Washington Court of Appeals Limits Claims against Real Estate Appraisers in RockRock Group, LLC v. Value Logic, LLC
When you purchase a home with lender financing, the lender will typically require a real estate appraisal to confirm that the purchase price does not exceed the value of the home. More often than not, this real estate appraisal is shared with both the buyer and seller. And, more often than not, both the buyer and seller rely on this real estate appraisal to confirm the value of the home. Although, it may be expected that the buyer and seller will rely on the real estate appraisal, the Court of Appeals recently ruled that only the person or persons for whose benefit the appraiser’s report was made are entitled to rely on the report.
The 2016 case RockRock Group, LLC, v. Value Logic, LLC stemmed from a 2006 transaction in which RockRock Group, LLC (“RockRock”) and RussellRock Group, LLC (“RussellRock”) purchased 75% interests in two vacant parcels in Spokane, Washington for $1,630,000 per parcel. The members of RockRock and RussellRock relied on an appraisal performed by Value Logic for the benefit of the lender, RiverBank, in encouraging investors to become members of RockRock and RussellRock. Value Logic determined that the larger parcel was valued at $4,500,000 and the smaller parcel was valued at $4,250,000. Based on this appraisal, the members of RockRock and RussellRock determined that they could make a substantial and quick profit on the properties by subdividing them and re-selling them at the appraised value.
By 2009, RockRock and RussellRock were unable to sell the properties as planned. The owners looked to re-finance their debt. As part of this re-financing, the new lender had the properties re-appraised by Value Logic. This time, Value Logic appraised the properties at $3,375,000 and $2,550,000, respectfully. Value Logic attributed the reduction in values mostly to a depressed real estate market.
Concerned by the reduced appraisal, RiverBank hired another appraiser to review Value Logic’s appraisal and determined that the appraisal made an error in assuming the property was light industrial, when in fact a large portion was zoned rural traditional and thus substantially less valuable. RockRock and RussellRock sued Value Logic for negligently overvaluing the properties in its 2006 appraisal reports.
The Court of Appeals relied on Restatement (Second) of Torts §552, which sets forth the elements for finding that a real estate appraiser is liable for negligent misrepresentation. The Court determined a real estate appraiser’s duty of care is “limited to a loss suffered by a person or one of a limited group of persons for whose benefit and guidance the defendant intended to supply the information or knew that the recipient intended to supply it.” The court determined that Value Logic only supplied the appraisals for the benefit of the lender, and not the purchasers. The court further determined that there was no evidence that Value Logic either intended to supply the appraisal reports for RockRock’s and RussellRock’s benefit, or that Value Logic knew its client, RiverBank, would share Value Logic’s appraisal report to RockRock and RussellRock. Accordingly, the court upheld the trial court’s dismissal of RockRock’s and RussellRock’s claims.
The lesson for buyers and sellers, is that they cannot rely on an appraisal unless the appraiser is aware of the buyers’ or sellers’ reliance, or unless the appraiser provides the report directly to the buyers or sellers. The lesson for real estate agents and attorneys is that if you decide to share an appraiser’s report with your client you should caution your clients that they cannot rely on the appraiser’s report and may need to obtain their own appraisal. Further, you should try to get the appraiser’s permission prior to sharing the report, so that the appraiser is aware of the buyers’ and sellers’ reliance.
The court’s full decision can be found here.