Arizona Court of Appeals Finds Appraisers Not Liable in Real Estate Disputes
In Arizona and throughout the country, the recent Great Recession, which “began with the bursting of an 8 trillion dollar housing bubble,” created a significant dip in the once-booming Scottsdale real estate market.
It also created a steady stream of real estate disputes.
Some homeowners found themselves with overvalued properties and few buyers were willing to pay the asking price. Others found themselves stuck with “underwater mortgages”—where the “balance of the mortgage loan is higher than the fair market value of the property.”
Both kinds of potential sellers found that the real estate market had become a distinctly buyer’s market.
Sellers who recall negotiating real estate during the 2007-2009 period may relate to the consolidated case decided recently by the Arizona Court of Appeals. The case, which can be found in full here, Southwest Non-Profit Housing Corp. v. Nowak, Et. Al., involves three appraisers who, at different times and with different buyers, appraised residential properties at least $10,000 below the contract price.
In each instance, the sale of the residential property was contingent on the buyer’s ability to secure loans. With each of the three appraisals, the sale predictably failed to materialize due to the lender rejecting loans to the buyers.
Under Restatement of Torts 2d §552, Southwest asserted a cause of action where the appraisers should be held liable for negligent representation, due to the alleged fact the appraisers knew that Southwest’s contracts would be represented to third party buyers.
The Court of Appeals heard the argument that Southwest justifiably relied on the appraisals in creating its contracts with buyers. The defendants prevailed in this case, despite the undisputed facts underlying the action.
Why this result?
The Court rejected the theory that under § 552, the appraisers intended to create seller reliance on the appraiser’s information. The appraisers’ were not brought into the transaction until after the contract prices had been settled; the appraisers argued Southwest’s reliance was unjustified. Beyond the timing of events, Southwest failed to prove to the Court that the appraisers owed it a duty of care.
The Court stated in its opinion, “Section 552, however, does not open liability to an unlimited class of individuals who are merely “foreseeable.” The appraiser is not liable to all whom ‘might reasonably be expected sooner or later to have access to the information and foreseeably to take some action in reliance upon it.’” It went on to say, “This court also has noted ‘a professional who provides information should not owe a duty of care to anyone who happens to receive the information.’”
This case shields appraisers who work with buyers who intend to quickly sell a rehabilitated home. Some may argue this result does not help the economy as much as a robust real estate market. We understand that a real estate dispute covers many perspectives. We’d love to hear your thoughts on the matter. If you have questions or would like to comment, please feel free to contact us.