A Cautionary Tale about Intended Users and the Law

Charles Argianas Cautions "100 Attaboys" Cancels out one "Oh No!"

It’s easy to forget how important the basics like scope of work and intended user are when you’re being billable, but as our founder Charles Argianas cautions, “100 Attaboys” cancels out one “Oh No”.

As we covered in part one of our blog series about intended users, an intended user is named by the appraiser as an authorized user who has the right to rely on and employ the information contained in the appraiser’s report. For example, a client may engage us to conduct an appraisal for financing. Even though the property owner pays for the appraisal, the client/intended user (the party authorized to rely on our work product) is the financial institution. Appraisers are bound at multiple levels, by USPAP, the Appraisal Institute’s code of ethics, FIRREA and the Dodd-Frank Act (if a Federally Regulated Transaction), which, amongst other things, prohibits the sharing of information, analysis and conclusions included in the appraisal with people who are not intended users. The fact that an appraiser receives property details from a property owner does not create an authorized duty/professional relationship between the appraiser and property owner.  The appraiser is forbidden to discuss or share details as to the appraisal with the property owner unless the lender gives them permission, and even then, the property owner does not take on the role of an authorized intended user. This arrangement is often an area of confusion.

Appraisers are responsible for ensuring information in their appraisal is shared only with the named client and/or intended users, as applicable. The intended user should be clearly identified in the appraiser’s engagement letter and specifically in the actual appraisal report.  Failure to do so by the appraiser can result in serious consequences should others rely on appraisal reports not intended for such unauthorized use. Always keep in mind that if you are not an intended user, you are not authorized to rely and make decisions based upon the analysis and conclusions of the appraisal.

clear as mud: the consequences of a vague report

Clearly identifying the intended user and use of the appraisal report protects the appraiser and intended user from unauthorized users. Recently, we were retained to assist on an assignment that spanned decades before we were brought in. In the early 2000s, another appraiser prepared a report for a federally regulated lending institution, but years later, a different bank chose to rely on the old appraisal report prepared for a different lender. Although it is not uncommon for banks to make decisions based on appraisals not prepared for their use, their reliance is unauthorized unless arrangements are otherwise made.

After relying on the report to make a loan, the bank felt something wasn’t right and decided to hire an expert to conduct an appraisal review and appraisal. The expert concluded that the original appraisal – which they were not authorized to act on, was flawed. After about a decade in court, both sides agreed to drop litigation. Identification of the appraisal’s authorized intended user would have helped the appraiser avoid years of legal fees and court costs.

appraisal vs. consulting services

“Despite time-honored valuation techniques”, Vice President Alexander Argianas shared, “we’re not always retained to perform an appraisal. Sometimes we provide consulting services in lieu of appraisals, for example, we can prepare a linear regression valuation model in determining the reasonability of value conclusions prepared by others.”

A linear regression model allows an appraiser to look at verified data of like-kind properties and apply it on an X and Y graph. Once on the graph, a line can be calculated (bringing back memories from high school algebra yet?) and unknown variables from a subject property can be solved using the line’s equation y=mx+b. “People are afraid of math, but it’s very simple”, Alexander said, “while it’s not appropriate in many cases, linear regression can be a valuable analytical tool if used properly.” Per Alexander, “If you only have a hammer, everything looks like a nail.” For something that came down to an engagement letter lacking the intended user, the Argianas team was able to make use of a tool to bring clarity to what was an obscure case for all involved.

crystal clear

Understanding appraisals is not an easy task. The team at Argianas & Associates has over 30 years of experience in valuations and commercial appraisals. If you have any questions about an appraisal you have received or who the intended user of the appraisal is or if you can use the information in the appraisal, please don’t hesitate to contact our experts. You can call us at 630-390-0113 or contact us through our website, here or email us at [email protected]. If learning about things you thought you’d left behind in high school doesn’t scare you and you want to learn more about commercial appraisals, please sign up to receive our newsletter