Is The Agent Liable If No Appraisal Is Done?

What Do You Mean I Don’t Need An Appraisal?

With the growing trend of non-traditional appraisal products such as Property Inspection Waivers (PIW’s) as well as cash sales, a question that has been raised is whether real estate agents can be held liable if no appraisal is done. Today I’m going to discuss the concerns that agents should have and what they can do about it.

My last blog post covered some of the concerns that buyers should have with PIW’s and Hybrid Appraisals but agents should also be concerned with potential liability issues when an appraisal is not completed on a purchase. Recently property inspection waivers have been used on some purchases, and then there is also the situation where buyers pay cash.

So what is the liability for agents in situations like these? Since PIW’s are relatively new we are venturing into unchartered territories and may not know what is expected.

The Agent’s Job

I think it’s most peoples understanding that an agent’s main job is to help consumers buy and sell homes. Seller’s agents attempt to help their clients sell their home for the most amount of money in the most reasonable amount of time.

The buyer’s agent is tasked with helping buyers find and purchase a home for the lowest amount of money or at least for a reasonable amount that is not overpriced for the market. They use negotiation tactics to help the buyer’s offer be accepted which is especially helpful in a seller’s market.

Enter The PIW

The Property Inspection Waiver has recently been introduced where some purchases do not require an appraisal. I believe the PIW is based on various things including the buyer’s credit and the loan to value ratio, such as when the buyer puts down a very large down payment.

The lender makes a decision about the use of a PIW based on their companies criteria. If they believe that their exposure is not that great then they will probably go with the PIW.

If a bank is making a mortgage on a property where the buyer is putting down 50% of the price then the bank feels that they are adequately collateralized. In their mind, getting an appraisal would be a waste of time and money so they go with the waiver.

While this may make sense to the bank does it make sense to the buyer? The PIW may be adequate for them but it does nothing for the buyer who needs to know what the true market value is for one of the most expensive things they will ever purchase.

No matter how much money buyers put down they must know that the property they are purchasing is worth what they are paying. The PIW does not answer this question for them.

What Is The Agent’s Responsibility?

So what is the buying agent’s responsibility to the buyer about what they are paying for the home? If they are acting on the buyer’s behalf and want to make sure they get a good deal how can they do this?

In the scenario I have described where the buyer is putting down 50% of the price what happens when they buy a home that is overpriced? What if they have to sell the home soon after they buy it and find out that they cannot sell it for what they bought it for because they paid too much?

Will they come back to the agent and sue them for not doing their job? Since the buyer got a PIW and an appraisal was not done should the agent have recommended an appraisal to make sure they were not overpaying? This situation could also be used for cash purchases as well.

Remember that if the buyer signs a waiver from the lender, they cannot sue the mortgage company or FannieMae. The real estate agent may be the only person in the transaction that the buyer can pursue in litigation.

It is a requirement for appraisers to carry E & O Insurance and I am sure that real estate agents have their own form of E & O but does it cover this type of negligence? I know they are not appraisers but if they don’t recommend an appraisal is that their unspoken approval and agreement that the price is accurate?

I know I have asked a lot more questions here than I typically do but these are all topics that need to be discussed. The introduction of PIW’s has opened up a whole new set of questions that we really did not have to worry about previously.

An Agent’s Perspective

I reached out to local Birmingham real estate agent Collier Swecker to get his take on the matter. I have interviewed Collier in the past where he discussed the importance of pre-listing appraisals. I was interested in hearing his take on this new concern.

Collier has been an agent for quite some time and also has a law background. This allows him to look at the situation from both perspectives.

Collier commented that he believes that “agents should always present the option of an appraisal to any buyer who is attempting to purchase a home even when it is not required by the lender”.

He adds, “I think that the agent could have liability if they knowingly and pro-actively encourage the buyer to purchase the property without providing guidance as to the current market value of the home. An agent’s core responsibility is to look out for the best interest of the buyer and if a similarly situated agent would “reasonably” know that the sale price is a lot higher than the current market value AND that agent did not disclose that fact to the buyer then I believe that the agent has committed negligent malpractice. Always recommend an appraisal”.

He recommends that agents should ALWAYS encourage their buyers to get an appraisal, in writing, in situations where it is clear that a buyer is overpaying for a home. However, an appraisal may not be necessary if the value is clearly in line with the market, ie not overpriced, which can be determined by a thorough CMA.

Collier and I have similar philosophies in this matter. If an agent has done their homework by completing a CMA and the contract price is in line with the market then it should be fine to forgo the appraisal. If however there is some confusion in how the contract price and market value match up then an appraisal should be performed.

I believe that the value of an appraisal far outweighs the cost. It would be much better to get an appraisal and have the assurance that you are not overpaying rather than find out later when it is too late.

Conclusion

If you have any questions about how to navigate through the home buying process when the lender says that no appraisal is needed, feel free to contact me or leave a message below. I’ll answer any questions you have with no obligation. As always, thanks for reading.

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