed. If the borrower has any questions about any aspect of the subject property, the borrower should secure their own appraisal in order to answer those questions."

With respect to defect claims, it is important to always reiterate and to distinguish the purpose of the appraisal versus a professional home inspection:

"This appraisal report is not a home inspection. It does not guarantee or imply that the house is free of defects. The appraiser is not a home inspector. It is suggested that the borrower secure a professional inspection of the property and take the necessary steps to insure the house is acceptable to them prior to closing escrow."

This one includes more explanation as to the scope of work. This language is beneficial when defending all claims, not just those made by third parties.

"The Appraiser assumes no responsibility for the verification of the type, quantity, or quality of insulation, if any, used in the improvements The Appraiser assumes no responsibility for the adequacy, capacity or operating status of mechanical equipment or systems including, but not limited to, electrical, heating, cooling, plumbing, sewers, septic systems, water supply, etc.
The appraiser is not an environmental or hazardous waste expert or inspector. The Appraiser is not qualified to detect such substances. The appraisal was prepared based on the assumption that no such substances exist at the subject property.
The Appraiser is not a surveyor, nor an expert in legal matters. The Appraiser assumes no responsibility for the legal description or the accuracy of any boundary issues, including easements and/or encroachments. The Appraiser is not an expert, and cannot be relied upon to determine building code and /or zoning code violations that might exist at the subject property."

*****Appraisers must also be familiar with Bulletins, Guidance and Instructions issued by Freddie Mac, VA, FHA, etc. and must be sure that any reports are prepared in compliance with those requirements.

*****Bulletins, Guidance and Instructions referenced herein were current as of April 1, 2020. Appraisers need to continually check resources in order to verify that they are utilizing current and up to date information.

See our COVID-19 Resources page.

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