Contracts and the Appraiser (Written 2007)

Note: The author is an appraiser, not a legal expert. The reader is advised to seek legal advice when warranted regarding the issues presented.

The landscape of the business of the appraisal business is changing. Most appraisers accept that there is more non-valuation work associated with their appraisal firm than ever before. One of these changes involves clients requiring the appraiser to enter into a written contractual agreement. I will discuss here some good business practices in these situations. There are two specific situations that are addressed. One is the signing of an engagement letter. The second involves a portion of a typical appraisal management company agreement. I want to start by saying that the appraiser puts himself and the appraisal firm at great risk by not reading and understanding any contract. As simple as that sounds I know that many appraisers do not fully read contracts. In fact, my wife reviewed a contract that I had signed with an appraisal management company (AMC), and she wondered why some of the clauses did not concern me. I replied that, They would have concerned me if I had read them. The significance of a written contract cannot be overstated. Once you are presented with a written contract you can throw away the Good Old Boy way of doing business. You will probably be held to all parts of a written contract regardless of what was verbally discussed by you and the other party prior to its signing. Some good business practices are to (1 take the time to read and understand the contract, (2 get help with any sections you do not understand, (3 make notes of all your concerns on a copy of the contract, (4 seek legal advice from an attorney if you are not crystal clear about the entire contract. In the end you must feel comfortable with all of the ramifications that result from entering into the contractual agreement. You have three choices when presented with a contract; (1 commit to it, (2 reject it, and (3 negotiate it. Negotiation is never out of the question. Often, the company presenting the contract has not viewed it from the appraisers perspective. They may be open to accommodating the legitimate needs of the appraiser. Lets discuss two situations that commonly require the appraisers to enter into a contract; engagement letters and AMC contracts. If you sign an engagement letter, you have contractually committed yourself to what ever the letter stipulates. It is important that the appraiser not just sign and place it in the report without reading it. Most lenders use outdated letters that are poorly written in terms of appraisal language. Cross out the parts that you can

not or are not willing to conform to. Initial and date any modifications that you have made to the letter. The information found on the letter may alter the fee you typically charge. If the letter requires a self-contained report and your discussion with the loan officer was for a summary report then change the letter. This might be necessary for things like the fee, the delivery date, etc. It would be good to have the loan officer modify the letter and then send it back to you, but do not hold your breath until it arrives. You should send the modified engagement letter to the loan officer before you accept the assignment, in case the changes are not acceptable to the client. Contractual agreements with AMCs are usually more involved and are presented on several typed pages. Expect to take up to an hour just to read it. Remember to make a copy, and make notes about the things you do not understand or do not agree with, on that copy. If you are too busy to do this or to hire someone to do this, then you probably do not need the business anyway. Here are a few questions that you must answer before you sign any agreement. 1. Do you truly understand all of the things that you are obligating yourself and your firm to? If not you must consult an attorney. 2. Are you willing to do them or are you morally and ethically uncomfortable with performing your obligations? 3. Does it make good business sense for you and your practice? 4. Are you making a panic decision? Or worse, do you feel you are being extorted? 5. Are you financially able to meet any obligation that you are making? I do want to mention an issue that is becoming common in contracts put forth by AMCs and other appraisal related vendors. This is typically some sort of hold harmless agreement. Basically, the party wants the appraiser to compensate them for any and all costs which they might incur related to the performance of the appraisers duties. This is a good section of the contract to get an attorney involved in. He/she can help you to understand what type of situations may apply and what the ramifications would be. I am not going to get into specifics here as I am not an attorney. I only want to advice on good business practices. After you have identified the situations that that clause might be associated with, consider questions 1-5 above for each situation that might occur. There may be a real problem with Question 6. My errors and omissions carrier has advised me that they will not honor any Hold Harmless agreements that I make. This means that I will have to reimburse the party out of pocket should they incur any expenses resulting from my performance. Could the party that I am working for be sued relating to one of my appraisals? I would not be surprised at all. Even if I am proven to not be responsible to the plaintiff, could the party incur significant legal expenses? You bet yah!

I believe that many appraisers (including myself) cannot financially meet this type of hold harmless contractual obligation. As a result I always try to negotiate this part of the agreement. In these negotiations, I remind them that they are making money in this venture. It does not seem fair that they are able to receive revenues, but transfer the normal liability risk to me, the appraiser. I tell them that if they are going to profit from the appraisal business then they must be able to accept the inherent risks associated with the business. In short, If they cant take the heat they should get out of the kitchen. After due consideration, I realize that I object to the hold harmless clause for Questions 2 & 6 above. Conclusion: Take any contract very seriously. Give it the due consideration that it deserves. Business is a risk; however, a good rule to follow is to only accept the risks that you can afford to take. David Braun, MAI, SRA