Assumptions and Limitations: Fundamentals of Assessment and Liability

Conditions and Limiting Conditions

Conditions and limiting conditions are integral to real estate appraisal, defining the framework for value opinions and the appraiser’s responsibility.

1. Definition

Conditions and limiting conditions are statements that define the scope or assumptions of the appraisal report’s conclusions. They clarify the appraiser’s liability limits and prevent misinterpretations.

• Conditions: Circumstances surrounding the appraisal that affect the process and results.
• Limiting Conditions: Statements that limit the application or assumptions of the report’s conclusions.

2. Importance in Real Estate Appraisal

Conditions and limiting conditions are essential to:

1. Clarify the scope of the appraisal: Define the property, property rights, purpose, and effective date.
2. Avoid unwarranted conclusions: Help users understand the report and avoid inaccurate inferences.
3. Define the appraiser’s responsibility: Specify the circumstances under which the appraiser can be held liable.

3. Types of Conditions and Limiting Conditions

Conditions and limiting conditions can be categorized as follows:

• Property-Related:
  • Property Identity: Precise identification of the property (address, plot number, etc.).
  • Property Rights: Precise definition of property rights (full ownership, lease, usufruct, etc.).
  • Legal Restrictions: Indication of legal restrictions (easements, rights of way, etc.).
• Appraisal-Related:
  • Purpose of the Appraisal: Definition of the appraisal’s purpose (mortgage, sale, insurance, etc.).
  • Effective Date: The date the estimated value reflects market conditions.
  • Scope of Work: Definition of the work performed (visual inspection, comprehensive inspection, data analysis, etc.).
  • Assumptions: Identification of the assumptions used in the appraisal process.
• Liability-Related:
  • Beneficiary of the Appraisal: Identification of the appraisal’s beneficiary (bank, buyer, seller, etc.).
  • Intended Use: Definition of the appraisal’s intended use (mortgage, sale, etc.).
  • Warnings: Inclusion of warnings regarding reliance on the appraisal for purposes other than those specified.

4. Examples of Common Conditions and Limiting Conditions

Examples include:

1. The appraisal’s sole purpose is to estimate the property’s market value.
2. The appraisal does not constitute a survey or boundary determination.
3. The appraisal does not constitute a legal opinion on ownership or other legal matters.
4. The appraisal does not constitute an engineering or inspection report.
5. The appraisal was conducted under uncertain conditions and is based on limited data.
6. The appraisal was performed with specific assumptions regarding the client’s needs and expertise.
7. The appraiser does not guarantee the accuracy of FEMA flood maps.
8. The appraiser will only testify or go to court if prior arrangements are made.
9. The appraiser assumes any ongoing or incomplete work will be completed professionally.

5. Legal Formulation of Conditions and Limiting Conditions

Conditions and limiting conditions should be clear, concise, and unambiguous, written in simple language. Appraisers should consult a real estate attorney to ensure compliance with local laws and regulations.

6. Impact on Appraiser’s Liability

Conditions and limiting conditions define the circumstances under which the appraiser can be held liable. They may state that conclusions are valid only for a specific client and for the report’s specified use. However, they cannot excuse incompetent appraisal work.

7. Changes in Standards: Fannie Mae and Freddie Mac

In March 2005, Fannie Mae and Freddie Mac introduced significant changes to the statement of assumptions, limiting conditions, and appraiser’s certification. The old Form 439 was withdrawn, and the expanded language became part of the 2005 Uniform Residential Appraisal Report.

• Scope of Work: The form defines the minimum acceptable scope of work requirements. Appraisers can expand the scope for complex appraisals.
• Intended Use: The form can only be used for mortgage finance transactions.
• Intended User: The lender/client named in the report. All intended users❓ must be named by name or type.

8. Appraiser Certification According to Fannie Mae and Freddie Mac

The new document consists of 25 paragraphs instead of 9. It includes current USPAP certifications, but the wording differs. Fannie Mae added new elements unilaterally. Many new certifications were developed to raise appraiser awareness of unacceptable lending and appraisal practices. There are also issues related to the competency of title appraisal.

9. Conclusion

Conditions and limiting conditions are essential to real estate appraisal, defining the framework for value opinions and the appraiser’s responsibility. Appraisers must understand and apply them correctly for accurate and responsible appraisals.