E&O - Construction Progress Reports: Don't Get Hammered!

It is commonplace for appraisers to receive construction progress report assignments from lenders. Lenders use these reports in making loan disbursements, also known as construction draws. Suits against appraisers involving construction progress inspections have consistently been a basis for litigation, and appraisers should consider this fact before agreeing to such an assignment. In a typical scenario, a homebuyer decides to build his dream home. His selection of a contractor is motivated by price alone, and little care is taken to check the contractor`s references or to stipulate the type and quality of materials to be used in the construction of his home. After construction begins, the relationship between the contractor and the homebuyer deteriorates. The contractor claims that the homebuyer keeps making demands that are not provided for in the original contract, and the homebuyer claims that the contractor is taking too long and is cutting corners. The usual outcome of such a dispute is that the contractor is either dismissed or he walks off the job, and that leaves the homebuyer with a partially finished home. The homebuyer, after his unpleasant experience with the "best-priced" contractor, decides to hire a top-notch contractor to complete the job. The new contractor informs the homebuyer that the previous contractor`s workmanship is flawed and that he used sub-standard materials, and therefore much of the construction will have to be re-done. Ultimately, the amount of money needed to finish constructing the dream home is far more than the amount remaining from the original construction loan.

When the homebuyer is unable to collect monetary reimbursement from the original contractor he pursues his claim against the appraiser. After all, the appraiser certified the percentage of construction completed and should have noticed poor workmanship or cheap materials!

In another scenario, the homebuyer simply walks away from the unfinished home and the mortgage obligation. The lender is then faced with the decision whether to finish construction before selling the home, or selling the home in its unfinished state so the new owner has the opportunity to finish the home to his liking. Inevitably, the lender sues the appraiser, arguing that the company suffered a loss on the resale due to the appraiser`s misjudgment of construction completion. Many appraisers decline construction progress assignments because they don`t think they are qualified or the fees are too little. Some appraisers accept these assignments simply to maintain the business relationship they have with their client/s. Appraisers who do perform construction progress inspections should consider the following suggestions to reduce their liability exposure: a) Use additional language The majority of lenders have pre-printed forms for the appraiser`s completion in construction progress inspections. The forms have a list of specific items and the appraiser must estimate a percentage of completion for each item. Liability Insurance Administrator's Claims Counsel recommends that you consider adding the following additional language to the prepared form:

"This report is prepared for the benefit of the lender to assist in making loan disbursements. It is not prepared for the benefit of the borrower."

Although we always argue that the appraiser owes no duty to the borrower, adding language similar to the above on the progress inspection report will assist us in asserting that position. Other language to be added might include:

"The purpose of this inspection is to determine an approximate degree of completion based on the appraiser`s limited knowledge of basic construction."

"The appraiser is not a contractor and does not have the expertise to evaluate the quality of construction, workmanship or materials."

Adding the language above is helpful in the defense of claims made by lenders who expect the appraiser to exceed the scope of their professional expertise because they are unwilling to pay a contractor to perform the construction progress inspection. b) Take as many photographs as possible Photographs should be taken during each inspection and attached to your progress inspection report. If the lender does not want photographs, retain them in your file or on your computer. The photographs give the lender a chance to compare images of the construction progress with your estimated percentage of completion and allows them an opportunity to voice any concerns they may have with your estimation before they make a further disbursement to the contractor. c) Insist that the lender have the borrower sign off on your reports and on disbursement requests Once a borrower signs off on your construction progress report and approves the disbursement to the contractor it becomes more difficult for him to argue later that he disagreed with your percentage of completion. If the borrower disputes the findings in your construction progress report, the disagreement should be resolved before the lender makes any further disbursements. d) Be careful when estimating costs of completion If asked to provide an estimate of "cost to complete", clearly indicate that it is simply an estimate, not a guarantee. Make sure you fully understand the work that needs to be done and the materials to be used. Stress that you are not a contractor and that a more accurate estimate should be sought from a qualified contractor. You do not want financial disbursements being made based upon what you merely consider to be a "ballpark" estimate. e) Don`t report that work is complete unless and until it is actually finished Only report construction that has been completed at the time of your construction progress inspection. Just because the materials are on site and the contractor assures you that the construction will be finalized does not guarantee that the work will be finished. Materials can be removed and promises can be broken. Even if it means you have to go back to do an additional inspection, don`t report that anything is complete when you know that it is not finished. SUMMARY Even though appraisers are aware of the increased risk with construction progress reports, they often accept such assignments to please a client or preserve an existing business relationship. By following some of the suggested loss prevention ideas, you may avoid being cast as the "villain" when the buyer`s dream home becomes a "nightmare". Read the full Liability Insurance Claim Alert - Click here. Appraisal , Real Estate , Appraiser , USPAP , RESPA , FHA , Bloomington , McLean , Illinois , Home Inspection