Gap in Chain of Title and Land Flips

[Robert Hronek]

I think the appraiser did what was required. It is not wrong or illegal to buy a property and sell it for more. What is wrong is to be involved in fraud and flip it for more than it is worth. The seller may have a land contract that wasn't recorded. Maybe the owner owed him some money and said he was taking the property as payment subject to existing liens. There are a number of legimate reasons the seller may have had an interest in the property but did not hold title.

You should look at the reasons that appraisers are required to report sales history and if the seller is not the owner. That is to alert the lender to do their due diligence in identifying fraud before it happens. It is not needed to estimate the value of the property.

 

[Karl]

Why aren't you questioning Title & Loan Underwriter. Appraiser DID his/her job saying seller was NOT owner. It's Lender Title Job after that..

 

[George Johnston]

Help me understand the reluctance here to do some more research. To say that it's the bank's or the title attorney's job to do a title abstract seems to avoid the issue. I agree that it's not the appraiser's job to verify good title, but that's not what I'm expecting him to do. I'm simply expecting him to follow-up and shed more light on a fact he already knows: the seller is not yet the owner. That means there is at least one more property transfer (in addition to the one the appraiser has already disclosed) that must occur. Looking at this from the standpoint of delivering a credible opinion of value, I would think that credibility is at risk until the appraiser checks out the intervening transfer(s) to see if it is indicative of the property value. As some have indicated, the transfer might be meaningless in that respect--a gift, say. But it also might be an arms-length, open market transaction. To leave it an open question seems akin to the doctor looking at the spot on your x-ray and saying no more tests are needed since it's probably nothing.

That said, I am curious about how the "normal course of business" standard can legitimately affect the level of research in a case like this. Certainly, an appraiser cannot be expected to be Detective Columbo for a $300 fee. Just how far do you go when getting the information you need is more than a little complicated?

 

[Couch Potato]

George, the reluctance stems mostly from the fact that who owns the property, who is buying the property or past transfers in general have no barring on what is the value of the property today. One transaction does not not "make the market," even when that transaction was the subject property. Even if some research is done, it is highly unlikely to yield anything that would affect the opinion of value.

I can't see the ownership issue being the concern of the appraiser. Its not like it would be a surprise to a competent client. I would think they would look at the contract before sending it to the appraiser. I would also think they would at least look at the current property appraiser's listing (or other report of the public records) to confirm the legal description they will send to the appraiser.

It's much more akin to the physical therapist pointing out the spot on the x-ray and trusting the doctor to take care of it.

 

[Terrel L. Shields]

Is it incumbent upon the appraiser (per USPAP 1-5) to at least inquire as to how the seller intends to acquire the property? If so, what does the appraiser do if no one is willing to disclose that information?

I think I am disagreeing with the entire lot. If I am following George right, he has not got a real gap in the chain, because there is no "Chain of title" issue. The issue is that the seller is not the owner, so who is the owner? If you have an obvious intermediary, the question is do you have ANY contract for sale? Which one is it? You must disclose that there will have to be an intermediate transaction to get from point a to point b...and to do that you have to INQUIRE and DISCLOSE the STEPS YOU TOOK to identify the intermediate steps. If you find no one will say so, then say something like, "I contacted the owner of records who refused to disclose the terms of a contract. I contacted the seller who refused to disclose whether such a contract exists and for how much. The client may wish to further research the terms of the intermediary sale and the appraiser is assuming that it involves no flips, frauds, etc etc. which will affect the market value of the subject." If it is a mere short sale or family transaction, then someone probably would volunteer that info and you can so state that it is not an arms length market transaction. The situation stinketh and the appraiser should not be an ostrich. The purpose of researching these transactions is to identify flips and scoping that responsibility away is not a legitimate excuse for the appraiser, imho. There are lots of times there are undisclosed factors that orally will be communicated which cannot be read into the contract...like the buyer being under pressure to execute a 1031 tax exchange for instance..without knowing that he might be willing to pay a premium, how can you judge whether that 'high' looking sale is likely as normal market activity or created by the potential for a tax loss if the sale does not go through?

 

[George Johnston]

I think I am disagreeing with the entire lot. If I am following George right, he has not got a real gap in the chain, because there is no "Chain of title" issue.

You are correct. I probably threw some people off by using "chain of title" in the heading. Poor choice of words. My bad.

George

 

[Terrel L. Shields]

well, the point is that you have to know a sale is missing and you need to disclose your efforts to figure out what it was. I don't think ignoring it would be the proper course, so i agree that the appraiser should have been more explicit about what steps he took and he should have taken some steps to identify that intermediate sale...i know that isn't always easy.

 

[Marcia Langley]

It has been my practice to state that the seller is not the current owner of record and to reiterate in my expanded comments that the owner of public record is xxxxxxx while the seller identified on the contract is yyyyyy.

If I have already determined the current owner as per the most recent recorded deed, what else should be expected?

If there is a more recent transfer that is not yet a part of public records (for what ever reason) I don't see why the appraiser should research that. The bank obviously will not make the loan until it is resolved and will require the seller to produce the proof and get it recorded.

 

[Carnivore]

George,

I am with you in spirit, but I am with Marcia in my practice. We as appraisers cannot possibly be held responsible for Things Not of Public Record. I actually name names of who did not co-operate.

"I requested a copy of the contract from Bank Employee Sally Smartpants and she said the contract was not available. I received an unsigned contract from RE Agent Judy Hotpants. She said they had not received a finalized copy, but the purchase price was $22 million. I ask judy hotpants about the different seller and she mumbled something unitellgibly. Repeated attempts to contact the Underwriter were blocked by Jim Nobrains, processor for the bank." The closing attorney did not return my calls." No other activity was discovered.

If I state the seller is not the owner of public record, then I have done my job by raising a red flag. Direct your attention straight at two people.
a. The UW who signed off on the loan and b. the closing attorney who completed BOTH simultaneous closings.

 

[hastalavista]

George,

I am with you in spirit, but I am with Marcia in my practice. We as appraisers cannot possibly be held responsible for Things Not of Public Record.

Count me in on that practice. And, IMO, that practice is what USPAP requires when one considers the purpose/intended use of the appraisal, the client expectations, "what would a peer do", and normal course of business.

The credibility of a report is a result of a number of things, but two important elements are the quality of the data and the quality of the analysis. In terms of data, quality can be measured in the amount of data considered and the steps taken to validate the data. The standard of "what's sufficient and what's not" is dependent on three things:
A. Purpose/Intended Use.
B. Client expectations.
C. What peers would do in a similar case in the context of "normal course of business".

Certainly, anyone may exceed the standards if they choose to do so, but once the standard is met, it is met. IMO, the only other comparison that can be made in terms of the standard is to compare two reports and see which one exceeded the standard to a greater degree. That might make one report the more "credible" of the two (in terms of data quality), but it doesn't make the other deficient in terms of what is required or expected. Both would be acceptable reports, one would be superior in its data collection process.