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Mike Benbow, Business Editor benbow@heraldnet.com

Appraisers' expertise is valuations, not home inspections

By Tom Kelly

It's been more than 13 years but "the leaky roof case" is still at the top of the list when it comes to defining and understanding the basic responsibilities of appraisers and inspectors. It's also become the prime ammunition used by defense attorneys in seeking restitution for their clients.

A recent example surfaced a few months ago when an Edmonds woman made an offer on an older one-story, weekend home in the Cascade Range. It was more updated than the typical cabin. It had insulated floors, energy-saving windows and a new septic system. She did not have the home inspected by an accredited home inspector. However, when she discovered the roof leaked, she began to mount a case against the appraiser.

Should real estate appraisers really be held accountable if their report does not disclose a leaky roof?

An important case on the issue -- Schaaf v. Highfield -- centers on the sale of a home in Bremerton that had a leaky roof. John Schaaf, the buyer, alleged that Paul Olson, an appraiser hired by the U. S. Department of Veterans Affairs, conducted a negligent appraisal of the home that did not reveal the leaky roof to Schaaf.

The trial court held that a VA appraiser owes no duty to a prospective purchaser such as Schaaf. The appeals court, however, held that a real estate appraiser owes a "duty of care" to third parties such as Schaaf. Olson, though, was not held liable in this case because Schaaf did not rely on Olson's appraisal when he bought the house.

In addition, Schaaf said that he already knew that the home needed a new roof before he bought it. According to court papers, Schaaf stated that he "offered the lower price because the house was 16 years old and thought the house would need a new roof."

Just what does this mean to appraisers? Are they expected to be experts in the field of home repairs? Would not a leaky roof be more in line with the responsibilities of a home inspector?

"I believe we are expected to be accountable in areas of valuation," said Bill King, an independent Federal Way-based appraiser. "But what levels of expertise are we expected to have in other areas?"

A typical appraisal on a single-family home costs about $400 to $750, more for huge homes with amenities such as timber, a swimming pool, view or waterfront. An appraisal is an estimate, or opinion, of value the market would bring if the property were offered for sale. The appraisal usually includes comparable sales from other homes in the immediate area.

Appraisals are often confused with a comparative market analysis. Real estate agents use the comparative studies to help home sellers determine a realistic asking price. Experienced agents often come very close to an appraisal price to the analysis, but an appraiser's report is much more detailed -- and is the only valuation report a bank will consider when deciding whether or not to lend the money.

Times have not been easy for appraisers. Fluctuating interest rates and flat appreciation have meant fewer jobs for "outside fee" appraisers not linked to a lender's in-house staff. And, with more disgruntled homeowners blaming appraisers for lower valuations, some conventional appraisers have looked elsewhere for income.

Lawyers who have studied and cited the Schaaf case state that while the court ruled that a duty was owed to the third party, the appraiser was let off the hook because Schaaf did not see the report until more than a year later. It also brings up the issue of detrimental reliance -- you can't rely on something to your detriment when you already know about it.

One of the main issues in Schaaf v. Highfield was the possible exception of liability for an appraiser hired by the VA. Should there be a loophole when the government was involved? And, was duty owed only to the VA or to the veteran-buyer?

According to the court, "when a prospective house purchaser applies to the Veteran's Administration for a loan guaranty and the Veteran's Administration hires an appraiser to appraise the house solely because of the prospective house purchaser's application, the appraiser owes a duty of care to the prospective house purchaser. Federal statutes and regulations do not pre-empt the appraiser's common-law duties owed to the purchaser."

But will any appraiser ever be an expert in leaky roofs?

Tom Kelly's book "Cashing In on a Second Home in Central America: How to Buy, Rent and Profit in the World's Bargain Zone" was written with Mitch Creekmore, senior vice president of Houston-based Stewart International and Jeff Hornberger, the National Association of Realtors' international market development manager. Signed copies are available on www.crabmanpublishing.com.