Contemplated Interest When Doing An Appraisal?

ORLANDO, Fla. – Dear Shannon: I’m a licensed appraiser and also a commercial real estate broker. I was hired by a local commercial lender to do an appraisal on a 24-unit apartment building. The owner was contemplating a possible refinance to take advantage of a bit of equity on the place and had no interest in selling the property. My appraisal report was complete and included the property address, date prepared, value, purpose and market data.  Evidently, the owner reviewed the appraisal and was pleasantly surprised at how much the building had appreciated in value over the last several years. So, instead of refinancing the owner decided to sell the property. And, I’m proud to report, that because the owner liked how thorough I was with the appraisal process, and they knew I was also a commercial real estate broker, they hired me to represent them as their listing broker. And not surprisingly, an offer was made on the property and accepted within a week.

Here’s where it gets dicey for me. During the loan application process the buyer informs the new lender that the property was recently appraised by a previous lender. The new lender is surprised to hear that I was both the listing broker and the appraiser. And now the new lender is concerned that no disclosure was made about my “contemplated interest” as per Standard of Practice (SOP) 11-1.

I asked several trusted colleagues if, according to SOP 11-1, they thought I had a “present or contemplated interest” in the property when I did the appraisal. One of my fellow Realtors® said yes, because I was paid by the lender to conduct the appraisal; another told me no, because the lender ordered the appraisal; and a third said yes, as a licensed commercial broker, there is always a chance that I could have listed the property in the future.  Am I in violation of Article 11? Most of my  network of Realtors is telling me yes for different reasons including: I should have disclosed in the appraisal that I’m a licensed real estate broker; and that I’m somehow either not qualified to conduct the appraisal or not qualified to list the property. So, I’m reaching out to you.  – Concerned

Dear Concerned: Based on what you’ve described, this does not look like a violation of Article 11 as interpreted by SOP 11-1. First, as used in SOP 11-1, did you have a “present or contemplated interest” in the property when you did the appraisal? Second, are you in violation of Article 11? In short, the answer to both is no. Let’s get into the details of SOP 11-1:

SOP 11-1 states: When Realtors® prepare opinions of real property value or price they must:

1. be knowledgeable about the type of property being valued,
2. have access to the information and resources necessary to formulate an accurate opinion, and
3. be familiar with the area where the subject property is located unless lack of any of these is disclosed to the party requesting the opinion in advance.

When an opinion of value or price is prepared other than in pursuit of a listing or to assist a potential purchaser in formulating a purchase offer, the opinion shall include the following unless the party requesting the opinion requires a specific type of report or different data set:

1. identification of the subject property
2. date prepared
3. defined value or price
4. limiting conditions, including statements of purpose(s) and intended user(s)
5. any present or contemplated interest, including the possibility of representing the seller/landlord or buyers/tenants (emphasis added)
6. basis for the opinion, including applicable market data
7. if the opinion is not an appraisal, a statement to that effect
8. disclosure of whether and when a physical inspection of the property’s exterior was conducted
9. disclosure of whether and when a physical inspection of the property’s interior was conducted
10. disclosure of whether the Realtor® has any conflicts of interest (Amended 1/14)

I’ve added emphasis on relevant portions for our discussion, which seems to be: “When an opinion of value or price is prepared other than in pursuit of a listing . . . the opinion shall include the following . . .any present or contemplated interest, including the possibility of representing the seller . . .” A lender hired you to conduct an appraisal of the property. As an appraiser, you prepared an opinion of value or price. The purpose of the lender’s requested appraisal was for an owner who was considering refinancing the property and not in selling the property. Thus, you prepared an opinion of value not in pursuit of a listing. If you knew the owner was contemplating selling the property, then per SOP 11-1, your opinion of value should have included a list of things including any present or contemplated interest, including the possibility of representing the seller. However, in your scenario, you were hired by the lender to conduct an appraisal for an owner who was considering refinancing the property. At the time you conducted the appraisal the owner had no interest in selling the property. Therefore, as used in SOP 11-1 you did not have a “present or contemplated interest” in the property when you did the appraisal because the owner was not interested in selling the property. Based on what you’ve described, it sounds like you provided all of the appropriate information in your appraisal and at that time, you had no intention of listing the property. Therefore, you were likely not in violation of Article 11 as interpreted by SOP 11-1.

Inspired by Commercial Code of Ethics Case Studies, Article 11, Case Study #2.  Other laws and rules may apply.

Shannon Allen is an attorney and Florida Realtors Director of Local Association Services

Note: Advice deemed accurate on date of publication

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