Chapter 99: Appraisals — Know When To Hold ’Em

An excerpt from the book Be The Better Broker’ Volume 3

Appraisals: Know When to Hold Em

“You’ve got to know when to hold ’em.” –Kenny Rogers

What happens when your client asks for a copy of the appraisal?

Short Version

Do not release an appraisal report to a client — ever.

Long Version

Think twice about giving your client a copy of the appraisal report.

You will have many requests from clients for copies of the appraisal reports done on their properties. In many cases, the clients themselves will have paid for the report, which makes saying no all that much more awkward. Certainly for Brokers who prepay for each and every report, something feasible only in certain markets, this does make the “no” conversation a bit easier and less incendiary.

When the client cannot have what they paid for 

Yes, the client paid for the appraisal report, but this does not mean they are entitled to receive a copy. Canadian appraisers follow the Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP), which states that only the appraiser’s client or intended user is entitled to a copy of the appraisal report. CUSPAP defines the client as the “person or party that engages (orders) the appraiser for the appraisal assignment.” This may or may not be the person who paid for the report. Usually it is not.

If a Mortgage Broker orders an appraisal, the Broker is the client of the appraiser, and the homeowner is the client of the Broker. There is no client relationship between the homeowner and appraiser, regardless of who pays for the appraisal. It is about who keyed in the order.

This concept can often upset a homeowner, so understanding the appraiser ∕ client relationship will help you manage the expectations of your client in advance—before they say, “Well, I paid for it, so I want a copy.”

In order to release a copy of the appraisal report to anyone, including a lender, the Broker requires the appraiser’s authorization. This usually comes in the form of a Letter of Transmittal (lot)—or to use the latest term, a “reliance letter”—to permit a particular party (lender) to rely on the report.

Why would an appraiser not want the homeowner to have a copy?

An appraisal report is a private and confidential document between appraiser and client (usually the Broker or the lender) and is not intended to be circulated outside this relationship without written permission from the appraiser (lot).

Unlimited liability

The Appraisal Institute of Canada (aic) requires its members to limit their liability, wherever possible. Appraisals are prepared for a specific use, and the appraiser’s liability increases with each additional use of a particular appraisal report.

When a homeowner obtains a copy of an appraisal completed for a Broker or lender, the appraiser has no control over how that appraisal may be used in the future. The appraiser then inadvertently assumes undetermined additional liabilities, over and above a simple mortgage appraisal.

Do not share an appraisal report with anyone—ever.

Improper use

Often, clients say they want a copy of the appraisal “for their files.” This can be easily addressed by pointing out that other documents in their files already contain the same data and that this report contains little information other than the value, legal description and some pictures of their home. In other words, their mortgage commitment, property assessment, property tax notice and photo album already provide a record of the same data.

Further the value cannot be relied on past thirty days in most cases, and so the report truly has an expiry, or “best before,” date on it which most clients also tend to overlook.

The reality is that homeowners often have other plans for the appraisal report and will mistakenly assume an appraisal is an appraisal.

Appraisals completed for mortgage purposes should be used only for mortgage purposes. Appraisals prepared for legal purposes should be used only for legal purposes. Insurance appraisals completed for insurance purposes should be used only for insurance purposes. The terms of reference for each use are quite different. And the valuations can be quite different as well.

Example: An appraisal is completed for a lender who wants the value of the significant outbuildings to be excluded. The homeowner obtains a copy of that appraisal and years later, or even days later, uses it to determine a buyout figure in a marital separation.

The individual being bought out relies on the appraisal assuming it represents the full fair market value of the property and does not realize that the value excludes the outbuildings. While the appraisal meets the terms of reference for the lender it was prepared for, excluding the outbuildings, it is clearly (to us) not suitable for determining a spousal buyout.

Following along, years later the party that relied on this report discovers this issue and sues their ex for the difference in value. At that point the appraiser is going to be called into court to defend the report. And if the appraiser had not authorized the release of this appraisal report to the original party, the person who released it to the homeowner could be held responsible for any losses incurred by the parties relying on the report.

In this example the person held liable—that could be you: you, liable.

How about this little tidbit: If a Broker passes along a copy of the appraisal to the homeowner, the Broker will be held accountable for any use of that report—forever.

Do not share an appraisal report with anyone—ever.

Fraud

These days, appraisers need to be mindful about fraud, and unfortunately, appraisal reports are being altered or edited by fraudsters more often than in past years. Interestingly, the majority of fraudulently altered appraisal reports were obtained without the authorization of the appraiser. A Broker has a responsibility to help mitigate appraisal fraud whenever possible, ideally by simply never releasing the report. Your client is not specifically the concern here. The concern is the third parties that your clients hand that report over to either knowingly or unknowingly: for instance perhaps the client hands it over to another Broker since you could not get their file approved. And perhaps that Broker has little regard for their license, or they are a bank mortgage specialist who has no license to start with and thus even less to be worried about, and that mortgage rep doctors that report to arrange for a private second mortgage funded by an unsophisticated investor. Fast forward to the inevitable lawsuit that the investor launches against the banker ∕ broker, borrower, and appraiser and guess who else is tagged in that mess…yep—you.

Why take a chance on any of this?

Do not share an appraisal report with anyone—ever.

PIPEDA

The various real estate boards closely guard the MLS comparable information, and appraisers are expected to ensure that some of this data is not circulated to the general public. In years past, appraisers would often provide a Broker with a “homeowner copy” of the appraisal with the MLS data redacted. Since the enactment of the Privacy Act (PIPEDA) in 2004, a redacted copy may not be sufficient to comply with the act.

This is a tiny section of this chapter, yet one of the most meaningful. To get on the wrong side of a privacy violation is a serious matter.

Do not share an appraisal report with anyone—ever.

Appraisal 101 

The fee an appraiser charges a Broker ∕ lender for an appraisal is roughly 50% of what that appraisal would cost if ordered by and prepared directly for the homeowner. The Broker receives this discount because Brokers and lenders are considered to be “sophisticated readers” of appraisal reports. We have read many appraisal reports before, we understand the appraisal process, we understand market value and how it’s determined, we know what the term comparable means and so on. Homeowners do not necessarily understand these concepts, and the appraiser often has to provide them with an appraisal-101 course to assist them. This takes extra time and therefore the fee is higher for a homeowners report. In some cases, the time involved in explaining the appraisal to homeowners is considerably longer than the time it took to complete the actual appraisal itself.

Whether an appraiser authorizes release of the appraisal to a homeowner is ultimately a business decision of the appraiser; however, most professional appraisal firms have similar policies in place on this issue to the one being hammered home in this chapter:

do not share an appraisal report with anyone—ever.

Full liability

As explained earlier, an appraiser cannot be held liable for an appraisal report that was relied upon without the consent of the appraiser. If a Broker releases a copy of an appraisal report to a homeowner without the written authorization of the appraiser, the Broker can be held liable for any use of the report. The liability the Broker takes on via unauthorized release of a report is quite significant.

Example; an appraisal completed for a Broker was released to a homeowner who in turn used the appraisal for house insurance purposes. Years later, the home was destroyed by fire. During the investigation completed by the insurance company, it was discovered that the appraisal contained an error in the square footage calculation of the home, resulting in the property being underinsured.

The appraiser was not held accountable because the appraisal was completed for mortgage purposes and was not authorized to be used for any other purpose.

However, the Broker was held partially responsible for the loss because of the unauthorized release of the appraisal report that the insurance company relied upon.

Ouch.

All because this Broker wanted to be nice, did not want to argue with the client and chose to skirt the rules.

Be nice; it is nice to be nice.

But say “NO”, say it nicely—but say it.

Don’t cave in.

Don’t argue, DO explain.

Don’t break the rules.

The rule: Do not share an appraisal report with anyone—ever.

Time management

Top Brokers understand acutely the value of their time. Ask yourself how much time you want to spend discussing appraisals with your clients. If time is money, how much time ∕ money do you want to spend debating the condition of your client’s home, articulating remaining economic life, discussing the cost approach, demonstrating how depreciation is calculated, explaining the definition of a “latent defect” and how it applies to the positioning of their powder room directly off the living room, sifting through active listings and dated sales, explaining why the neighbouring house that sold two years ago wasn’t used in the appraisal?

Providing copies of appraisal reports to your clients (with or without the appraiser’s authorization) can create a situation for you that eats up resources and may not be productive in any way, shape, or form.

It is not customer service, because it has no bearing on your number one job—getting the file complete. It is you wasting your clients time and your own, talking about things you cannot change.

Take a lesson from the Canadian banks; they have all learned that keeping appraisals as internal documents is the best way to manage their lending staff resources. No chartered bank will release an appraisal to a client; neither should you.

Rogue bank staff will release a report on occasion, but there is a vast difference between their role as an unlicensed employee and yours as the owner of a mortgage corporation (you did get yourself Incorporated since it was last mentioned right?). Why would you go rogue against your own company?

Do not share an appraisal report with anyone—ever.

Niceties

Lenders may not want the homeowner to view a copy of the appraisal either.

Time management of their staff is one reason, but another is that the lender wants a completely unbiased report of the subject property, and this is especially true for private lenders. An appraiser may use different language to describe a negative aspect of a property if they know the homeowner will be reading the report, whereas the lender, especially a private lender, wants unfiltered language and a completely unbiased description of the property, positive or negative. Make it clear to your appraiser that you will never release a report they prepare directly to the homeowner.

Conclusion

As with appraisers, it also ultimately comes down to a business decision of the Brokers or lenders as to whether they wish to release copies of appraisals to their clients. If, as part of your business model, you want to provide a copy to your client, be sure to obtain authorization before you do so.

Recognize that you are adding another layer of complexity to the transaction, and if you prefer to simplify processes and maximize efficiencies, then advise your clients in advance that the appraisal fee is for a service required by the lender as part of the lending process, and it is not a fee for a product the clients themselves will receive.

Keep your business simple; keep your life simple. 

Do not share an appraisal report with anyone—ever.

Chapter Tip: Have a policy and do not deviate from it. Take material from this chapter, write out your own explanation and have it on hand to forward to clients when they ask for a copy.

Chapter Tip: Just in case you missed the main message here, your policy should be to never, ever, under any circumstances, release the appraisal report. It is not worth the potential fallout that could come raining down years from now.

Dustan Woodhouse