The Best of the Legal Hotline: Let's Talk Appraisals


 Deb Conrad  |    September 11, 2014
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Appraisal contingency

The listing agent received an offer to purchase, and the Appraisal Contingency section within that offer is marked ‚ÄúN/A.‚ÄĚ A day after the offer was accepted, the agent received a pre-approval letter stating ‚Äúfinancing subject to a satisfactory appraisal.‚ÄĚ
The listing agent asked the cooperating agent if the buyer intended to include an appraisal contingency. The cooperating agent responded, "unless I'm wrong, my take on the appraisal contingency is that whether it's checked or not, if buyer is getting a mortgage loan, they will almost always have an appraisal. If the appraisal doesn't come in at or above the amount, the bank can deny the loan, so what's the sense of this contingency?" Is the cooperating agent correct?

The financing and appraisal contingencies are separate contingencies in the offer. If a buyer does not want the offer to be contingent on an appraisal, the Appraisal Contingency should not be checked. 

The primary reason to include an Appraisal Contingency in an offer is to protect the buyer against becoming contractually obligated to purchase a property that does not appraise at or above the purchase price and, as a result, the lender will not make the loan. If the buyer includes the Appraisal Contingency and receives a loan commitment subject to an appraisal, the separate Appraisal Contingency is not waived by delivering the loan commitment to the seller. If there is no separate appraisal contingency and the buyer delivers a loan commitment to the seller that is subject to an appraisal, the buyer is assuming the risk that the property will appraise at or above the purchase price. 

If the property does not appraise at that required value, a buyer without a separate appraisal contingency would be in breach of contract if they did not close, even if they have no financing due to the low appraised value. If the independent appraisal contingency is used, the buyer would be protected and would not be in breach of contract if the property did not appraise at the required value ‚ÄĒ even if a loan commitment subject to an appraisal had previously been delivered to the seller. The separate Appraisal Contingency is not waived by delivering the loan commitment and gives the buyer a way to be released from the transaction.¬†

Brokers contacting appraisers

A local bank told a broker that she cannot contact an appraiser for any reason. When a question came about, the bank needed clarification from the appraiser. The broker called the appraiser to ask for this clarification, and she asked that the appraiser contact the bank so they can clear the transaction to close. Can the broker do this?

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), Truth in Lending Act (TILA), USPAP, and other federal guidelines all address appraiser/agent communications. None prohibit appraisers from speaking with real estate agents during the appraisal process. Agents may talk with appraisers and provide additional property and neighborhood information and comparables. An agent may not, however, intimidate or bribe an appraiser and should provide suggestions respectfully. The federal regulations under Dodd-Frank provide that the rules designed to ensure appraisal independence do not prevent a real estate broker from asking the appraiser to ‚Äúconsider additional, appropriate property information, including the consideration of additional comparable properties to make or support an appraisal, provide further detail, substantiation, or explanation for the appraiser's value conclusion or correct errors in the appraisal report.‚Ä̬†

See NAR’s Appraiser Independence resources at www.realtor.org/appraisal/appraiser-independence. 

Distribution of information

An appraiser inquired about the sale price and the closing date of a pending deal. The agent believes that until such information is made public, these details cannot be given out. Please advise.

The general rule is that real estate licensees should keep the terms and conditions of the offer to purchase confidential. However, in the Distribution of Information section on lines 272-277 of the WB-11 Residential Offer to Purchase (and in the other updated offers), the parties grant the broker the authority to share what would otherwise be confidential information so that appraisers can comply with various regulatory and client-imposed standards and provide more accurate and current valuations. Pending sale information may be needed by the appraisers researching comparable sales in order to make proper adjustments and arrive at better, more accurate appraisals that benefit all parties. Appraisers may request information regarding listings, pending offers, concessions and other pre-closing data, and the Distribution of Information section permits brokers to share this information. If a broker has a concern about the information requested, the broker may discuss confidentiality concerns with the appraiser, obtain express permission from the parties, or decline the request.

Appraiser performing BPOs

A real estate agent who is also a licensed appraiser was approached by a bank to perform broker price opinions (BPOs) for home equity loans. The bank routinely checks each year to confirm that the value supports the equity line. On his BPO reports, the agent/appraiser states that he is a licensed appraiser but that the BPO valuation should not be construed as an appraisal. Can the agent/appraiser perform BPOs for the bank? His income is from real estate sales; he is not engaged in appraisal practice.

With regard to the agent/appraiser’s status and multiple credentials, must he comply with USPAP if he undertakes the BPOs for the lender? The following is an excerpt from USPAP Advisory Opinion 21:

‚ÄúRobert Agent is an individual who provides both brokerage and appraisal services. ‚Ķ USPAP provides flexibility for brokers/appraisers and others who have multiple professional roles. If providing the service as an agent or broker, USPAP requires only that an appraiser must not misrepresent his or her role. In others words, if Robert was contacted by his client because he is an agent or broker and signing his report as an agent or broker, then Robert need not comply with USPAP except to not misrepresent his role. If Robert is contacted by the client because he is known as an appraiser and is signing his report as an appraiser, then USPAP applies.‚ÄĚ

The REALTOR¬ģ Code of Ethics in Standard of Practice 11-1 in provides, ‚ÄúWhen REALTORS¬ģ prepare opinions of real property value or price they must:
1) be knowledgeable about the type of property being valued,
2) have access to the information and resources necessary to formulate an accurate opinion, and
3) be familiar with the area where the subject property is located unless lack of any of these is disclosed to the party requesting the opinion in advance.
When an opinion of value or price is prepared other than in pursuit of a listing or to assist a potential purchaser in formulating a purchase offer, the opinion shall include the following unless the party requesting the opinion requires a specific type of report or different data set:
1) identification of the subject property
2) date prepared
3) defined value or price
4) limiting conditions, including statements of purpose(s) and intended user(s)
5) any present or contemplated interest, including the possibility of representing the seller/landlord or buyers/tenants
6) basis for the opinion, including applicable market data
7) if the opinion is not an appraisal, a statement to that effect
8) disclosure of whether and when a physical inspection of the property’s exterior was conducted
9) disclosure of whether and when a physical inspection of the property’s interior was conducted
10) disclosure of whether the REALTOR¬ģ has any conflicts of interest (Amended 1/14).‚ÄĚ

Thus, the agent/appraiser may act as a real estate agent in preparing BPOs provided he makes it clear to the lender that he is providing that service in the capacity of a real estate agent and that the BPO is not an appraisal.

Resources

‚ÄĘ ‚ÄúProfessionalism in the Appraiser World: Cooperation between professionals reaps optimal results,‚ÄĚ in the March 2013 Wisconsin Real Estate Magazine: www.wra.org/WREM/Mar13/AppraiserEthics
‚ÄĘ ‚ÄúAre You Reporting Sales Concessions?‚ÄĚ in the September 2007 Wisconsin Real Estate Magazine: www.wra.org/WREM/Sept07/SalesConcessions
‚ÄĘ "Best of the Legal Hotline: Taming the Financial Gorilla" in the August 2011 Wisconsin Real Estate Magazine: www.wra.org/WREM/Aug11/LegalHotline
‚ÄĘ Pages 12-13 of the November 2009 Legal Update, "WB-11 Residential Offer to Purchase ‚ÄĒ 2010 Edition:" www.wra.org/LU0911
‚ÄĘ ‚ÄúBest of the Legal Hotline: Financing Contingency‚ÄĚ in the January 2009 Wisconsin Real Estate Magazine: www.wra.org/WREM/Jan09/FinancingContingency
‚ÄĘ NAR consumer brochures and resources, including ‚ÄúResidential Appraisal Process ‚ÄĒ FAQs for Agents,‚ÄĚ ‚ÄúGuide: Understanding a Residential Appraisal,‚ÄĚ and ‚ÄúCommon Myths about Appraisals in the Home Buying Process:‚ÄĚ www.realtor.org/appraisal/appraisal-tools
‚ÄĘ REALTOR¬ģ Code of Ethics: www.wra.org/codeofethics

Debbi Conrad is Senior Attorney and Director of Legal Affairs for the WRA.

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