Easing Into Consulting and Expert Witness Work

Easing Into Consulting and Expert Witness Work Prepared for the Appraisal Buzz Presentation by Steven R. Smith, MSREA, MAI, SRA, AG 2123

Here are some things to think about and use as a Guide for researching and getting to know your way around legal work. It is different than loan production work. More Due Diligence is required in order to withstand scrutiny.

My suggestion is not to take on litigation assignments until one is versed in the vocabulary, definitions, and venues.

• Definitions of legal terms used in different courts

• Types of court cases requiring appraisals and reviews

• Difference between forensic appraisals and lending

• The pecking order of litigation work

• Due diligence steps to take

• Importance of competency and USPAP compliance

• How to avoid advocacy and maintain independence, impartiality, and objectivity

• The differences between deposition and trial testimony

• Tips for surviving depositions and cross-examination

• Educational paths to help get started

• Sources of business & marketing Plans

• Definitions of commonly-used terminology in expert witness appraisal assignments

• Specific issues pertaining to different types of litigation appraisal assignments

• Overview of the legal process as it applies to cases that require appraisals

DEFINITION

Expert Witness: defined in the Federal Rules of Evidence (FRE) as “a witness, who by virtue of education, training, skill, or experience, is believed to have knowledge in a particular subject beyond that of the average person, sufficient that others

may officially (and legally) rely upon the witness's specialized (scientific, technical or other) opinion about an evidence or fact issue within the scope of their expertise, referred to as the expert opinion, as an assistance to the fact-finder.”

ARTICLE VII, RULE 702 FEDERAL RULES OF EVIDENCE

“If scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education, may testify thereto in the form of an opinion or otherwise, if

(1) the testimony is based on sufficient facts or data,

(2) the testimony is the product of reliable principles or methods, and

(3) the witness has applied the principles and methods reliably to the facts of the case”.

SELF-ASSESSMENT

What attributes do you personally possess that could help you qualify as an expert in an appraisal case?

• Knowledge

• Skill

• Experience

• Training

• Education

Take a minute and jot down how you would show that you have attained each of these qualifications.

Remember, you don’t have to meet all five.

Understanding Legal Language

Bailiff: The court officer who is in charge of prisoners and swears in witnesses

Complaint: The legal document written alleging some cause for action, i.e. harm that has been done to the plaintiff

Cross Examination: Questions posed by the opposing attorney. These questions are aimed at showing weakness in the appraiser’s testimony and attempt to discredit the appraiser

Condemnation: The legal procedure followed in jurisdiction to acquire property, which often involves the property owner being sued by the condemning agency

Curriculum Vitae: The professional resume of an expert witness

Defendant: The party against whom the complaint has been filed

Deposition: Oral testimony while under oath during a period preceding the trial as part of the discovery process; given with a court reporter present to record the testimony verbatim

Direct Examination: Questions posed by the expert’s employing attorney; usually includes questions about the appraiser’s qualifications as well as the expert opinions rendered

Discovery: The mechanism used to uncover or “discover” the evidence the other parties possess in a lawsuit; in most states, occurs prior to the case going to trial

Eminent Domain: The right of the government to take private property for the public good, with just compensation

Forensic Appraisal: An appraisal service intended for use in a court of law or public discussion and debate; valuation for litigation

Interrogatories: Written questions sent to the other side requesting answers to specific questions, as part of the discovery process

Just Compensation: Payment for property taken by condemnation

Parties: The individuals who are directly involved in the lawsuit as either plaintiffs or defendants

Plaintiff: The person making the complaint and filing suit; typically, the plaintiff has the burden of proof

Percipient Witness: A person who testifies and is not considered an expert; can be used to establish the facts of the case or elicit direct testimony

Stigma Loss: In its simplest sense, a loss in value caused by the reputation or “taint” a property possesses; can be caused by property defects, contamination, disturbing events, or external obsolescence, either real or perceived

Subpoena: A document served upon a person compelling him/her to appear at a deposition or trial; to be valid, must be served on the recipient personally

Trier of Fact: The entity that determines the outcome or verdict at the trial; the judge in a bench trial, or the jury in a jury trial

Venue: Trial may be held in either federal, state, or local (county or district) court, depending upon who has jurisdiction; the location may depend upon where the contract was signed or where the property in question is located

Voir Dire: An examination of an expert without the jury, in which the expert is questioned and the judge determines what he/she will allow in court; can also be used to determine if the witness qualifies as an expert

COURT CASES REQUIRING APPRAISALS

• Divorce

• Ad valorem assessment appeal

• Specific performance

• Casualty loss

• Detrimental conditions

• Bankruptcy

• Judicial foreclosure

• Condemnation - Eminent Domain

• Inverse condemnation

• Easements and title issues

• Civil litigation, including professional liability

• Estate appraisals

• Partition actions/partnership dissolution

• State appraisal board actions

THE PECKING ORDER OF LITIGATION WORK

• Divorce and assessment appeal work are probably the easiest to get started with, although client pressure can be problematic

• Bankruptcy work is increasing, as more defaulting borrowers file in order to keep their homes

• In some states, judicial foreclosure work is readily available, especially during recessionary periods

• Condemnation or detrimental conditions work is complex, and may take years to qualify for

• Civil litigation can run the gamut, from a simple case involving one property, to a complex class-action suit involving hundreds of properties

TYPES OF COURT CASES AND THEIR ISSUES

Divorce or Dissolution

• Attorneys typically hire the appraiser

• The “out” spouse may want a high value

• The other may want a low value

• Date of value may be retrospective, current, or both

• Usually residential, but can involve other types of property too, depending on what the partners own

• Being deposed is likely; going to trial is not

An excellent “first step” for residential appraisers

who want to enter the expert witness field

• Each side usually hires an appraiser, although they may agree on one

• Sometimes appraisers are hired directly by one of the spouses

• In either case, be sure to understand who is paying you and, if possible, receive payment in advance

• Many cases are heard by an arbitrator or mediator, not a judge or jury

• Arbitration or masters’ hearings tend to be less formal than traditional court proceedings

• Either side may want an appraiser to become their advocate. Do not advocate

• Appraisers should become extremely familiar with the Conduct and Management Sections of the USPAP’s ETHICS RULE

TAX OR AD VALOREM REPORTS

Declining market conditions

• When values decline due to market conditions, assessment may be reduced on a temporary basis

Detrimental conditions

• Whether internal or external, they impact value

Physically damaged

• Earth, wind or fire events impact property

• Determine if you are being hired as an appraiser (objective) or a non-appraiser (advocate)

• Do not cross over; take one or the other position

• You cannot be both an advocate and a neutral appraiser in the same assignment

• Advocates act as consultants, often on a

percentage-of-savings basis

• Contingent compensation is normal and typical for advocates, but not for appraisers

Being an advocate does NOT violate USPAP if you do not perform the service as an appraiser, and do not misrepresent your role.

(See Advisory Opinion 21 and the Conduct section of the ETHICS RULE).

Be careful! Some states or local jurisdictions have laws or regulations regarding who may

represent or receive compensation from property owners in assessment appeal situations.

Specific performance

• When one party in a purchase agreement or lease does not perform, and the other party sues

• Multiple dates of value may be required, driving up costs

• Default Date and/or Current Date

• Property access or records may not always be available; multiple interviews and copious notes or direct attorney instructions may be required

• There can be value pressure from either side

Casualty loss

• When a sudden event such as

fire, flood, rain, mudslide, landslide, earthquake, stigma, detrimental condition(s) causes a loss

• Value loss can last over a period of years or may be permanent

• Clients can range from a typical insurance company to attorneys, CPA’s, or the property owner

Detrimental conditions

• Read Real Estate Damages by Randall Bell, MAI

www.realestatedamages.com has a lot of

information, as do the Bell Chart, books, seminars, case studies

• Take a detrimental conditions seminar and/or affiliate with an expert; do not try to do this type of appraisal alone

• It’s better to turn down an assignment than to get in over one’s head

• There can be client pressure from either side

Real Estate Damages

Real estate damages involve the economic study of detrimental conditions, such as environmental issues, floods, earthquakes, tornadoes, construction defects, soil problems, market cycles, and so forth. Nationally, these types of issues amount to well over $50 billion in damages per year nationally.

Additionally, many frivolous suitsare filed annually that allege damage where no legitimate damage has occurred, or that overstate the damage’s impact.

CONTAMINATED PROPERTIES

• Agricultural lands, adjacent or downstream

• Chemical plants and adjacent properties

• Dry cleaners and adjacent properties

• Dumps, both legal and illegal

• Furniture manufacturers

• Gas stations, adjacent or downstream

• Junkyards

• Manufacturing sites

• Methamphetamine labs

COMPTENCY RULE: Do not take assignments unless competent, or affiliated with a competent appraiser, and/or take courses to gain competence

• Read and follow Advisory Opinion 9 (AO-9)

• Remediation and Compliance Estimation

Phase 1

Phase 2

Radon, Lead, Asbestos Testing

• Multidisciplinary solutions may be required

Plaintiffs’ attorneys represent homeowners and homeowners’ associations

• Defense attorneys represent insurance companies and developers

• Cases may involve hundreds or even thousands of homes and/or condominiums, apartments, etc.

PROBLEMS MAY INCLUDE:

• Subsoil or geologic issues

• Drainage

• Slabs and foundation issues

• Framing

• Electrical

• Plumbing

• Windows

• Roofing

CONSTRUCTION DEFECTS EXAMPLE

• Polybutylene (PB) plumbing was widely used from the mid-1970’s to the mid-1990’s in homes throughout the country

• PB was later found to be a defective product, linked to millions of dollars in damage to homes due to leaks

• A nationwide class-action lawsuit against the makers of PB (Cox vs. Shell Oil) led to a

settlement of $1 billion

• Numerous other suits have been filed against manufacturers and builders throughout the U.S.

• Polybutylene is still controversial

• Many assert that the pipes themselves were not defective, and blame the leaks on poorly installed fittings

• Use of PB is not permitted by building codes in many parts of the country

• In most markets, homes that have PB – even if it has never leaked – suffer a loss of value due to stigma

Bankruptcy

• Appraisals are used to determine if there is equity; if so, the lender or creditor is denied the right to foreclose, since their collateral is not in jeopardy

• Debtors or their attorneys may want an inflated value; this is where the greatest pressures come

• Lenders or their attorneys may want a lower value so they can go forward with the foreclosure and sell the property

BANKRUPTCY: CAUTION

• Attorneys for debtors often hire appraisers who will come up with predetermined (high) values

• Payment and future assignments often depend on the value estimate

• An appraiser’s education, experience, and skill are often not a factor in selection

• Sometimes attorneys purposely hire

inexperienced or non-licensed appraisers, as they consider them easier to control

• Because of discovery, these appraisal reports can end up in many hands, and complaints are often filed with state enforcement agencies

Judicial foreclosure

• Used by lenders in trust deed states when they think they may have a loss and either have a guarantee from the borrower or believe they can get at other assets

• Debtors’ lawyers may want a high value, while lenders’ lawyers may want a low one

• Always inform the client that you are a neutral party

• Do not slant values or become an advocate, or you will be on your way to a reputation as such

Condemnation - Eminent Domain

• Don’t even think about this until and unless you actually have taken 80+ hours of coursework on this specific type of appraisal assignment

• Can involve full or partial takes, fee or lease, or easement rights

• Many different types of federal, state, county, and local public agencies may need this type of work done, as well as school districts and utility and water companies

• Fees typically run in the thousands, not hundreds

CONDEMNATION: EXAMPLES

• Construction of new highway

• Widening of existing road

• Expansion of military base

• Electric power line

• Construction of sewage treatment plant

• Construction of school or government building

• Water line

• Acquisition of existing poor-condition building, to eliminate a community hazard

• Can involve a full or partial take of property

• If a partial take, two value opinions are required

Value of property after the take

• Additional value opinions also may be required (for example, a separate valuation of part taken)

• Depending on the condemning authority, federal or state rules may apply

• We are not expected to be attorneys, but USPAP states that appraisers must be aware of, and comply with, laws and regulations that impact the value of the property being appraised.

INVERSE CONDEMNATION & REGULATORY TAKINGS

• Building permit denial

• Burning on public lands which goes too far

• Critters: birds, flies, frogs, rats, etc.

• Down zoning or general plan change

• Flooding from government diverting waterways

• Construction going outside of right of way

•Similar to condemnation appraisals

• Surface

•Temporary or permanent

•Large or small, wide or narrow

•Land rent calculations may be required

•Damages can occur because driveways, trees, fences may need to be removed, etc.

• Subsurface Pipeline, cables, tunnels, wells

• Aviation Takeoff and landing zones limit usefulness

Civil litigation, including professional liability

There are all kinds of reasons people sue each other that involve real estate, requiring an expert to give an opinion of value of the property in question.

What kind of cases have you heard of that might have required an appraisal? What appraisals have you referred away in the last year?

LEASEHOLD & LEASED FEE ESTATES

• Landlord-tenant disputes or contracts

• May require appraisals every renewal period

• Used in trusts

DISCLOSURE CASES

• Owner or broker, or both, failed to disclose

• What was the impact on value, if any?

• If so, at what price -- the same, higher, or lower?

• Case study; or

• Broker survey method

DISCLOSURE CASE EXAMPLE

• City announces a new park and stadium to be built

• Location is behind a homeowner’s fence, 10’ from the home

• Homeowner immediately lists and sells home

• Buyer moves in Would an informed buyer buy it?

• Construction begins with all its noise, dust, etc.

• Construction is finished and the new multi-use stadium opens, with the beer concession right outside the new owner’s window

DISCLOSURE LAWS

For real estate brokers and agents, there are 29 states that have specific disclosure laws, and disclosure is highly recommended in 18 others. Here are some of the key State court decisions regarding disclosure:

• Fausett & Co v. Bullard, 229 S.W.2d 490 (Ark. 1950)

• Clark v. Olson, 726 S.W.2d 718 (Mo.banc 1987)

• Lynn v. Taylor, 642 P.2d 131 (Kan.App. 1982)

• McRae v. Bolstad, 646 P.2d 771 (Wash. 1982)

• Fauerke v. Rozga, 332 N.W.2d 804 (Wis. 1983)

• Reed v. King, 145 Cal.App.3d 261, 193

(Cal.Rptr.130 1983)

Professional liability cases increase when a recession occurs after a market boom. As lenders try to cover loan losses, they sue the appraisers in larger numbers.

Top Six Reasons Appraisers Get Sued

MORTGAGE FRAUD

Attorneys who specialize in real estate or financial institution work are a source of business. Look up Prieston Law or the Wolfe Law firm as examples

• Cases of reported mortgage fraud are up by 75 percent, according to the FBI

• Fraud can hit any lender, of any size, anywhere in the country

• The Prieston Group helps protect lenders against mortgage fraud by offering a fully integrated suite of fraud protection, mitigation and indemnification services (www.priestongroupg.com)

• Mortgage fraud cases often involve hundreds of thousands or even millions of dollars in losses

• Sometimes involve multiple properties

• The defending appraiser or broker will usually need to hire his or her own appraisal expert witness

• Appraisers who do this type of work are typically highly experienced, with advanced designations

• Prior expert witness experience is a must to even be considered for this type of assignment

• No attorney wants to trust a million-dollar fraud case to an inexperienced “expert”

ESTATE APPRAISALS

• Date-of-death reports for trusts

• Family limited partnership

• Step-up appraisals

• Partial interest appraisals

• Value opinions are often retrospective

• The IRS seldom challenges well-prepared appraisals, minimum of summary report

• Clients are often attorneys, CPAs and executors

Other TYPES OF COURT CASES and THEIR ISSUES Partition action

• When one owner sues to force the sale of property

• May involve fractional interest valuation issues and require additional experts, either obtained by you or by the client

• Developing a relationship with appraisers who do fractional interests is a good thing

Partnership dissolution

• Contract calls for an appraisal to set the value if one party wants out

• Often it specifies a designation

PARTIAL-INTEREST VALUATION

• Property is appraised in fee first

• The fee value is multiplied by the percentage of ownership

• This number is then discounted at an appropriate rate to reflect issues of marketability

• Partial-interest appraisals can be both challenging and lucrative

• Special courses need to be taken or referred to a qualified expert in PIV

State appraisal board actions

• Complaints against appraisers are constantly being filed with state enforcement agencies

• These agencies often need experts in appraisal and appraisal review to develop opinions as to the quality of the work that is the subject of the complaint

• If the case goes to a formal hearing, expert witness testimony may be required

• Because USPAP is the appraisal standard that is referenced in state laws and regulations, extensive knowledge of USPAP is paramount

• The state may require the reviewer to develop his/her own opinion of value, although not always

• Of course, the appraiser against whom the complaint is filed has the opportunity to employ expert witnesses in his/her defense

• This essentially doubles the number of opportunities to get involved in this type of work

Accepting the Litigation Assignment

• Overview of USPAP considerations when accepting an expert witness appraisal assignment

• Questions to ask when accepting an expert witness appraisal assignment

• Type and definition of value

• Expert witness vs. consultant issues

• Phased assignments

• Retainer agreements and compensation

• Dealing with attorneys

THE PHONE CALL

• On a dreary Monday morning, you receive a phone call from a local attorney who asks how busy you are. You reply, “Why do you ask?”

• The attorney says she needs an appraisal on a single-family home for a bankruptcy case, which is going to court in two weeks. You (wisely) resist the urge to ask why she waited so long to call you.

• You have never done an appraisal for a bankruptcy case, but you are familiar with the

neighborhood, and would like to accept this appraisal assignment.

Take a minute and write down four questions that you would ask the attorney at this point.

1.

2.

3.

4.

THE BASICS OF WHAT TO ASK

• When in doubt, an appraiser can always rely on USPAP. The SCOPE OF WORK RULE sets forth information that an appraiser must know before an assignment can be accepted.

• Client and any intended users

• Intended use of the appraiser’s opinions

• Type and definition of value

• Effective date of appraiser’s opinions

• Subject of the assignment and its relative characteristics

• Assignment conditions

WHO IS MY CLIENT?

• Don’t be afraid to ask; this is not a silly question

• Given the facts of this particular case, you might assume the attorney is your client; after all, she is the one who called you

• However, that assumption may be invalid, because the attorney could be engaging your services on behalf of the actual client; for example, a mortgage lender or property owner

• Imagine showing up in court with an appraisal report addressed to the wrong client

• You also need to know if there are any other intended users in addition to the client

WHAT IS THE INTENDED USE?

• In this case, it has been established that the

appraisal would be used in a bankruptcy case

• Some attorneys will try to engage you without giving you an intended use

• An attorney may say, “What does it matter? The value should be the same regardless of the intended use.” This is a fallacy – don’t fall for it!

• It is simple – if you don’t know what the intended use is, it is not possible to produce credible results

• Remember that the credibility of any assignment results is measured in the context of intended use

TYPE AND DEFINITION OF VALUE?

• Appraisers who do all or mostly mortgage lending work sometimes have trouble with this

• Not every intended user wants market value

• Not every market value definition is the same as the pre-printed definition that appears on the Fannie Mae 1004 form

• Most courts have their own definition of market value; you need to use the definition that is applicable in your assignment

• A sharp opposing attorney can get an appraisal report thrown out because of an incorrect type or definition of value

DEFINITIONS OF VALUE USED IN DIFFERENT COURTS

• Market Value – source?

• Fair Value

• Fair Market Value

• Liquidation Value

• Uniform Appraisal Standards for Federal Land Acquisition

• State Codes of Civil Procedure

• Bankruptcy

• Judicial Foreclosure

It is my hope that this quick introduction into the world of litigation assignments; might stimulate some into taking advanced course work. There are courses available through the AI, ASA, IRWA.

There is a huge world of appraisal assignments outside of doing form reports for loan appraisals.

As the GSE’s seek to eliminate appraisers as much as possible; we need to improve our knowledge and skills in order to be able to successfully work at higher levels of research, verifications and report writing.

Give yourself a brighter future with new skills.

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