Coming Soon: Open Season on Real Estate Appraisers in Arizona

It was just a matter of time before someone started looking at what appraisers were doing during the run up to the real estate bubble, and now it’s clear that appraisers will be held liable for their negligence in appraising properties in the coming months.

In a recent appeals decision titled Sage v. Blagg Appraisers, Sage, (the buyer/borrower) sued Blagg Appraisers (“Blagg”) after discovering that Blagg had overcalculated the square footage of the property by nearly 30%.

The lower trial court granted summary judgment to Blagg, concluding that two prior Arizona appellate decisions, Kuehn and Hoffman established that an appraiser hired by the lender did not owe a duty to the buyer.

For those of you unfamiliar with the term summary judgment, it means:

“A final decision by a judge, upon a party’s motion, that resolves a lawsuit before there is a trial. The party making the motion marshals all the evidence in its favor, compares it to the other side’s evidence, and argues that there are no “triable issues of fact.” Summary judgment is awarded if the undisputed facts and the law make it clear that it would be impossible for the opposing party to prevail if the matter were to proceed to trial.” From Nolo.com

Sage appealed, and the Arizona Court of Appeals reversed the trial court’s opinion, holding that the prior appellate decisions did not govern the circumstances in Sage’s case.

Rather, based on “public policy . . . , the realities of the loan/purchase transaction by which one typically acquires a home, and emerging industry guidelines recognizing that the buyer/borrower normally relies on the appraiser in the situation we address,” the Court of Appeals unanimously held that “an appraiser owes a duty not only to the lender that contracts for the appraisal but also to the prospective borrower who intends to purchase the home.”

The Court reasoned that expanding the duty to borrowers would add nothing to appraisers’ substantive obligations to lenders because “the appraiser is obligated to perform the appraisal in a non-negligent fashion; the appraiser will owe the prospective homebuyer the same standard of care.” Furthermore, the Court could “see no public policy reason to exclude the buyer/borrower from the scope of the appraiser’s duty in a case such as this.”

The Court also referenced recent changes to the appraisal report forms that are universally used by appraisers in mortgage finance transactions and in which they must certify that the buyer has a right to rely on the appraisal:

Our recognition of the duty owed by an appraiser to the buyer/borrower, moreover, is consistent with evolving industry standards that acknowledge that a buyer/borrower in fact relies on an appraisal prepared at the request of the lender.

In March 2005 . . . the Federal Home Loan Mortgage Corporation (”Freddie Mac”) and the Federal National Mortgage Association (”Fannie Mae”) issued a revised Uniform Residential Appraisal Report for use by appraisers hired by lenders in mortgage finance transactions. See Freddie Mac & Fannie Mae, Uniform Residential Appraisal Report (2005), available at http://www.freddiemac.com/sell/forms/pdf/70.pdf. . . . The federal form [] requires appraisers to certify their understanding that the borrower and a limited class of others in the same mortgage finance transaction “may rely on this appraisal report.”

As a result, Sage was allowed to proceed with her lawsuit against Blagg. You can read the decision here. Sage was represented by local attorneys Berk & Moskowitz, PC.

So what does the mean for the rest of you who think the appraiser was negligent in appraising your home prior to purchase? It means they could be held liable for their mistakes in appraising homes. This decision will likely open the doors to other lawsuits against appraisers for their negligence in appraising homes.

I’ve spoken to many homeowners who suspected that the appraiser’s report was suspiciously high, or the appraiser went outside of the accepted range to make the house appraise for a certain amount to that the borrower could qualify for the loan, and heard various other stories from homeowners about how the appraiser screwed something up during the transaction. In some extreme cases of appraisal fraud, appraisers were regularly appraising homes for 25% over their real value so that the lender could make higher loans to borrowers.

The bottom line as a result of this decision is that appraisers in fact owe a duty to the borrower, regardless of whether they are paid by the lender.

Got questions? Send me an e-mail at Christine@DesertEdgeLegal.com.