Illustration of a real estate appraiser examining his work choices and its effects, symbolizing attention to detail and accuracy in appraisals

Don’t Make the Same Mistake Twice

In the world of real estate appraisals, a cardinal rule should always be "Don't Make the Same Mistake Twice!" Unfortunately, there have been recent incidents that underscore the importance of treating each appraisal assignment as a unique endeavor rather than a mere repetition of the past. Problems tend to emerge when appraisers or appraisal firms simply recycle information from older reports into new ones without conducting thorough checks and verifications.

It should never be assumed that all the information from previous appraisals is infallible. Any errors made in prior reports can compound into significant problems when they are perpetuated in subsequent ones. The most common issue arises with square footage figures, but it can extend to zoning categories and flood zone classifications as well. These repeated errors not only reflect poorly on appraisers but can also lead to claims and complaints filed with licensing boards.

Property conditions can change over time. Additions may be constructed, outbuildings added, and zoning regulations updated. It's crucial not to rely solely on old data. Public records should always be consulted, and due diligence performed. Consider these three cases below as examples.

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Case 1:

In South Carolina, an appraiser was initially tasked with valuing a small commercial building divided into six separate suites in 2019, as part of a purchase money loan transaction. The property was measured at 10,184 square feet, with an estimated value of $1.3 million.

In 2021, the appraiser received a call from the new building owner, who had paid off the loan and was now the sole owner of the property, free of any encumbrances. The owner had also made some modifications to the building and shared the plans with the appraiser.

Upon inquiry about the purpose of the appraisal, the owner indicated it was for "Asset Management," which was also stated as the "Intended Use" in the report, with the owner being the sole "Intended User."

Unfortunately, the appraiser misinterpreted the construction plans provided to him. He erroneously stated that the improvements had added 7,500 square feet to the property, resulting in a total square footage of 17,684. In reality, the construction had only added 5,500 square feet, making the correct total square footage 15,684. Notably, the appraiser did not physically measure the property but relied solely on the plans.

In 2022 and 2023, the appraiser was once again called upon to appraise the building for the property owner. On both occasions, the stated reason for the reports remained "Asset Management," maintaining consistency with the "Intended Use."

During these subsequent assessments, the appraiser inquired whether any "changes" had been made to the property. The owner asserted that there had been no changes. Consequently, both 2022 and 2023 reports continued to report a total square footage of 15,684, even though no additional measurements were taken since the initial 2019 appraisal.

Shortly after delivering the 2023 report, the appraiser received a request for a meeting from the owner. The owner informed him that a few months prior, one of the tenants had acquired a partial ownership interest in the property. The purchase price for this partial interest had been influenced, in part, by the 2022 appraisal.

The new partner had reviewed the construction plans from 2020, as well as the appraiser's 2023 report, and raised concerns. He pointed out that the appraisal had overstated the building's square footage by 2,000 square feet, thereby inflating the appraised value.

Additionally, the appraiser discovered that since 2021, the building owner had been using the appraised value as a basis for setting the tenants' rental rates. This meant that the owner had been overcharging tenants for several years, and he attributed this issue to the appraiser's errors. The new owner also argued that he had paid more for his partial interest due to the inflated appraisal.

Consequently, the property owners stated their intent to consult with legal counsel and their accountant to assess their damages. They hoped that the appraiser's insurance company would agree to a settlement to avoid a lawsuit.

A demand for an amount exceeding $750,000 was issued. The appraiser insisted that his reports were never intended to determine rental amounts for tenants or partial interest purchase prices. Unfortunately, the language of "Intended Use" and "Intended User" in the appraisals was vague. When questioned by legal counsel, the appraiser could not provide a clear definition of "Asset Management," as it was the stated "Intended Use" in his reports.

It is evident that the appraiser made a critical mistake in 2021 by misinterpreting the provided plans and then compounded it by failing to measure the property in subsequent years.

However, a defense could be raised, arguing that the property owner should have been aware of the property's size, especially since the owner oversaw the construction project in 2021. Had the owner closely examined the appraisals, they might have noticed the erroneous square footage figure and brought it to the appraiser's attention.

The owner's claim that they relied on the appraisal reports each year to determine tenant rent while simultaneously asserting they did not closely read the reports to identify the square footage discrepancy presents a credibility challenge. Ultimately, it will be up to a judge or jury to decide the validity of these arguments.

Case 2:

In Oregon, an appraiser was commissioned three times to assess a sprawling commercial/industrial property utilized for a lawn care business. This property encompassed approximately 10 acres and boasted a total of seven buildings, including a sizable two-story office building and six additional warehouse/storage structures.

Before embarking on the initial appraisal in 2018, the appraiser and his associate conducted a site visit with the property owner. During this visit, they were informed that the primary goal was to determine the property's "Market Value." Regrettably, the appraiser did not delve further to ascertain how the report would be utilized.

The property owner asserted that the six warehouse buildings were "identical," implying that inspecting one would suffice, obviating the need to inspect all six. However, the appraiser insisted on inspecting, measuring, and photographing each of the six buildings, delegating this task to the associate appraiser.

While the appraiser proceeded to measure and photograph the office building and other areas of the property, the associate appraiser measured only one of the six warehouse buildings, which he believed to be the same size as the others, measuring 40 feet by 80 feet. He duly inspected and photographed all six buildings.

However, a significant error arose during the report preparation phase when the warehouse measurements were erroneously recorded as 40 feet by 60 feet, resulting in the report indicating that each warehouse was 2,400 square feet instead of the actual 3,200 square feet. Remarkably, this substantial discrepancy was not identified by the property owner upon receiving the completed report.

In 2019 and 2020, the appraiser and the same associate revisited the property to conduct new appraisals. On both occasions, they inspected the office building and the six warehouses, taking new photographs. Unfortunately, no new measurements were taken, and the erroneous square footage data from the previous report was reiterated. Consequently, the total figures, sketches, and the incorrect information persisted in the subsequent reports.

The intended use for all three reports, including the original and the subsequent ones, was to establish the "Market Value" of the property.

In 2022, the appraiser received a demand letter from an attorney representing the property owner. The letter stated that the property owner and their agent had relied on the appraiser's 2020 appraisal report when listing the property for sale. It was only after the sale had concluded that they realized the property had been undervalued due to errors in the appraisal.

The letter highlighted a significant discrepancy in the square footage figures for the six warehouse buildings between the appraiser's reports and the appraisal prepared for the property's buyer. This "error" resulted in an understatement of nearly 5,000 square feet, leading to an undervaluation of the property and the sales price.

Counsel retained on behalf of the appraiser argued that the appraisal report should not have been the sole basis for listing the property for sale. The property owner and the listing agent had an independent obligation to verify property details before listing, including the dimensions of the warehouse buildings.

The listing agent, prior to listing the property, should have conducted their own due diligence, including measurements, rather than relying on an appraisal report that was several years old and not intended for that specific purpose. Counsel also emphasized that the property owner, having owned and operated the business from that location for 12 years, should have possessed essential knowledge about their property. Whether or not the information in the appraisal was accurate was deemed irrelevant.

While these arguments hold promise, the case remains unresolved. The appraiser's initial oversight in the first appraisal was unfortunately perpetuated in subsequent reports. Notes in the original workfile confirm that accurate measurements were taken during the initial inspection. Regrettably, during data entry into the appraisal software, a critical error occurred, resulting in incorrect calculations and sketches for all six warehouse buildings.

Case 3:

In Alaska, an appraiser initially crafted an appraisal for a purchase loan, but the report exhibited a host of issues, including numerous typos and inaccuracies. Notably, the contract date was erroneously noted as "02/11/2012" instead of the correct "2020." Furthermore, the appraiser inadvertently marked checkboxes for both "Sanitary Sewer" and "Septic." Adding to the litany of errors, the "Year Built" was incorrectly stated as "1997" instead of the actual "1979," and the "Effective Age" on Page 1 was inexplicably listed as 92 years, diverging significantly from the 12 years mentioned in the Comparable Grid.

Remarkably, all these mistakes, and more, went unnoticed by not only the appraiser but also the underwriters and agents involved, all of whom were under immense pressure to expedite the purchase transaction's closure.

However, the situation took a markedly different turn two years later when the same appraiser was enlisted to compile a refinance appraisal. Rather inexplicably, the appraiser elected to reproduce the previous report in its entirety, complete with all the earlier errors. Despite correctly indicating the nature of the transaction as a "Refinance Transaction," the appraiser paradoxically retained the erroneous "2012" contract date from the initial report. In addition, the incorrect "Effective Age" and "Year Built" persisted, and both the "Sanitary Sewer" and "Septic" checkboxes remained inappropriately marked.

Curiously, the appraiser failed to include a statement disclosing that he had appraised the property within the preceding three years, as mandated by industry standards. These numerous lapses and inaccuracies were subsequently brought to the attention of the licensing board by disgruntled borrowers who contested the appraisal's valuation. They contended that certain improvements made to the property since their purchase warranted a higher refinance appraised value. Their discontent was exacerbated by the litany of errors they had managed to unearth, leading them to question the appraiser's competence and diligence.

Regrettably, the appraiser offered no compelling defense in response to the complaint. He simply cited his heavy workload and the use of poor judgment when copying over his prior appraisal, though this explanation did little to clarify why he had initially committed so many errors in the first report.

Ultimately, the appraiser faced disciplinary action for the preparation of two deeply flawed and misleading reports, underscoring the critical importance of diligence and accuracy in the appraisal profession.

In all these cases, the appraisers, unfortunately, made critical errors and failed to rectify them in subsequent reports. While it may be argued that property owners and agents should have detected these discrepancies, these examples underscore the importance of meticulous attention to detail on the part of appraisers. Relying on outdated information or failing to meticulously review and verify facts can culminate in costly legal disputes and significant damage to one's professional reputation.

Ultimately, these real-world examples serve as cautionary tales for appraisers, reiterating the necessity for a diligent and scrupulous approach to every appraisal assignment. Ensuring that each report is not just accurate but also up-to-date isn't just good practice; it's an imperative to evade costly errors and the ensuing legal complications that may arise down the line.

Always keep in mind:

  • Mistakes are a part of life, but they can also come at a steep cost and can be avoided in many instances.
  • It's crucial to approach each appraisal as a fresh assignment. Thoroughly inspect and measure each property, and meticulously proofread your reports before sending them out. Be vigilant in checking for typos and mathematical errors.
  • Resist the temptation to simply duplicate or replicate information from previous reports. Avoid taking shortcuts. While certain information may be transferable, wholesale copying of an entire report is not advisable. If you find yourself too pressed for time to do it correctly, consider declining the assignment.
  • Investing the time to validate your previous assessments can prove invaluable in preventing or mitigating potential claims. Sometimes, a quick phone call or a website check can make all the difference.
  • Don't overlook the importance of noting whether you have appraised the subject property within the past three years. This crucial detail is sometimes omitted in reports that are merely copied over.
  • Always remember that assuming you got it "right" the first time is not a safe approach. Stay diligent and thorough in your work to ensure accuracy and avoid costly errors.