Watch for the Red Flags that can cause an E&O Claim!

You may have played this game as a child, or you may recall the basics of learning to cross the street: “Red means stop; green means go.”

From our younger years, we have all learned that red, whether it be flags, lights, or sirens, are a symbol of danger, caution, designed to get your attention. As the pace of the real estate market slows from its frenzy of recent years, appraisers need to be wary of the red flags that arise in the course of doing their appraisals. When the market slows and foreclosures are on the increase, everyone starts looking for potential targets to share in the responsibility for financial loss.

Appraisal Buzz talked with Elaine Matternas, who oversees Intercorp’s Real Estate Appraisers Errors & Omissions Program, about some of the claims being lodged against appraisers, and to get advice about dealing with these “red flags.”

Buzz: Have you seen an increase in the number of claims being filed against appraisers?

Intercorp: There has probably been a slight increase in the number, but perhaps a greater increase in the severity of the claims. For example, we see demands for larger dollar amounts.

Buzz: Are lenders still the primary filers of lawsuits against appraisers?

Intercorp: Lenders and financial institutions still lead the pack. Oftentimes, as you know, it may not be the original lender, but an institution that purchased a loan and thus is farther removed from the original transaction. But beyond lenders, there are property owners and homeowners, parties in divorce, failed businesses or others who may have been impacted financially because of an appraisal.

Buzz: What are the major causes of claims against appraisers?

Intercorp: If you take a snapshot look at 100 claims filed against appraisers, you would find:

• Almost half of the claims relate to overvaluation of properties.
• About 10% relate to disciplinary actions at the state level.
• Five percent each to the following:
  • Fraud.
  • Flipping schemes.
  • Identity theft, misuse of signature, forgery.
  • Mismeasurement, inaccurate acreage, etc.
  • Construction or property defects.
  • Undervaluation of property.

The rest would include a range of allegations: nondisclosure that a structure was a manufactured house; misinformation on septic issues, or connection to public sewage; appraising the wrong property; zoning issues; use of unsuitable or inappropriate comps; misunderstanding of assignment (appraised one apartment instead of a four-unit building), and so on.

So you can see that they run the gamut, but overvaluation leads the list at the present time.

Buzz: How does an appraiser defend his or her work from a charge of overvaluation?

Intercorp: While you can’t anticipate or foresee everything, I would say meticulous attention to detail and documentation of your file are critical to an appraiser in defending his or her workmanship and reasoning. Documentation is critical, because the typical claim against an appraiser is not filed until two years or more after the appraisal was done. You can’t be expected to remember every detail on every property you appraised two years ago, and even if you could, a good memory does not stand up in the legal system as well as a thoroughly documented file.

This is one area where photographs can be worth a thousand words. Interior photos of a prime property two or three years ago may look very different than the property looks today when it is in foreclosure.

Buzz: You mentioned disciplinary actions; have you seen more activity in this area as well?

Intercorp: Definitely. A number of the states have become more aggressive, and the attention that is being paid overall to mortgage fraud puts appraisers in the limelight. Look at Colorado and the record fines that are being levied, for example. Keep in mind, too, that when a regulator or investigator starts reviewing an appraisal, it gets put under a microscope, and the regulators are likely to find some violation of some rule somewhere.

Disciplinary actions often deal with technical violations of USPAP and similar issues, although supervision of trainees (or rather, lack thereof) has also garnered attention from state regulators.

Buzz: What are some of the red flags appraisers should look for in accepting or carrying out assignments?

Intercorp: There are probably a number of areas, but here are a few:

1. Accepting an assignment for job you are not qualified to handle. I remember a situation some time ago where an appraiser was offered an assignment that he felt could not be undertaken without recommending an inspection by an EFIS certified inspector. The lender wanted an “as is” appraisal, and actually stated something to the effect that “if you don’t want to do the assignment, I will search out and find a less informed appraiser to do the work.” Don’t allow yourself to be a target for this type of assignment.
2. Accepting data from individuals who may have a financial interest in the outcome of the appraisal, without independently checking the information and verifying it. Be wary of the party that tells you the information doesn’t need verification.
3. Accepting assignments from lenders who are less than ethical. You are known by the company you keep, and there are times when you are better off declining an assignment rather than putting your reputation and E&O insurance on the line. This is where it is important to keep abreast of what is going on in the industry at large. Network with other appraisers in your area, so you are not operating in isolation
4. Of course, the most obvious is resisting pressure to “make the numbers.” It is reminiscent of the “Just Say No” campaign against drugs some years ago, but you do have choices. I know of appraisers who have developed creative ways to say “no” and still get plenty of business. And lender pressure is finally getting some attention from lawmakers and regulators.

Buzz: You mentioned undervaluation as a cause for claims?

Intercorp: Yes, this does show up from time to time. Keep in mind that when you have two parties to a divorce, one is probably seeking a high appraisal of the property in question, while the other wants it low-balled. Also, in the recent refinance boom, some homeowners were disappointed to find that their homes did not appraise high enough to get the cash out they were looking for.

Buzz: Do you have any other advice for appraisers when it comes to E&O insurance?

Intercorp: Maintain uninterrupted coverage, so you don’t lose your prior acts. Partner with a provider who listens to your needs and answers your questions. Report claims—or potential claims—promptly in order to protect your interests under the policy. Keep impeccable records; they can be a lifesaver when it comes to defending you against wrongdoing.

We have several articles posted on the Real Estate Appraiser page on our web site, but two in particular might be helpful: “Document, Document, Document” and “Help—I’ve Been Sued. What to Do (or Not Do) if It Happens to You."