Sellers Cannot Look to the Appraiser When Lenders Pull the Plug on a Prospective House Flip

An outgrowth of Arizona’s housing downturn in recent years has been the proliferation of would-be real estate investors who purchase, renovate and flip residential properties.   On the other hand, in part to prevent the next downturn from occurring, lenders have tightened borrowing requirements and balked at financing any purchase of a “flipped” home that exceeds the appraised value.  Often caught in the middle of these competing interests are the appraisers themselves: when a lender-commissioned appraisal comes back substantially below the proposed purchase price, the prospective buyer often has no choice but to walk away.   And, when the real transaction falls apart accordingly, the real estate investor-turned-seller might seek to hold the appraiser liable for what it deems to be a negligently-conducted valuation of the property.  On Monday, however, the Arizona Court of Appeals stepped in to shield appraisers from such lawsuits.

In Southwest Non-Profit Housing Corp. v. Nowak, Et. Al., Southwest had filed three separate complaints against three appraisers, asserting each had been negligent in performing his or her respective appraisal in Tucson.  With respect to a residence on Desert Aire Drive, defendant Nowak had appraised the home at $13,000 below the contracted $94,000 price.  For a home on Bayberry Street, defendant Kniffen’s appraisal was $20,000 below the $170,000 contract price.  And with respect to a residence on Harvester Drive, defendant Martell valued the property at $14,000 below the proposed $141,000 contract price.  In all three cases, the buyers cancelled their prospective purchase from Southwest, drawing lawsuits in each case.  However the trial courts dismissed each complaint.

In a consolidated appeal, the appellate court affirmed the dismissals and held that Southwest had no viable cause of action here.  Under the legal principles codified in the Restatement of Torts §552, an appraiser may be liable for negligent misrepresentation if the appraisal is intended to reach and influence a particular type of individual or class of persons, even if the appraiser does not know the specific identity of the third-party recipient.  In this case, however, Southwest’s contracts with its prospective buyers preceded the appraisals in question, and thus the appraisers could not have intended to influence Southwest in any way.  The appraisers simply owed no duty of care to Southwest under these circumstances.

Based on the appellate court’s holding, appraisers would be wise to expressly state in any appraisal certification that sellers are not intended third-party recipients and have no right to rely on the appraisal.  But as long as the appraisal does not enter into the parties’ negotiations in setting the sales price, appraisers presumptively remain immune from suit when previously-agreed sales fall through.