Would you like Claudia to manage your liability concerns?


Many appraisers are asked to appraise new construction for the purpose of construction financing. While this is not unusual, more and more lenders subsequently ask the appraiser to perform periodic reviews of construction progress. The appraiser’s reports are then relied upon by the lender in making loan disbursements. Unfortunately, providing construction progress reports may increase the appraiser’s chances of getting sued.

In the typical scenario, we see unsophisticated homebuyers who decide to build their dream home. Their selection of a contractor is often motivated by price alone, and little care is taken to check references or to stipulate the type and quality of materials to be used. After construction begins, the relationship between the contractor and the buyers deteriorates. The contractor claims the buyers keep making demands not provided for in the contract, and the buyers claim that the contractor is taking too long and is cutting corners. Eventually, the contractor is fired or walks off the job, leaving the homebuyers with a partially finished home and no contractor. Having now been burned, the buyers then hire a top-notch builder to complete the job. Unfortunately, the new contractor advises the buyers that the work performed by the original builder was faulty and used cheap materials, and much of the work will have to be re-done. Ultimately, the amount of money needed to finish the job is far more than the amount remaining from the original construction loan. If the buyers are unable to receive monetary reimbursement from the original builder (as is often the case) they look to the appraiser as a source of recovery. After all, it was the appraiser who certified the percentage of construction completed, and he should have noticed faulty workmanship or cheap materials!

Sometimes, the homebuyers are inclined to simply walk away from the partially built home and from their mortgage obligations. The lender is then faced with having to finish construction, so the home can be sold. Or, the lender might decide to sell the home in the unfinished state so the new buyer can finish the property to their taste. Either way, it is the lender who then makes a claim against the appraiser arguing either a loss was suffered on the resale or they had to spend more money to complete construction than what was left from the original loan.

Far too many appraisers recognize these scenarios and have been sued as a result of such situations. What can appraisers do to avoid these types of claims? Many appraisers decline this type of assignment. The appraiser does not think he or she is qualified to report on the degree of construction completed, finds the percentages arbitrary and thinks a lender should pay to have a contractor or an architect prepare these reports. Most appraisers also think that lenders pay so little for progress inspection reports that the amount of time spent and work performed is not being fairly compensated.

While other appraisers may share these concerns, they accept the assignments simply to maintain the business relationship they enjoy with the lender. Those appraisers who do perform construction progress inspections should consider the following suggestions of ways to reduce your liability exposure:

Use disclaimers

Many lenders have pre-printed forms that they ask the appraisers to complete. The forms have a list of specific items and the appraiser must estimate a percentage of completion for each item. If at all possible, consider adding some disclaimer language to the prepared form such as:

“This report is prepared for the benefit of the lender to assist in making loan proceed disbursements. It is not prepared for the benefit of the borrower.”

Although we would argue that no duty is owed by the appraiser to the borrower, having language similar to the above on the form assists us in asserting that position. Other language to be added might include:

“The purpose of this inspection is to determine an approximate degree of completion based on the appraiser’s limited knowledge of basic construction.”
“The appraiser is not a contractor and does not have the expertise to evaluate the quality of construction, workmanship or materials.”

The above paragraphs are helpful in the defense of claims made by lenders who hire the appraiser to act like a contractor because they are unwilling to pay a contractor to perform the same work.

Take as many photographs as possible

Photos should be taken during each inspection. If possible, attach them to the report. If the lender does not want photos, retain them in your file or on your computer. If the lender disputes your estimated percentage of completion, the photo would give them the chance to raise their concerns. The photos will help to support your version of what the property looked like, at the time of your inspection.

Insist that the lender have the borrowers sign off on your reports and on disbursement requests

If the borrowers sign off on your report and approve the disbursement to the builder, it is more difficult to later argue that they disagreed with your findings. If they disagreed, it should have been resolved before the lender made a payment.

Be careful when estimating costs of completion

Other may be relying upon what you just consider to be a “ballpark” estimate. If you must provide an estimate clearly indicate that it is simply an estimate, not a guarantee. Make sure you fully understand the work that needs to be done and the materials to be used. Stress that you are an appraiser, not a contractor and that a better and more accurate estimate should be sought from a qualified contractor.


It doesn’t matter whether the building materials are on site and the work is in progress or not. Promises that the work will be completed must be ignored. You might not want to travel back to the site to perform a second inspection, but it has to be done. Appraisers have been duped too many times only to later find out that promised work was not performed.

Suits against appraisers involving the performance of construction progress inspections are a troublesome area of appraiser litigation. It may not always be possible to avoid this exposure since assignments are often accepted to please a client or to preserve an existing business relationship. However, by following some simply loss prevention suggestions, you may be able to avoid being cast as the “villain” when the buyer’s dream home becomes a “nightmare”.



If you masquerade as an expert, be prepared to be judged as one

A Montana appraiser accepted a lender`s assignment to perform a "subject to completion" appraisal of a new construction, and also agreed to perform periodic construction progress inspections. During construction a disagreement started between the contractor and the borrowers about the manner in which the home was being finished, resulting in the contractor walking off the job.

The borrowers and the contractor agreed to resolve the dispute by requesting the insured appraiser compile a list of incomplete items and estimate the cost to complete these items. The appraiser, with the consent of the lender, prepared his list and estimated the completion cost at $34,000. The lender consequently withheld 1 1/2 times this amount and deposited it into an escrow account; the remaining loan funds were paid to the contractor as his final disbursement.

The borrowers then hired a new contractor to finish the construction; he estimated the cost to complete the home to be in excess of $80,000. The insured appraiser allegedly failed to include numerous unfinished items on his list and further failed to disclose defects in workmanship and the cost of repair or replacement. The borrowers did not have sufficient financing left to complete the construction and filed a lawsuit against the original contractor (who was in bankruptcy at that time), the lender and the insured appraiser.

The court determined that the insured appraiser had assumed a duty to the borrowers when he agreed to prepare a list of items still needed to complete construction and the estimated cost of completion. This report did not contain any additional language that described his scope of work, that he did not have the expertise of a contractor, that he could only include items that were visually apparent and that the figures were only an estimate and not a guarantee. The borrowers testified that the appraiser represented himself as an expert and they therefore relied upon his opinion. We settled the case for about $30,000, the difference between the loan funds held in escrow and the amount charged by the new contractor to complete construction.

Diligence equals liability protection

A similar case in South Carolina had a very different outcome. An insured appraiser agreed to perform a "subject to completion" appraisal of a new home, and also agreed to perform periodic construction progress inspections. The insured appraiser completed eight construction progress reports on pre-printed forms provided by the lender and attached a cover sheet to each report which stated in bold print that "The attached inspection report is prepared solely for the benefit of [lender] to assist with making loan disbursements. It is not prepared for the benefit and should not be relied upon by the borrowers or by any other party".

Further, the construction loan agreement clearly stated that the "inspector`s" reports would be for the lender`s use only and were not prepared for the benefit of the borrowers. In addition, each disbursement payment was made payable jointly to the contractor and to the borrowers, consequently the borrowers had to endorse the check before the contractor would be paid.

At the time of his last inspection, the insured appraiser opined that the property was 89% complete. The contractor and the borrowers got into a dispute about woodwork that still needed to be done and ultimately the contractor refused to finish the job. There was only $26,500 of the original loan proceeds left to complete the construction and the new contractor opined it would cost much more than that to complete the home. The borrowers included the insured appraiser in a lawsuit to recover excess costs.

We filed a motion for summary judgment. The borrowers argued that none of the progress inspection reports they received from the lender had a cover page attached with the insured appraiser`s additional language; however, the court agreed that no duty was owed to the borrowers by the insured appraiser, and granted our motion. The court based its decision on the language in the construction loan agreement and on the fact that the borrowers had agreed to all payments by endorsing the checks.

This experience showed the insured appraiser that it is better to include additional language on the report than on a separate page that could be detached.

Mistakes in the Land of 10,000 Lakes

After performing a "subject to completion" appraisal of a new townhouse in Minnesota, the insured appraiser was also retained to perform construction progress inspections. In his first construction progress report, conducted about thirty days after the "subject to completion" appraisal, the insured appraiser erroneously reported that construction was 85% complete. He meant to report that construction was 25% complete on the subject and 85% complete on the entire townhouse development. In the second construction progress report the insured appraiser stated that the exterior of the subject was 100% complete while the interior of the subject was only 50% complete.

More than one year later, the lender requested the insured appraiser do a third construction progress inspection. The insured appraiser reported that everything was the same as in his second construction progress report but added a comment that the subject showed signs of deterioration due to the property being left vacant and incomplete during the harsh Minnesota winter.

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More than 3 1/2 years after the third construction progress report was completed the insured appraiser received a demand letter from the lender claiming that the insured appraiser had made a mistake in his first construction progress report. This was the first time the insured appraiser realized that he mistakenly stated 85% completion when he meant to report 25% completion, and the lender claimed to have relied on that report when they disbursed 85% of the loan funds to the contractor. The contractor diverted some of the money to other projects and never completed the construction, the borrower defaulted on the loan and the lender was unable to sell the property for the original appraised value.

The lender eventually filed a lawsuit against the insured appraiser and we defended the case for several years. We eventually settled the case to avoid a trial and since the insured appraiser made a mistake in his first construction progress report, however, the settlement amount was far less than the initial demand because the lender had to concede their contributory negligence.

Copyright 2005. Liability Insurance Administrators. All rights reserved.