Intended User

[Phil Rice]

I have a technical USPAP question about the “intended user”. I am interested in feedback from certified USPAP instructors, or anyone that has an opinion.

Assume these facts: Appraiser is hired to do an FHA appraisal, for the purchase of a typical residential property. The contract has a clause which says: If the property does not appraise for at least $180,000, the buyer has an option to back out of the deal with no penalty.


First question: Assuming the appraisal report has an “intended user” section, does the appraiser have an obligation to identify as intended user(s):
1) Local mortgage broker/loan company that hired the appraiser, AND
2) HUD

Is HUD both a client and “intended user?, Intended user but not client? Or neither?

Second question: Does the appraiser have an obligation to identify the “buyer” as an “intended user”. USPAP consistently refers to the “clients intended use” – which would suggest that if someone is not the client, their “use” of the report does not qualify as an “intended use”. USPAP specifically says that just because someone is legally entitled to get a copy of the appraisal report does not necessarily make them an “intended user”.

However, USPAP Stmt-9 says: “The intended use of an appraiser’s reported appraisal is established by the client. The client’s intended use may encompass requirements of one or more other intended users”. I have never asked “HUD” how they feel about the buyer using the appraisal, and specifically about the buyer being an intended user, but when I think about HUD (in good faith), seems to me that the reason HUD insists on the VC inspection is to protect the home buyer – HUD stood up for the homebuyer and said that they are entitled to rely on the appraisal.

Furthermore, the contract says the buyer (not the lender) is entitled to use the appraised value to back out of the deal without penalty. Seems to me, this clause in the contract makes the buyer an “intended user” (even if the appraised value is over $180,000).

I know that appraisers dislike the idea of the home buyer being an “intended user”, but it seems to me, in this scenario, the homebuyer is an “intended user”. Do you agree or disagree?

 

[Pamela Crowley (Florida)]

I'll tackle the one I know first.

FHA is to be listed as an Intended User. They are not the client, the lender is.

Personally, I specifically state in my reports that the borrower is NOT an intended use. I'm thinking that I would mention that the contract has that clause, but that it does not make the buyer/borrower an intended user of this Appraisal Report.

 

[Ben Vukicevich SRA]

Phil,

Pam has it correct, as per 4150.2 HUD/FHA must be listed as an Intended User of the report. It's in the manual. They then issue the appraised value to the borrower..which is why that statement is typically in an Agreement of Sale for an FHA insured loan. The Client is the lender that engaged you.

The buyer is not an Intended User for an FHA appraisal. The buyer signs the HBS and acknowledges that the property is not up to FHA MPS..which may or may not be the buyers "standards." The appraiser conditions the appraisal report/value to HUD/FHA MPS. Both the DEU and appraiser sign-off on the satisfactory completion of repairs/conditions required to meet MPS.

So all the buyer can rely on is that the home meets MPS.

Ben

 

[Phil Rice]

I have the same statement in my report, "borrower/buyer is specifically excluded as an intended user"

but I am re-thinking that statement, especially on on purchase appraisal. USPAP is pretty clear...

The intended use...is established by the client

 

[Pamela Crowley (Florida)]

Intended "USE" is for the lender/client to make financing decisions.

Intended "USER" is the lender/client only on conventional loans.

Intended "USER" for FHA is the lender/client and FHA only.

 

[Richard Carlsen]

If the property does not appraise for at least $180,000, the buyer has an option to back out of the deal with no penalty.

The client is the lender. If you complete the assignment knowing that the above clause is contained in the purchase agreement, then the buyer is also your client. If the report does not acknowledge this clause, you are still performing an appraisal for the buyer to act upon. And without compensation but with all of the liability.

If you say that the lender alone is your client, and the appraisal is used for any other purpose than lending consideration, it is an unauthorized use of the report. Regardless, in Michigan, the borrower is considered to have standing in law as an additional user of the report with this kind of clause in the purchase agreement only adding additional liability to your opinion.

This has been one of my pet peeves. I have on occasion an occasion or two, if the statement is this specific, required this clause either to be removed from the contract or I would decline the assignment.

Over the years, there are two ways to get around this problem:

#1 Ask the LO to discuss with his UW the loan companies ability to use a report whereby the lender and the buyer are specifically named as clients; the lender for lending consideration and the buyer for buying determination. Also inform them that if they can use this kind of report, your fee will be double the normal fee due to the duality of use of the report. They will soon get back to you that that clause will be taken out.

#2 Call the Selling Broker and ask them to forward a check for the amount of the appraisal for the report requested in the purchase agreement. Tell them that you can certainly provide the buyer with an Update of the report for the buying consideration but you cannot do it for free. Otherwise, this clause will have to be taken out of the purchase agreement in order for the appraisal to be used for lending consideration only.


If you choose to not do either of these things, for gosh sakes, cover yourself 2 or 3 times in the report. The last report that I did for a very good client that had this kind of clause in the purchase agreement, stated at least two times in the report the contents of the purchase agreement and the fact that I was not doing this report with the buyer considered a client. We also stated specifically that the use of the report for enforcement of this out clause was not contemplated by the author nor authorized in any way.

 

[Otis Key]

The client is the lender. If you complete the assignment knowing that the above clause is contained in the purchase agreement, then the buyer is also your client. If the report does not acknowledge this clause, you are still performing an appraisal for the buyer to act upon. And without compensation but with all of the liability.

It depends upon how you write your scope of work and intended user/s and purpose. Then you can cover it where the buyer is not the intended user, especially if you so stipulate in the intended user section.

Honestly, I don't care what the PA says. If the offer is $150k and the market indicates $180k, then I call it $180k. Same thing goes for the other direction. Based upon your interpretation of that clause in the PA, then the buyer is always an intended user. I don't think so. I include a statement similar to:

INTENDED USE of THE REPORT: The intended use of this report and analyses is to assist the client shown on page one of this report in making a first mortgage lending decision that will utilize the subject of this report as collateral.

and

Supplemental Addendum: As previously stated, this appraisal report is prepared for the sole and exclusive use of the lender/client shown on page one of this appraisal report, Steal'm Blind Mortgage, to assist with the first mortgage lending decision. No third parties are authorized to rely upon this report without the express written consent of the appraiser. It is not to be relied upon by any third parties for any purpose, whatsoever. This appraiser is not a home inspector. This report should not be relied upon to disclose any conditions present in the subject property. The appraisal repot does not guarantee that the property is free of defects. A professional home inspection is recommended.

 

[Ben Vukicevich SRA]

I like, Otis, don't really care what's in the agreement of sale. I didn't sign it. Same goes for the mortgage commitment date.. I didn't sign anything to agree to that date either.

Ben

 

[Phil Rice]

Otis - I see a lot of holes in what you are saying - if we assume an FHA loan for a purchase. Ben says:

as per 4150.2 HUD/FHA must be listed as an Intended User of the report

sounds to me like

No third parties are authorized to rely upon this report

would be wrong on an FHA appraisal. HUD is going to rely on the appraisal. To pretend otherwise is just silly.

Richard, its called an "FHA Amendatory Clause" - written on a seperate sheet of paper, signed by the borrower and seller, and it is (more or less) standard procedure on every FHA contract I see. It clearly indicates that the buyer is going to get a copy of the appraisal before the closing, and may use the appraisal to make a decision about buying the house (or not).

To say "without compensation" seems silly to me. I am getting paid, and I am well aware that the money is coming from the buyer. Of course, if I don't think I am getting paid enough, I can try to charge more. I do charge more for FHA.

 

[Phil Rice]

Intended User is defined as:

the client, and any other party as identified as users of the appraisal by the appraiser, on the basis of communication with the client at the time of the assignment.

An appraisers obligations to the client are established in the course of considering and accepting an assignment. If an appraiser becomes aware of a change in the clients intended use of the report - the appraiser is required to work it out with the client.

USPAP is pretty clear (IMHO) that the client has a lot to say about intended user. The appraiser does not get to unilaterally dictate who is (or is not) an intended user. Of course, the appraiser always has the option to decline the assignment.

USPAP imagines that the appraiser and client have a thoughtful and thorough "communication" on this subject - sounds good in theory. What percent of the time does that happen? HUD has a fairly detailed (one way) communication on what they want - but HUD is not the client (right?).