Land mines

Vacant land appraisals are high-risk assignments, and appraisers need to know how to navigate the often rough terrain

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When appraisers find themselves as defendants in a legal claim, there’s a good chance their nightmare began with a request for a vacant land appraisal. The number of claims for this type of appraisal is disproportionately high compared with other types.

The most common reason for these claims? The wrong property was appraised. I expect some of you are not surprised.

This mistake can be easily avoided through diligence and by obtaining clear instructions from the client about the subject property — and then keeping those instructions in the workfile. If the property is difficult to find, ask that a representative of the client visit with you. Some appraisers even take a few photos of the property with the representative visible in the background just in case proof is required. (Of course, these photos don’t go into the report.)

Another reason vacant land appraisals result in so many legal claims is that use of the land for new development can be speculative and economically risky, which can lead to unhappy parties suing over their financial losses. Moreover, the valuation of vacant land can be challenging due to development restrictions that are hard to understand or easy to miss; access difficulties; unknown hazards (such as soil problems or undisclosed contamination); and issues with utility services.

The best way to avoid any claim is to always use plain English to disclose and explain special conditions or problems affecting the property, and detail any issues that remain unknown or unresolved. It also behooves appraisers to treat as high-risk all vacant land assignments, and to apply a heightened degree of scrutiny to their work and their report.

To help illustrate the risk associated with vacant land appraisals, I’ve included a couple of real-world nightmare scenarios below. (I’ve edited some identifying details to protect those involved.)

Wrong lot!

An appraiser in California accepted a vacant land assignment from a mortgage broker despite having completed only a couple such appraisals in his short career. When he tried to do the inspection, the appraiser was confused by the undeveloped and narrow streets winding through the hillsides of the affluent community. The appraiser finally came upon what looked to be the lot he was assigned; it was flat and fronting a public street. Despite some lingering doubts about being at the correct site, he performed the appraisal. Comparing similar vacant land sales, he valued the lot at $465,000.

When the borrower defaulted, the lender hired a different appraiser who was very familiar with the area and who quickly determined his client had a big problem. The lot that secured the loan was actually landlocked and far up a slope, rendering it economically unbuildable even if access could be secured. The mortgage company had originated a $190,000 loan on land that could only be sold for $5,000 to an adjoining landowner.

The lender filed a lawsuit for damages against the original appraiser, who acknowledged to claims counsel that he had guessed where the lot was located, that no one met him at the site and that he never questioned or disclosed to the client his difficulty in locating the property. It turned out that the appraiser had not even been on the correct street.

The defense team shifted some blame to the mortgage broker. Apparently, the broker knew there was a problem locating the lot because another appraiser who had been retained to appraise the property had reported back that he was unable to find it. The broker did not convey this information to the defendant appraiser or to the lender. The broker also failed to tell the lender that the borrower had credit problems.

With responsibility partly shifted to the mortgage broker, the case settled out of court for approximately $100,000.

Right verdict!

Not all vacant land appraisals result in a big settlement or damages verdicts. Near the peak of the last real estate cycle, an appraiser in the Midwest was hired to appraise a property comprising 135 vacant acres. His opinion of value was $3.24 million, and the borrower obtained a loan for more than $3 million. The borrower was an internet company that quickly failed and defaulted on the loan within 37 days.

The lender took possession of the property but made no real effort to sell it — a little wooden "For Sale" sign was posted on the property, but a professional commercial broker was never engaged. The market then took a downturn. The appraiser was sued for negligence.

The bank commissioned an appraisal that valued the property at $515,000 in its current state. At trial, the bank claimed the actual value was $0 because the property had not sold.

An expert witness appraiser retained by the defense supported the original value of $3.24 million, and a banking expert severely criticized many aspects of the bank’s conduct in qualifying the borrower for the loan. A real estate broker testified that the bank had failed to appropriately market the foreclosed property.

Nevertheless, the bank insisted that nothing less than $1 million would be an acceptable settlement, which made a trial unavoidable. The verdict: The jury voted 9-0 in favor of the appraiser.