Conditions and Constraints: Application Fundamentals and Accountability

This chapter of the course “Conditions and Limitations of Real Estate Appraisal: Fundamentals of Application and Responsibility” addresses the concepts of conditions and limitations in real estate appraisal reports, emphasizing their importance in defining the scope of the appraisal and protecting the appraiser from liability.

Main Points:

• Limiting Conditions: Statements or interpretations that limit the application or assumptions of the conclusions in the appraisal report. They precisely define❓ what can be inferred from the appraisal. Examples include: the sole purpose of the appraisal is to estimate value; the appraisal does not constitute an engineering survey; the appraisal does not constitute a legal opinion regarding ownership or other legal matters; the appraisal does not constitute an engineering report or property inspection report; the appraisal is based on limited data and under uncertain conditions; and the appraisal relies on specific assumptions about the client’s needs and expertise.
• Objectives of Limiting Conditions: To help the client and other readers understand the report and avoid unwarranted conclusions; to prevent non-specialist readers from assuming that the appraiser has verified certain aspects (e.g., property boundaries or condition of title) if that was not part of the appraisal scope; to limit the appraiser’s legal liability for the consequences of actions taken based on the report, but cannot be used as an excuse for incompetent appraisal. Validity of appraisal is limited to a specific client and for the specific use in the report.
• Fannie Mae and Freddie Mac Changes (2005): Significant changes were made to the statement of assumptions and limiting conditions and the appraiser’s certification in March 2005. The old form 439 was eliminated, and the expanded wording of the new document became part of the six pages of the 2005 Uniform Residential Appraisal Report.
• Scope of Work: Fannie Mae defines the minimum acceptable scope of work. The appraiser is allowed to expand the scope of work for a complex appraisal.
• Intended Use: Use of the form is limited to mortgage financing transactions only.
• Intended User: The lender/client as stated in the report. Under USPAP, all intended users must be named by name or type.
• Definition of Market Value: Same definition as mentioned elsewhere in the text.
• Statement of Assumptions and Limiting Conditions:
  • Paragraph 1: Legal title is not a concern for the appraiser. The appraiser assumes the title is marketable.
  • Paragraph 2: The sketch provide❓d in the report is approximate only and is not a survey.
  • Paragraph 3: While the appraiser may have looked at FEMA flood maps, there is no guarantee from the appraiser regarding the accuracy of the maps. The appraiser is not a surveyor.
  • Paragraph 4: The appraiser will only testify or go to court if prior arrangements are made to do so.
  • Paragraph 5: Although the appraiser may have noted obvious adverse conditions discovered during their search and inspection, unless otherwise stated, the appraiser has no knowledge of any hidden or unapparent adverse conditions and has assumed there are none. The appraiser is not a building inspector, engineer, or environmental scientist.
  • Paragraph 6: The appraiser assumes that work in progress or subject to completion will be completed in a professional manner (the old form used the term “workmanlike manner”).
• Appraiser’s Certification: The new document consists of twenty-five paragraphs instead of the nine found in the old document. Current USPAP certifications appear within the new document but the wording differs from that found inside the USPAP document. Fannie Mae appears to have unilaterally added new items to the appraiser’s certification. Several of these new certifications were developed to make appraisers aware❓ of certain lending and appraisal practices that Fannie Mae finds unacceptable. There are several competency issues in the appraisal, related to the title. The most controversial of these new certifications are paragraphs 21-23.
  • Paragraph 1: The appraiser followed the scope of work.
  • Paragraph 2: The appraiser viewed both the interior and exterior of the subject property.
  • Paragraph 3: The appraiser followed current USPAP requirements.
  • Paragraph 4: The appraiser used the sales comparison approach only. He/she must consider the cost and income approaches, but is not required to include them in the report.
  • Paragraph 5: The appraiser indicated all listings of the subject property within the past 12 months and all sales of the subject property within the past 3 years.
  • Paragraph 6: The appraiser indicated all prior sales of the comparables within the past 12 months.
  • Paragraph 7: The appraiser used the most similar comparable sales.
  • Paragraph 8: The appraiser is not supposed to add the cost of land and improvements from two separate contracts and call it market value. These “bundled” sales are not considered “arm’s length” transactions.
  • Paragraph 9: Adjustments should be based on market reactions.
  • Paragraph 10: All information provided by anyone with an interest in the property should be verified by “arm’s length” parties.
  • Paragraph 11: The appraiser certifies that they have the geographic and subject matter competency to appraise the type of property.
  • Paragraph 12: The appraiser is aware of and able to obtain all data necessary to prepare a credible report.
  • Paragraph 13: Any data provided by others that is used in the report is believed to be reliable and correct.
  • Paragraph 14: If any adverse conditions were either seen by the appraiser or they were made aware of, they have been listed in the report and their effect on value has been analyzed.
  • Paragraph 15: The appraiser has not knowingly withheld any information, and the data and information contained in the report are true and correct to the best of the appraiser’s knowledge.
  • Paragraph 16: The appraiser is unbiased. The analyses and conclusions are the appraiser’s and are limited only by the assumptions and limiting conditions stated in the report.
  • Paragraph 17: The appraiser has no present or future interest in the property being appraised. Furthermore, the appraiser has no bias with respect to the race, religion, color, sex, marital status, disability, familial status, or national origin of any parties involved.
  • Paragraph 18: There are no predetermined values and no predetermined results.

Conclusions:

Conditions and limitations are an integral part of the real estate appraisal report. They provide the necessary clarity to understand the scope of the appraisal and limit the legal liability of the appraiser. Appraisers must strictly adhere to standard conditions and limitations and ensure they accurately reflect the nature of the appraisal and the assumptions upon which it was based. Readers, especially non-specialists, should pay attention to these conditions and limitations to avoid drawing incorrect conclusions.

Implications:

• For Appraisers: Appraisers must understand and apply conditions and limitations correctly to protect themselves from liability.
• For Lenders: Lenders must ensure that appraisal reports include appropriate conditions❓ and limitations to ensure borrowers understand the scope of the appraisal.
• For Borrowers: Borrowers must read the conditions and limitations carefully to understand what was and was not verified during the appraisal.
• For Standards Development: Appraisal standards, such as USPAP, should include clear guidance on the use of conditions and limitations.