Sage v. Blagg Appraisal Co. (“Blagg”) involved a residential appraisal that was prepared at the request of the lender. Sage, the buyer/borrower, filed suit against Blagg after she discovered he had overcalculated the square footage of the house by nearly 30%.

The trial court granted summary judgment to Blagg, concluding that two prior Arizona appellate decisions (Kuehn and Hoffman established that an appraiser hired by the lender did not owe a duty to the buyer. Berk & Moskowitz appealed on behalf of Sage.

The Arizona Court of Appeals reversed, holding that the prior appellate decisions did not govern the circumstances in Sage’s case. Rather, based on “public policy . . . , the realities of the loan/purchase transaction by which one typically acquires a home, and emerging industry guidelines recognizing that the buyer/borrower normally relies on the appraiser in the situation we address,” the Court of Appeals unanimously held that “an appraiser owes a duty not only to the lender that contracts for the appraisal but also to the prospective borrower who intends to purchase the home.”

The Court reasoned that expanding the duty to borrowers would add nothing to appraisers’ substantive obligations to lenders because “the appraiser is obligated to perform the appraisal in a non-negligent fashion; the appraiser will owe the prospective homebuyer the same standard of care.” Furthermore, the Court could “see no public policy reason to exclude the buyer/borrower from the scope of the appraiser’s duty in a case such as this.”

The Court also referenced recent changes to the appraisal report forms that are universally used by appraisers in mortgage finance transactions and in which they must certify that the buyer has a right to rely on the appraisal:

Our recognition of the duty owed by an appraiser to the buyer/borrower, moreover, is consistent with evolving industry standards that acknowledge that a buyer/borrower in fact relies on an appraisal prepared at the request of the lender. In March 2005 . . . the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and the Federal National Mortgage Association (“Fannie Mae”) issued a revised Uniform Residential Appraisal Report for use by appraisers hired by lenders in mortgage finance transactions. See Freddie Mac & Fannie Mae, Uniform Residential Appraisal Report (2005), available at . . . The federal form [] requires appraisers to certify their understanding that the borrower and a limited class of others in the same mortgage finance transaction “may rely on this appraisal report.”

As a result, Sage was allowed to proceed with her lawsuit against Blagg. Read the Court’s entire decision.