English
Conditions and Limitations: Application and Liability in Real Estate Appraisal.
Conditions: A circumstance or state that must exist or be true for the assessment to have value or meaning. These conditions can be related to the property itself, market conditions, or assumptions relied upon by the appraiser.
Limitation: A statement or clarification that limits the application or assumptions of the conclusions in the report❓❓. Limitations precisely define❓ the inferences that can be drawn from the assessment.
Conditions and limitations serve to clarify the meaning of the assessment, prevent incorrect conclusions, and define the appraiser’s responsibility.
Types of conditions and limitations include those related to the property (identity, property rights), scope of work (purpose, intended use, timeframe), and assumptions (market conditions, property condition, data used).
Examples of common conditions and limitations include: the sole purpose is to estimate market value, the assessment does not constitute a survey or legal opinion, the assessment does not constitute an engineering or inspection report, the assessment was performed under conditions of uncertainty, the appraiser assumes❓ marketable title, and plot plan is approximate only.
Conditions and limitations are important for defining the appraiser’s professional responsibility. The appraiser may be liable for negligence or fraud.
In 2005, Fannie Mae and Freddie Mac introduced significant changes to the statement of assumptions and specific conditions and the appraiser’s certificate.
Key components of the new form include: scope of work, intended use (mortgage financing), intended user (lender/client), definition of market value, statement of assumptions and specific conditions, and appraiser certification.
The statement of assumptions includes the appraiser is not concerned with the legal title, the plot plan is approximate only, no guarantee regarding the accuracy of FEMA flood maps, the appraiser will testify or go to court only if prior arrangements are made, the appraiser is unaware of hidden adverse conditions, and assumes work in progress will be completed professionally.
Example: An appraisal report should state that it does not constitute a survey or legal opinion to prevent the user from assuming that the property boundaries and title are in order.
Example: An appraisal report for insurance purposes can specify that the valuation depends on the property complying with all local environmental regulations.
In some cases, mathematical formulas may be used to clarify the terms and limitations. For example: Value = Income / (Discount Rate - Growth Rate)
Chapter Summary
This chapter from the course “Appraisal Conditions and Limitations: Fundamentals of Application and Responsibility” addresses the topic of conditions and limitations in real estate appraisal reports, focusing on understanding their application and impact on the appraiser❓’s responsibility. Limiting Conditions are defined as statement❓s or explanations that specify the scope of application of the conclusions in the report or the assumptions on which they are based.
Key points covered:
- Definition of Limiting Conditions: A precise definition of what constitutes limiting conditions and their essential role in defining the scope of the appraisal.
- Examples of Limiting Conditions: Real-world examples of common limiting conditions that appear in appraisal reports are provided, such as:
- The sole purpose of the appraisal is to estimate value.
- The appraisal does not constitute a property survey.
- The appraisal does not represent a legal opinion regarding ownership or other legal matters.
- The appraisal does not represent an engineering or property inspection report.
- The valuation is performed under conditions of uncertainty and is based on a limited amount of data.
- The valuation is performed with specific assumptions regarding the client’s needs and experience.
- Purposes of Conditions and Assumptions: Three main purposes of conditions and assumptions in appraisal reports are identified:
- Clarifying Meaning: Helping clients and other readers understand the meaning of the report and interpret it correctly.
- Preventing Unwarranted Inferences: Avoiding inaccurate or unsupported conclusions based on the report. This is increasingly important as laws now require borrowers to be provided with copies of appraisal reports.
- Limiting Appraiser liability❓: Limiting the circumstances under which the appraiser can be held liable for the results of any actions taken based on the appraisal report. It emphasizes that limiting conditions cannot be used as an excuse for incompetent appraisal.
- Fannie Mae and Freddie Mac Updates: The chapter discusses key changes introduced by Fannie Mae and Freddie Mac in 2005 to the “Statement of Assumptions and Limiting Conditions” and the “Appraiser Certification,” focusing on changes in language, meaning, and content.
- Essential elements in the Uniform Residential Appraisal Report (URAR): Highlights important elements in the form, such as Scope of Work, Intended Use, Intended User, Definition of Market Value, and the Statement of Assumptions and Limiting Conditions.
- Detailing the clauses of the Statement of Assumptions and Limiting Conditions: The chapter analyzes the clauses of the Statement of Assumptions and Limiting Conditions in detail, explaining how these clauses limit the appraiser’s liability regarding matters such as legal ownership, accuracy of diagrams, FEMA flood map information, testimony in court, hidden adverse conditions, and completion of work in progress.
- Appraiser Certification: Details the clauses of the new and expanded Appraiser Certification, which aims to ensure that appraisers❓ comply with USPAP standards and are aware of unacceptable lending and appraisal practices by Fannie Mae. Emphasis is placed on issues related to competence, impact on value, and avoidance of bias and predetermined outcomes.
Conclusions and Implications:
Understanding conditions and limitations in appraisal reports is critical for both appraisers and users❓ of appraisal reports. These conditions and limitations help clarify the scope of the appraisal, avoid incorrect conclusions, and limit the appraiser’s liability. The changes introduced by Fannie Mae and Freddie Mac to these conditions and limitations reflect the increasing need for transparency and accountability in the appraisal industry. Appraisers must be fully aware of these conditions and limitations and apply them correctly in their reports. Users of appraisal reports, including borrowers and lenders, should carefully read and understand these conditions and limitations to ensure that the report is used appropriately and informed decisions are made.
In short, understanding conditions and limitations is the cornerstone of responsible and transparent real estate appraisal, limiting liability and ensuring that the appraisal is used within its specified scope.
