Navigating the often muddywater of Appraisal ReviewCharting how appraisers can avoidpotential review problems

By Brandon BoudreauWhile certainly a necessary practice — and oftentimes required — most appraisalorganizations and appraisers are looking for better ways to address the appraisalreview process. Covering this from a global and all-inclusive perspective, we shouldfirst identify the stressful points throughout this hot topic process.

In many circumstances, it is as simple as a lack of consistent formatting of reportsthat can frustrate both appraiser and reviewer. When the Uniform Appraisal Dataset(UAD) was introduced, it helped in lessening the wide variance of applicable, andsometimes not applicable, responses within any given assignment resultsperformed on GSE forms. (Check out the side bar on p. 3)

If formatting for major residential form types was to be standardized, there wouldbe a lot less confusion from the review side in identifying results and bettercommunication coming from the appraiser’s side. It seems that comments madein the report are overlooked because they’re buried in addendums or simply

March 18, 2013

Volume 11, No. 21

VALUATION REVIEWThere is no comparable

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Valuation Review is a production of October Research,LLC specializing in business news and information forthe valuation industry and real estate appraisalprofessionals, and is published 24 times a year.

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Under pressureLet’s face it: appraisers get the shaft. In today’s economy, it’s hard to accept thereality of market value. Sellers, buyers and other parties involved in the mortgageprocess often complain about appraisals coming in “too low.” Such is the case witha recent Wall Street Journal Q & A, in which a reader asked for advice in a stickyselling situation. To make a short story shorter: The buyers asked for $20,000 in repairs/upgrades, the appraisal came up short of the agreed price, and now theseller is being pressured to lower the price. What’s that? Pressured?! From theWall Street Journal article:“Nevertheless, I am troubled that you are being pressured by your agent to accept a deal that you don't think is fair. Your agent should be standing up foryour interests. Unfortunately, since agents don't get paid unless the deal goesthrough, sometimes they'll put their own interests first. Don't let that happen.”After explaining that the Realtor should be working for the seller, not for theirown interests (though that is up for debate if you’ve ever checked outFreakonomics), Wall Street Journal writer June Fletcher recommended that theseller review the appraisal himself, looking for any missed “upgrades” andpossibly get a second opinion by ordering another appraisal from a differentappraiser. If that failed, Fletcher recommended throwing in items such as thepatio furniture or big screen TV. After all, they’re already getting the kitchensink. That’s all well and good, but again, that shouldn’t factor in when you’relooking at the issue from the appraisal point of view. On a personal note, I am currently going through the homebuying processand despite having the appraisal understanding as the editor of ValuationReview, my wife and I still find ourselves coming up with our own idea of house “values” as buyers. Sure, much of that is based on recentcomparables and quality of the home, but it’s easy to get caught up in theemotional value. (HGTV’s insane remodeling show BPOs don’t help either— put $20,000 in, get $30,000 back!)Nevertheless, we still depend on the appraiser. In a process that’s filledwith emotion, it’s important to have an objective voice in the matter.

Your valued editor,

Jason MorganEditor, Valuation Review

placed in the wrong section of the report. This is a complaint made by both sides of theaisle and can be mitigated with simpleformatting guidance.

A practical approach for intended users of thereports to get in front of the problem is tohave a very clear and concise scope of workthat will be required. Scope creep, as it iscalled, is a major issue for your everydayappraiser, and addressing items that were not

clearly asked for at the time of order leads to an unsatisfied experience from the serviceprovider. One of the biggest issues from theappraiser’s perspective is that items areaddressed on the first “revision”; thensubsequent second, third and even fourthrevisions will come back asking for additionalitems. However, the appraisers are notwithout fault in this transaction. Manyappraisers feel they are above reproach, andthe canned response of “it is already in the

report” will suffice.

These quality control (QC) reviewers play a critically important role not only to ourindustry and our clients, but also to the entiresafety net of the housing market. Appraisersneed to have an outlook that these reviewersare allies and not adversaries. The valuationindustry has needed a major house cleaning,and the transactional review of assignmentsshould be viewed as a necessary step in

COVER STORY

The Uniform Appraisal Dataset (UAD) is just one of threecomponents of the government sponsored enterprise (GSE)loan submission system. The goal is to paint a clear, concisepicture in the mind of the reader. The UAD attempts toaccomplish this with six condition ratings:

•C-1: The structure and components are new;

•C-2: No deferred maintenance;

•C-3: Limited depreciation, the structure has been wellmaintained;

•C-4: Minor deferred maintenance, adequately maintained;

•C-5: Deferred maintenance, the overall livability hasdiminished due to the condition of the property; and

•C-6: Substantial deferred maintenance that affects thesafety, soundness or structural integrity of the property.

In addition to the condition ratings, appraisers also have to indicate whether or not there has been any materialwork done in the past 15 years in key rooms of the property,typically the most expensive ones to construct. If the answeris no, the entry "no updatein the prior 15 years" must be provided. If the answer is yes, the appraiser must indicate the level of work and the timeframe using one of the times from the provideddrop down box on the form for the kitchen and bathroom.

The level of work should be indicated as updated, notupdated or remodeled. For the timeframe the majority of the improvement work was completed, the categories are:less than one year, one to five years, six to 10 years and 11to 15 years. If the timeframe is unknown, that is indicated.

Additionally, there are six corresponding descriptions for thecondition of the improvements:

•Q-1: Individually designed property — a property put together for a specific buyer with exceptional high-quality;

•Q-2: Custom design — a high-quality property, typically in aneighborhood where all the homes are built to this standard;

•Q-3: Upgraded from stock standards;

•Q-4: Stock or builder-grade and may feature someupgrades;

•Q-5: Economy construction — stock materials and limitedrefinements; and

•Q-6: Lowest quality — minimal systems and equipment.

While indicating the improvement quality, appraisers mustalso provide a description of the conditions of theimprovements in sentence form based on his or herobservations.

UAD refresher

3

By Jason Morgan

4

COVER STORYthe process. Similar to the TSA efforts beforeboarding a plane, the QC review can beannoying at times, but I think the majority of people are glad these safeguards are in place.

Appraisers also need to understand thatrevisions are time sensitive, and the pressureto respond is being directed at thelender/client and down the road to theappraiser. The time-sensitive nature ofservice is real and should be expected; there are many parties involved in thevaluation process and seemingly too manymoving parts.

Appraisers can take some simple initiatives to ensure the review process will be smooth.The following suggestions should lead to fewer revisions and result in a moreefficient process:

• Make sure the data throughout the report isconsistent and the comments are in line withthe results. Removing “canned comments” or confirming they are at least applicable is

mandatory in today’s valuation environment.

• Comments should be sufficient enough to enable the reader to understandthe report without rewriting the report’s limiting conditions.

• Any items that exceed typical guidelines need specific commentary.

• Missing exhibits (license, photos, mapssketches, etc.) seem to be a very common “kick-back” and should be easily identified prior to delivery to the client.

The most common reason an appraisal is rejected is a lack of specific and sufficientcommentary. Other common kickbacks are address discrepancy (betweenengagement and report), use of MLS photosand confusion around secondary market PUD classifications.

In any communication in life, it is always bestto use manners. To help avoid confrontationwith appraisers, the best practice forreviewers is to begin the communication byidentifying positive aspects of the report in

question. The reviewershould never use anaccusatory tone withappraisers they desire to work with.

Often a QC reviewer canbe wrong if he or she isrelying on old or publicrecord data. In mostcases, the QC reviewersdo not have geographicknowledge orcompetency to make theiranalysis complete.Coming at problems asan opportunity to open adialogue that allows the

appraiser to explain the issue at hand, asopposed to top-down assertions, will mostdefinitely result in fewer QC standoffs. Bothparties need to realize the goal is to deliverthe best report possible for the intended user.

As the industry begins to grow again and the demand for QC review heightens, manyinexperienced individuals are findingthemselves in the role of QC reviewer. Thistrend can be very frustrating (and rightly so)for any appraiser. To facilitate a smoothertransaction, it is important for appraisers to avoid being confrontational. Challengingthe QC reviewer’s credentials or competencyrarely results in anything other thanimmediate gratification. Appraisers shouldkeep the conversation to factual data and inquiring for further clarification beforeprocessing the inexperienced or misguided request.

With the excellent analytic programs, robust data sets and aerial photographyavailable, the QC reviewers are able tosignificantly enhance their ability to confirmdata and market trends. However strong andreliable the new tools seem to be, the QCreviewer has the obligation to confirmdiscrepancies before drawing conclusions.The best way to improve a delicate andnecessary QC process is to create andmaintain a positive working relationship withdirect and open communication. Appraisersand QC reviewers have to be on the samepage to achieve the desired goal of delivering quality services.

Brandon Boudreau is the chief operatingofficer at Metro-West Appraisal Co. LLC, thelargest 100-percent staff residential realestate appraisal company based in Michigan.www.metrowestappr.com. — Brandon Boudreau,

chief operating officer,

Metro-West Appraisal Co. LLC

FEATURES

5

While appraisers have a lot to gripe aboutin the less than perfect appraisal process,appraisal review is often one of thebiggest stress points between theappraiser and client. Coercion, poorpractices and just plan appraisalignorance all can play a role in makingthe appraiser’s work more stressful. Weasked our panel of excellent appraisershow they deal with this potential pitfall.

Valuation Review: What are the mostcommon stress points in the appraisalreview process?

“The majority of complaints are fromborrowers, and second most are fromAMCs. The complaints range from failingto fill in a check box in a Fannie Mae formto accusations based on strangemisinterpretations of USPAP by statesubcontract review appraisers,prosecutors, and AMC reviewers,”explained Roger Durkin, chair of theAmerican Society of Appraisers (ASA)and an attorney for appraisers whodefends appraisers before the licensingboard. “USPAP interpretation is a seriousissue. Did you know that a sanction bythe licensing board that you violatedUSPAP may be used as relevant andadmissible evidence in a civil negligencelaw suit? My wish is that reviewappraisers recognize that their policingactions can have a serious impact on appraisers. I would add that review is or should be an objective professionalcritique measured against clearlydelineated standards (USPAP) shouldinclude a critique of the logic or logicalfallacies, and finally a critique of thecredibility of the appraiser.”

“The person completing the appraisalreview is not a state-licensed peerappraiser in the same state as theoriginal appraiser,” said Darwin Ernst, an appraiser with Darwin Ernst AppraisalServices Inc., based in Missoula, Mont.,highlighting one of the biggest problemsin appraisal review — reviews done byunqualified, non-appraiser individuals.“The reviewer is not completing anappraisal review... they are oftencompleting a risk assessment or QC examination and mislabeling thatprocess as an appraisal review. Thereviewer's credentials and qualificationsare always in question by the originalappraiser, because they are neveridentified in the review process. This is very problematic, because they knowwho the original appraiser is and there is no potential for the original appraiser to file a complaint against a reviewer whomay be acting inappropriately.”

Ernst also pointed out that theinteragency guidelines do npt follow thesame definition of "appraisal review" as the description of "appraisal review"defined in the USPAP. That can obviouslycreate confusion to the lender's staff, theAMC's staff and the licensed appraiserswithin the profession who are often askedto provide services as a "reviewer" of appraisals.

“Poor comp selection is a big issue withme. As a reviewer I see many appraisalsthat could support the value with bettersales selection,” said Michael Chandler,a review appraiser based in Chicago.“Also lack of commentary on key issueswithin the report is a problem. A little

explanation goes a long way. And stopusing the word average to describe anyhome over $400,000+ or any home under$400,000 that has unique features.”

Valuation Review: What advice wouldyou give to appraisal firms looking toimprove their appraisal process?

“The advice I would give appraisal firmsis to provide pertinent market analysisand provide well-verified and pertinentsales and comparable information,meaningful reconciliations and proofreadreports,” advised Bill Pastuszek, chiefappraiser and owner of ShepherdAssociates, based in the Boston area.“And, don't plagiarize — provide a sourcefor cut and pasted data.”

“I would advise all appraisal firms to havean internal peer appraiser within the firmread through the assignment conditionsand the appraisal report and see if thereare any obvious corrections that couldeliminate any future problems by theclient's review of the report, whether theclient's ‘review’ is some type of riskassessment, quality control examination,an actual appraisal review, or somecombination thereof,” Ernst added.

Valuation Review: How does reviewtechnology impact the process?

“The technology does the ‘reading’ but no thinking,” said Mark Hastert, owner of Residential Valuation, based in theKansas City, Mo., Area. “UAD has made itall but impossible for a lay person to readand understand an appraisal report. TheUAD ‘reforms’ were the product of trying

Appraisers review appraisal review: Tips from top appraisers for dealing with touchy appraisal review situationsBy Jason Morgan

to stuff a 2-lb. chicken in a 1-lb. bag.”

“Review technology impacts the processby not being a review of an appraisalreport,” commented Ernst. “Thetechnology that allows a robo-search forpotential form-filling errors is a function of quality control and can be veryproblematic for those appraisers who areattempting to complete a complex or non-traditional valuation assignment report on the pre-printed, industry-created, non-USPAP compliant (but UAD-compliance required), appraisal formstypically required within the financiallending industry.”

“Technology does not replace good oldpersistence, common sense, knowledgeand experience,” Pastuszek added.

The final word goes to Ernst:

“The appraisal review process is not now, nor should ever be, an interactiveprocess when the appraisal and appraisalreview are required to adhere to USPAP,”he said. “Appraisal and appraisal reviewis clearly defined by the USPAP. A State-licensed appraiser, who is completing an ‘appraisal review’ and also trying toinfluence the outcome of another State-licensed appraiser's independent report,is in potential violation of numerous

infractions of the USPAP.

“It is one thing to be a supervisor or mentor of another appraiser and it is something completely different to complete an ‘appraisal review’ of another appraiser's work. State-licensed appraisers should adhere to the minimal standards of professionalappraisal practice while performing‘appraisal reviews’ of other State-licensed appraisal reports, or they could be held accountable to their State-licensing agency for violations of the ethics rule, competency rule, scope of work rule, Standard 3 or anycombination thereof.”

6

Serious problems in the residential appraisalprocess must be addressed in order to restore confidence in the residential real estate market and to establish afoundation for sustainable growth of the U.S.economy, according to a new white paperfrom the National Association of HomeBuilders (NAHB).

Appraisals are regulated by the states, so standards and requirements vary greatly,resulting in a system that is inconsistent,confusing and does not serve consumerswell. The white paper, "ComprehensiveBlueprint for Residential Appraisal Reform,"addresses these perceived problems.

It is the work of an Appraisal Working Groupformed by NAHB last year to developrecommendations for comprehensiveresidential appraisal reform. The groupconsists of homebuilders and

representatives from the financial andappraisal sectors. The Appraisal WorkingGroup sought input from representatives ofall stakeholders in the residential appraisalprocess, and the white paper offers specificrecommendations for changes to all aspectsof the appraisal system.

"Even as the residential constructionindustry shows signs of recovery, housing activity is thwarted by an appraisalsystem that remains dysfunctional and is a major impediment to a stable housingfinance framework," said Rick Judson,NAHB chairman and a homebuilder fromCharlotte, N.C. "Until we see meaningfulappraisal reform, the U.S. housing financesystem will be operating underunprecedented uncertainty."

Judson praised the efforts of AppraisalWorking Group co-chairs Barry Rutenberg,

NAHB's immediate past chairman, and JoeRobson, who served as NAHB chairman in2009, for their leadership.

The Appraisal Working Group addressed theneed for reform in four broad areas:

• Regulatory framework and oversight;• Data and technology;• Professional standards; and• Practice, process and procedures.

"The states are responsible for oversight of appraisal practices, but many states do not provide the funding necessary toperform this function adequately,"Rutenberg said. "A modest investment inappraiser licensing and certification wouldgo a long way toward improving theappraisal system."

In its white paper, the Appraisal Working

NAHB recommends reforms of residential appraisalsystem

FEATURES

Group states that the regulatory frameworkfor real estate valuation needs to fostermore effective oversight of standards,guidance and enforcement.

The goal is to better integrate andstreamline the jumble of existingrequirements set forth by various entities toensure that residential appraisals occur in acoordinated and effective manner and aresubject to uniform and consistent standards.A more unified and functional system is

required to:• Establish ethics and uniform standards;• Promulgate best practices;• Monitor the activities of state appraisal boards;

• Establish licensing and certification standards;

• Set minimum education requirements; • Support independent education and training programs;

• Create policies to ensure appraiser independence;

• Enforce and oversee authority for anyone who engages an appraiser; and

• Establish a standards body responsible forsetting data and technology standards.

"We believe the white paper has many goodideas that stakeholders can agree on, andwe are hopeful that policy makers will moveforward soon on many of these proposals,"Robson said. "We look forward to workingwith our many partners to achievemeaningful reforms."

FEATURES

7

When the National Association of HomeBuilders (NAHB) released a white paper thatstated there are “serious problems in theresidential appraisal process” that “must be addressed in order to restore confidencein the residential real estate market and to establish a foundation for sustainablegrowth of the U.S. economy,” it was just thelatest instance of the NAHB pointing thefinger at appraisers. Similar reports andaccusations were launched last year as well.Not surprisingly, appraisers did not takekindly to statements such as:

"Even as the residential constructionindustry shows signs of recovery, housing activity is thwarted by an appraisalsystem that remains dysfunctional and is a major impediment to a stable housingfinance framework," said Rick Judson,NAHB chairman and a homebuilder fromCharlotte, N.C. "Until we see meaningfulappraisal reform, the U.S. housing financesystem will be operating underunprecedented uncertainty."

“The essence that appraisers are ‘blowingdeals’ is a direct reflection on the market

conditions at the time of a sale,” rebuttedLee Perry, a Valuation Review reader. “Justbecause a seller has convinced a buyer to purchase a property at a specific price forwhatever reason does not mean that thecollateral is going to be adequate to justify a loan of other people’s money. Maybe if theNAHB wanted to lend the money on thepurchases of their sales of new constructionthey could then make their own rulesgoverning collateralization.”

Another point of contention was that theAppraisal Working Group, co-chaired by Barry Rutenberg,NAHB's immediate pastchairman, and JoeRobson, who served as NAHB chairman in2009, is going toaddress the “need forreform” in four areas:

• Regulatory framework and oversight

• Data and technology• Professional standards• Practice, process and procedures

To that, reader Wade Gibson said:

“Their nine points to create a unified andfunctional system, at least in the state of Texas, are already in effect on a state as well as federal level. Evidently, theirworking group did not actually talk to anyappraisers nor do much research as to therequirements for becoming and remainingan appraiser. I can understand their‘concern’ if or when a property does notappraise for their perceived value, as theylose their profit margins. Reators have thesame ‘concern’ regarding the appraisal

Appraisers respond to NAHB’s appraisal ‘problems’

— Cal Baetz,

Valuation Review reader

8

process and state and federal requirements that we have to comply with,which do not apply to either of them.However, the appraiser is the only partyinvolved in the transaction that actually tellsthe lender the value. The appraiser gets allthe liability and is the least compensatedperson in the entire chain of thetransaction.”

“I have to laugh when I readarticles like this where peopleare talking about something thatthey have no clue about,” saidreader Robbie Zetrouer. “Whatthey need to do is educatethemselves and understand it doesn't matter what it costs to build a home. If the marketdoesn't support it then it’s notworth building. They need to take a look around at thesales in the area before theypour the footings to see if it isfeasible or potentially profitablefrom the market. That's what gotthe housing market into thismess — speculation, or should I say over speculation?”

Frank Lucco commented:

“As one who often has theopportunity to meet and speak withdisgruntled real estate agents, lenders,homebuilders and confused politicians on this issue, I believe there probably is a way to diminish some of the gap. A largepart of the problem has to do with thedefinition of market value which the realestate appraiser is working with. Differences

in contract and/or sales prices can oftenoccur when items such as upgrades whichdon't contribute dollar for dollar to marketvalue are included in the contract — builderpays for HOA dues, two years taxes, golfclub memberships, etc. which may very wellbe valuable to the buyer and an expense to the seller do not translate necessarily into

market value of the property. That's becausewe have as appraisers a ‘cash equivalency’clause which requires us to factor out muchof the fluff.”

Lucco outlined an exaggerated example of this by pointing to Houston in the mid-80swhen interest rates on home loans,

surprisingly were near or at 20 percent and builders were buying down the interest rates on the mortgage loan to assist inqualifying homebuyers. “We would see numerous contracts wherethe builder was paying in excess of 20 loandiscount points,” he explained. “So you canimagine on a $100,000 loan, 20 loan

discount points translated into$20,000 that the builder wasreimbursing the lender for makingthe loan. Although both buyer andseller thought they were getting a good deal and in light of thereduced mortgage interest rateprobably were paying a reasonable price for the land,improvements and financing it,however, did not represent themarket value of the property.Unfortunately, for many thiswasn't discovered until interest

rates decreased and buildersdiscontinued the practice of buyingdown the mortgage interest rate,instead just reduced the price of the property by $20,000.”

Finally, Valuation Reviewreader Cal Baetz echoed the age-old refrain:

“The NAHB does not want an honest appraisal. It wants an appraisal that reflects the sales price of their overinflated sales amount. Thatbeing said, the appraisal industry has beenstripped of its integrity by AMCs that hire 19-year-old gum chewers who have no clue what an appraisal is. That’s the realproblem here.”

APPRAISER NEWS

— Frank Lucco,

managing director,

Qualified Analytics

The Interagency Appraisal ComplaintForm continues to generate concernedcomments from industry professionals.The latest comments come from theAppraisal Institute and the AmericanSociety of Farm Managers and RuralAppraisers (ASFMRA), which penned a letter addressed to the Federal DepositInsurance Corp. (FDIC), National CreditUnion Administration, and Comptroller of the Currency, in hopes of highlighting

some of the potential stress points if thecurrent form is put into action.

First a little background: The InteragencyAppraisal Complaint Form, along with theAppraisal Complaint Hotline mandated by the Dodd-Frank Act, aims to collectinformation about complaints of non-compliance with the appraisalindependence standards and the UniformStandards of Professional AppraisalPractice, including complaints from

appraisers, individuals, financialinstitutions and others.

According to the Appraisal Institute and ASFMRA letter, this form will includenon-payment of appraiser fees tocoercion of appraisers to complaintsabout appraisals.

Meanwhile, the Consumer FinancialProtection Bureau is developing a form

of its own that isdifferent from the formin question. It soundslike there are a lot of regulator cooks inthe forms kitchen.

“Overall, the form is intending to cover a broad range of issuesin one place,” theAppraisal Institute letterstated. “We are unsurewhether this is the mosteffective approach, orwhether separate formsto receive complaintson subtopics may be more valuable or appropriate. Forinstance, weunderstand that the

Form was developed in consultation withstate appraiser regulatory agencies. As a result, the complaint form may havemore applicability with some stateappraiser regulatory agencies than realestate commissions and state mortgagelicensing agencies.”

The institute listed out their suggestionsfor improving the usefulness of the forms:

1. The Agencies should not accept

complaints regarding “inaccurate” valuesor disagreements with the value providedby the appraiser.

2. The current section of the formentitled, “Who are you complaining about”is insufficient and should include, at aminimum, options for real estate agentsand mortgage brokers.

3. Only one classification of “appraiser” is necessary.

“Disagreements over value opinions have nothing to do with appraisalindependence matters,” the institutewrote. “Further, such differences ofopinion do not rise to the level ofpotential USPAP violations unlessspecific violations are identified by thecomplainant. Here, the form alreadyincludes a section for potential USPAPviolations to be referred. As such, thecheckbox option that states, ‘Appraisalinaccurate or disagree with the valueprovided in the appraisal’ should beremoved entirely.”

In regard to who the person is complaining about in the form, theassociations cite that real estate agentsand brokers or loan officers are typicallythe most likely to attempt to influence theappraisal process, according to surveysof real estate appraisers.

According to the associations, addition of these two industry classificationswould greatly increase the relevance andusability of the form for appraisers andassist with agency safety and soundness,and mortgage fraud-tracking issues.

Appraisal Institute, ASFMRA sound off on the InteragencyAppraisal Complaint Form

9

FEATURES

10

An Arizona appellate court addressed thepurely legal issue of whether a trial courtcorrectly ruled that an appraiser did notowe a duty of care to a lender as a matterof law, after the lender filed a complaintagainst the appraisal company fornegligent misrepresentation. Theappraiser had countered that he owed noduty to the lender because the appraisalswere intended specifically for someoneelse’s use alone. The court reversed thedismissal of a negligentmisrepresentation case against theappraisal company, saying the allegationsin the complaint alleged sufficient facts to state a claim upon which relief can be granted and effectively put theappraiser on notice of the nature andbasis of the claim against him.

The case is Belen Loan Investors LLCand Los Lunas Investors LLC v. JamesBradley and Karen Bradley and KB RealEstate Appraisers Inc. (Court of Appealsof Arizona, No. 2 CA–CV 2011–0153)

Belen Loan Investors and Los LunasInvestors had challenged the trial court’sdismissal of their complaint for failure tostate a claim against James and KarenBradley and KB Real Estate AppraisersInc. for negligent misrepresentation andconspiring in or aiding the tortiousconduct of others.

In September 2006, BLI loaned LosLunas Highlands LLC and Belen 368 LLC$2,600,000 and $2,950,000, respectively,for the purchase and development

of various unimproved residential lots in Valencia County, N.M., in exchange fortwo promissory notes, security interest in the property, and the personalguarantee of Michael Myers, an officer of The Myers Group and agent affiliatedwith the borrowers.

According to BLI, the borrowers madefalse representations of the propertyvalue to induce BLI to provide excessloan funds which then were transferred to the borrowers’ personal profit sharingplans. The borrowers hired Bradley, anArizona appraiser, to provide appraisalsfor Myers’s use in obtaining the loans.

When the borrowers defaulted on theirloans, BLI initiated a judicial foreclosureaction in New Mexico and sued Myers,the borrowers, and their associatedentities, corporate officers, and trusteesfor various causes of action.

Bradley moved to dismiss BLI’s claimsagainst him for conspiring in or aiding thetortious conduct of others and negligentmisrepresentation, which were based on allegations that he intentionally or negligently had provided “falselyinflated appraisals” upon which BLI reliedto fund “excessive loans.” Bradleyasserted BLI had failed to state a claimupon which relief could be granted.

The trial court dismissed both claimsagainst Bradley on the ground he owedBLI no duty. The court determined thatSage v. Blagg Appraisal Co. “specificallylimited [an appraiser’s duty to third

parties] to the ‘traditional home-purchasetransaction” and concluded thatbecause the instant case involved“speculative large-tract real estateinvestments,” BLI was “not in the narrowclass of persons entitled to rely on theappraisal[s],” citing Kuehn v. Stanley andHoffman v. Greenberg.

BLI appealed, asserting that, contrary to the court’s analysis, an appraiser owesa professional duty to any third party theappraiser “knows will receive theappraisal for purposes of influencing thespecific transaction.” BLI acknowledgedBradley was hired by Myers to prepareappraisals for Myers’s use but maintainedthat, because Bradley knew Myers wouldprovide appraisals to BLI, Bradley couldbe held liable to BLI for negligentmisrepresentation.

Bradley countered that it owed no duty to BLI because the appraisals wereintended specifically for Myers’s usealone and that the Sage holding is inapplicable because that case isfactually distinguishable from thesituation at hand.

Section 552, Restatement (Second) of Torts (1977), states that an appraiser’sliability is limited to loss suffered “by theperson or one of a limited group ofpersons for whose benefit and guidance[the appraiser] intends to supply theinformation or knows that the recipientintends to supply it” and extends only to those transactions “that he intends the

Appraisal negligent misrepresentation case explores‘duty of care’

LEGAL NEWS

By Syndie Eardly

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LEGAL NEWSinformation to influence or knows that therecipient so intends.” Further, theappraiser need not know the identity of the third-party recipient at the time hesupplies the information, as long as thethird party falls within a distinct group orclass of persons the appraiser intends toreach and influence with the information.

On the other hand, the appraiser has no duty to a third party who is merely a member of the larger class who mightreasonably be expected sooner or later to have access to the information andforeseeably to take some action in reliance upon it.

The Court of Appeals of Arizona clarified§ 552 in Sage, holding that “an appraiserretained by a lender to appraise a homein connection with the granting of apurchase-money mortgage may be liableto the prospective buyer for failure toexercise reasonable care in performingthe appraisal.”

“In Sage, we distinguished earlierdecisions in which we had declined to recognize any duty owed by anappraiser to a third party,” the court said.“For example, in Kuehn an appraiser washired by a lender to determine the valueof a residential parcel ‘for use by [thelender] for a mortgage financetransaction only.’ That the appraiser owedthe home purchasers no duty wasevidenced by the type of appraisal: a ‘short form for lending purposes, which was not prepared for the guidanceof the homebuyers.”

In Hoffman, the court held that anappraiser hired by the seller of parcels of vacant land owed no duty to the third-

party purchaser of the property. The seller in that case had refused toinform the appraiser how he intended touse the report.

“Given the contours of an appraiser’sduty as outlined in these cases, we agreewith BLI that the trial court incorrectlyinterpreted Sage, insofar as it appears to have concluded Sage imposes morestringent limits on an appraiser’s duty tothird parties than does the Restatement,”the court said. “Just as in Sage, Kuehnand Hoffman, to ascertain whether a dutyexists, the circumstances andrelationships between the parties willdetermine whether BLI was an entity ‘for whose benefit and guidance Bradleyintended to supply the information orknew that Myers intended to supply it.’”

“In sum, if Bradley intended to supply his appraisals to BLI, or knew Myersintended to supply them to BLI specificallyor to a limited class of persons includingBLI, Myers owed a duty to BLI,” the courtsaid. “Alternatively, if Bradley and Myersregarded the recipient’s identity as ‘important and material’ and, thus,Bradley understood that his liability wasto be restricted to Myers alone, he owedno duty to BLI.”

With the above scope of duty in mind, thecourt considered whether BLI’s complaintsufficiently alleged a claim for reliefbased on negligent misrepresentation.

“Bradley asserts that BLI’s complaintfailed to state a claim upon which reliefcan be granted because it containedconclusory allegations,” the court said.

But, the court noted, BLI contendedspecifically that 1) Bradley intentionallyand/or negligently provided falselyinflated appraisals for Myers’s use in thebusiness transaction; 2) that Bradleyknew that the appraisals were to be reliedupon by lenders and that they had a rightto rely on the appraisals; and 3) thatBradley failed to exercise reasonablecare in communicating the representationsto BLI by neglecting to obtain comparablesales data and using incomplete orinappropriate valuation methodology.

Based on this, the court concluded BLI’scomplaint alleged sufficient facts to putBradley on notice of the specific nature of the claim.

Bradley contends BLI’s acknowledgementthat the appraisals were prepared forMyers’s use constitutes an admissionthey were not intended for BLI’s use.

However, the court disagreed, sayingBLI’s acknowledgement does notpreclude finding a duty based onBradley’s alleged knowledge that Myerswould give the reports to third-party BLI, despite the provision that they were“not intended to be used, transferred or relied upon by any person other thanthose noted.”

“Notwithstanding the limitations in theappraisals, the complaint, if proven, mightentitle BLI to relief on the theory thatBradley intended to supply falseappraisals to BLI or knew Myers intendedto do so,” the court concluded.

The Off ice of the U.S. Attorney announced thatFederal Distr ict Judge Lynn Adelman sentenced Paul Zaleski , age 64, formerly of Twin Lakes, Wisc.,now l iving in Ojai, Cal i f . , to 14 months in federalprison for his part in a mortgage fraud scheme thatspanned from 2004 to 2006. Zaleski, who pled gui l tyto one count of wire fraud and one count of moneylaundering, faced a total of 30 years in prison forthese offenses.

According to the indictment, Zaleski, act ing as a mortgage broker, orchestrated a scheme whichinvolved straw buyers, fraudulent loan appl icat ionsand inf lated appraisals. He was able to arrange inexcess of $14 mil l ion in loans for the purchase ofapproximately 51 propert ies located in southeasternWisconsin and northern I l l inois. More than $2mil l ion of the loan proceeds wired by the variouslenders were funneled to shel l companies thatZaleski establ ished.

In connection with the scheme, Zaleskirepresented himself as a person involved in thepurchase and improvement of real estate for prof i tand the coordinator of a group of investorsengaged in that act ivi ty. Al l but a few of thepropert ies ult imately went into foreclosureresult ing in a loss of more than $5 mil l ion. Themoney laundering counts al leged that i l l -gottenloan proceeds were used, in part, for thepurchase of addit ional propert ies and forpersonal expenses, including Zaleski ’s purchaseof a new Chevrolet Corvette.

Adelman previously sentenced Zaleski ’s co-conspirators for their roles in the fraud scheme.Appraiser John Hochrek, 51, of Ingleside, I l l . ,was sentenced to one year in prison for wire fraud. Remodeling contractor Michael Pembroke , 48, of Twin Lakes, Wisc.,

was sentenced to one year in prison for wire fraudand money laundering. Investor Patr icia Kay, 60, ofKenosha, Wisc., was sentenced to three years’probation for misprision of a felony. Loan processor,Robert Farrel l , 33, of Mundelein, I l l . , was sentencedto three years’ probation for conspiracy. Resti tut ionhas yet to be determined.

According to First Assistant U.S. Attorney GregoryHaanstad , “This prosecution ref lects the Departmentof Just ice’s commitment to protect ing homeowners,lenders and the economy from the serious damagethat f lows from mortgage fraud. As was the case in this prosecution, our off ice wi l l continue to work col laborat ively with the FBI, the IRS, and our other law enforcement partners to holdaccountable those who engage in these frauds andwho, by doing so, undermine the integri ty of ourhousing and credit markets.”

“Mortgage fraud has had a devastat ing impact on our society,” said Teresa Carlson , special agentin charge of the FBI Milwaukee Division. “However,through the great collaboration of our law enforcementpartnerships, we wil l continue to dedicate resourcesto combat the threat of mortgage fraud here inWisconsin and across the nation.”

“Zaleski held a posit ion of trust not only in FirstSecuri ty Financial, but also in the eyes of the publ icand the Kenosha community as a whole, andunfortunately chose to violate that trust and abusehis posit ion,” said Kelly Jackson , special agent incharge of the IRS-Criminal Investigat ion off ice whoinvestigated Zaleski. Jackson added that federalauthori t ies wi l l continue their efforts to di l igent lyinvestigate and prosecute cr imes which f inancial lyvict imize others.

Mortgage broker’s inflated appraisals sealed hissentence