In the context of Fannie Mae and Freddie Mac appraisal forms, what is one significant change observed in the newer "Certificate of Appraiser" document, compared to older versions?

Conditions, Limitations, and Liabilities in Real Estate Appraisal

Real estate appraisal is a cornerstone in investment and financing decisions related to real estate. The accuracy and reliability of this appraisal depend on understanding the conditions and restrictions that govern the appraisal process and define its scope. This chapter, titled "Conditions and Restrictions: Limits of Application and Responsibility in Real Estate Appraisal," aims to highlight these aspects and clarify their impact on the final results and related responsibilities.

The scientific importance of this topic lies in establishing a framework for the appraiser and those dealing with real estate appraisal, defining the scope of work, basic assumptions, and restrictions imposed on the use of the report. Ignoring these conditions and restrictions may lead to misinterpretations of results and ill-considered decisions with financial and legal consequences. Conditions and restrictions are an integral part of the appraisal process, protecting all parties involved, including the appraiser, the client, and other users of the report.

This chapter aims to:

1. Define conditions and restrictions in real estate appraisal, clarifying the difference between them, with examples of common types of conditions and restrictions in appraisal reports.
2. Determine the importance of conditions and restrictions in understanding the context of the appraisal, preventing misinterpretations of results, and defining the appraiser's legal and ethical responsibilities.
3. Analyze the impact of conditions and restrictions on the scope of the appraisal, affecting the data and information collected and analyzed, and the methods used in the appraisal.
4. Understand the appraiser's legal and ethical responsibility and how the appraiser can protect themselves from potential claims by including clear and specific conditions and restrictions in the appraisal report.
5. Review modern developments in conditions and restrictions, focusing on amendments introduced by institutions such as Fannie Mae and Freddie Mac, and their impact on appraisal practices.

Conditions and Restrictions in Real Estate Appraisal

1. Definition of Conditions and Restrictions:

Conditions and restrictions are statements or interpretations that limit the application or assumptions of the conclusions in an appraisal report.

• Conditions: Circumstances or requirements that must exist or be met for the appraisal to be valid or applicable.
• Restrictions: Factors that limit the scope of the appraisal or the accuracy of the results.

Example:

• Condition: The property must be free of any legal disputes related to ownership for the appraisal to be accurate.
• Restriction: The appraisal is based on the available market data at a specific date, and economic conditions may change and affect the future value of the property.

2. Importance of Conditions and Restrictions:

Conditions and restrictions serve three main purposes:

1. Clarifying the meaning of the appraisal: Helping the client and other readers of the appraisal report understand its meaning and avoid drawing unjustified conclusions.
2. Preventing unjustified conclusions: Preventing users from drawing unsupported conclusions from the report.
3. Defining the appraiser's liability: Defining the circumstances under which the appraiser may be liable for the results of any actions taken based on the appraisal report.

3. Types of Conditions and Restrictions:

1. Property Identification and Real Estate Ownership Interest: This type identifies the property being appraised accurately, including the legal address, engineering description, and any rights or obligations associated with the property. It also identifies the ownership interest being appraised.
   • Example: "This appraisal is limited to estimating the market value of the freehold property located at the following address: [Enter Address]. The appraisal does not include any lease interests or other easements."
2. Purpose and Use of the Appraisal: This type specifies the specific purpose for which the appraisal was conducted and how it will be used.
   • Example: "This appraisal was conducted for the purpose of obtaining a mortgage loan from [Bank Name]. It may not be used for any other purpose without written consent from the appraiser."
3. Effective Date of the Appraisal: This type specifies the date on which the appraisal was conducted.
   • Example: "The estimated value in this report is valid as of [Appraisal Date]. Any changes in economic or real estate market conditions after this date may affect the value."
4. Assumptions: Statements that the appraiser assumes to be true for the purposes of the appraisal.
   • Example: "This appraisal assumes that the property is connected to a public sanitary sewer system and that all necessary building permits have been obtained."
5. General Limiting Conditions: These conditions include general statements that limit the appraiser's liability and clarify the limits of the appraisal.
   • Example:
     • The sole purpose of the appraisal is to estimate value.
     • The appraisal does not constitute a survey.
     • The appraisal does not constitute a legal opinion on ownership or other legal matters.
     • The appraisal does not constitute an engineering or property inspection report.
     • The appraisal was conducted under conditions of uncertainty and is based on a limited amount of data.
     • The appraisal was conducted with certain assumptions regarding the client's needs and experience.

4. Appraiser's Responsibility in Defining Conditions and Restrictions:

The real estate appraiser is responsible for defining the appropriate conditions and restrictions for the appraisal and ensuring they are clear and understandable to all users.

• Professional Standards: The appraiser must adhere to relevant professional standards, such as the Uniform Standards of Professional Appraisal Practice (USPAP).
• Disclosure: The appraiser must disclose any information or circumstances that may affect the accuracy or credibility of the appraisal, including any potential conflicts of interest.

5. Practical Example:

An appraiser is tasked with evaluating a plot of land for the construction of a residential project. The conditions and restrictions in the appraisal report may include:

• Property Identification: A plot of land with an area of [X] square meters located in [Location].
• Purpose of the Appraisal: Determining the fair market value of the plot of land for the purpose of obtaining construction financing.
• Assumptions:
  • Obtaining all necessary building permits.
  • Availability of infrastructure services (water, sanitation, and electricity) on the site.
  • No legal or environmental restrictions hindering the development of the project.
• Restrictions:
  • The appraisal is based on the available market data on the date of the appraisal.
  • The estimated value may change in the event of significant changes in economic or market conditions.
  • The appraisal does not include any soil testing or environmental studies.

6. Role of Fannie Mae and Freddie Mac Models in Conditions and Restrictions:

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

• Scope of Work: The form defines the minimum scope of work requirements acceptable to Fannie Mae. The appraiser is allowed to expand the scope of work for a complex appraisal.
• Intended Use: This form can only be used for a mortgage financing transaction.
• Intended User: The lender/client named in the report.
• Market Value Definition: It is the same definition as mentioned elsewhere in the text.
• Statement of Assumptions and Limiting Conditions:
  • Paragraph 1. States that legal ownership is not a concern for the appraiser. The appraiser assumes that the property is marketable.
  • Paragraph 2. Indicates that the drawing provided in the report is approximate only. It is not a survey.
  • Paragraph 3. Although the appraiser may have looked at FEMA flood maps, there is no guarantee from the appraiser regarding the accuracy of the maps.
  • Paragraph 4. The appraiser will only testify or go to court if arrangements are made in advance to do so.
  • Paragraph 5. Although the appraiser may have noted apparent adverse conditions discovered during their search and inspection, unless otherwise stated, the appraiser is unaware of any hidden and non-apparent adverse conditions and assumes that none exist. 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.

7. Appraiser Certification:

The new document consists of twenty-five paragraphs instead of the nine in the old document. Current USPAP certifications appear to be within the new document, but the wording differs from that within the USPAP document. Fannie Mae seems to have unilaterally added new elements to the appraiser certification simply because it feels it can do so. Many of these new certifications were developed to make appraisers aware of certain lending and valuation practices unacceptable to Fannie Mae.

• Paragraph 1. The appraiser followed the scope of work.
• Paragraph 2. The appraiser viewed both the interior and exterior of the property.
• Paragraph 3. The appraiser followed current USPAP requirements.
• Paragraph 4. The appraiser only used the sales comparison approach.
• Paragraph 5. The appraiser indicated all property listings in the past 12 months and all property sales in the past 3 years.
• Paragraph 6. The appraiser indicated all prior sales of comparisons for the past 12 months.
• Paragraph 7. The appraiser used the most similar comparative 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.
• Paragraph 9. Adjustments must be based on market reactions.
• Paragraph 10. All information provided by anyone with an interest in the property must be verified by arms-length parties.
• Paragraph 11. The appraiser certifies that they have both the geographical competence and the competence to appraise the type of property.
• Paragraph 12. The appraiser is aware of and able to obtain all the data necessary to conduct a reliable report.
• Paragraph 13. Any data provided by others and used in the report is believed to be reliable and correct.
• Paragraph 14. If the appraiser has seen or been informed of any adverse conditions, they have been included in the report and their impact on value has been analyzed.
• Paragraph 15. The appraiser has not intentionally withheld any information, and the information and data in the report are true and accurate to the best of the appraiser's knowledge.
• Paragraph 16. The appraiser is not biased. The analyses and conclusions are the appraiser's analyses and are limited only to the assumptions and limiting conditions contained in the report.
• Paragraph 17. The appraiser has no current or future interest in the property being appraised. Furthermore, the appraiser has no bias towards the race, religion, color, sex, marital status, disability, or familial status or national origin of any of the parties involved.
• Paragraph 18. There are no predetermined values. There are no predetermined results.

8. Conclusion:

Conditions and restrictions are essential elements of real estate appraisal. By clearly defining these conditions and restrictions, the real estate appraiser can protect themselves, the client, and any other users of the report from misunderstandings or unjustified conclusions.

The chapter analyzes the importance of conditions and restrictions in real estate appraisal, defining their impact on the scope of application and appraiser's responsibility. These conditions and restrictions clarify the scope of work, avoid unjustified conclusions, and limit appraiser liability.

Main Points:

• Definition: Conditions and restrictions are statements or interpretations that define the application or assumptions of the valuation report conclusions, including property identification, ownership interest, purpose of the appraisal, and effective date.
• Objectives:
  • Clarify report meaning to clients and readers, preventing inaccurate conclusions.
  • Prevent users from assuming the valuation covers unexamined aspects, such as surveying or legal title verification.
  • Limit appraiser liability by defining circumstances where the appraiser can be held responsible.
• Examples:
  • The appraisal's sole purpose is to estimate value.
  • The appraisal does not constitute a survey.
  • The appraisal does not constitute a legal opinion.
  • The appraisal is not an engineering or property inspection report.
  • The appraisal was conducted under uncertainty with limited data.
  • The appraisal was conducted with assumptions about the client's needs and expertise.
• Fannie Mae and Freddie Mac Updates: In 2005, significant changes were made to the assumption, limiting conditions statement, and appraiser certification.
• Scope of Work: The form defines minimum acceptable scope of work requirements satisfactory to Fannie Mae. Appraisers can expand the scope for complex valuations.
• Intended Use: The form can only be used for mortgage financing transactions.
• Intended User: The lender/client stated in the report. All intended users must be named or identified by type, according to USPAP.

Conclusions:

Understanding conditions and restrictions is crucial for both appraisers and users of appraisal reports to ensure proper interpretation, appropriate use, and clearly defined appraiser liability. Fannie Mae and Freddie Mac's changes emphasize transparency and accountability in the appraisal process.