California Real Estate Appraisals – the Test to Determine Who May Rely On Them

Most California real estate appraisals are done to obtain a loan secured by the property, often involving the initial purchase. The lender requires the appraisal, often requiring the borrower to pay for it. However, parties other than the lender obtain copies of the appraisal. The question then arises, who may rely on the appraisal? If a Buyer wants an appraisal to make a purchase decision, they could include an appraisal contingency in the purchase contract; if they do not like what the appraisal reveals, they can bow out of the contract. This type of appraisal would certainly be prepared for the buyer to be able to rely on. However, less sophisticated buyers may believe that, because they paid for their lender’s appraisal, it is theirs, and they may rely on it. Parties interested in an appraisal may want to consult with an experienced real estate attorney to determine the best way to protect themselves. In a decision concerning a commercial real estate purchase, a buyer apparently did not have much guidance in entering the purchase contract, and was disappointed when he discovered that he could not rely on the lender’s appraisal.

In Willemsen v. Mitrosilis (230 Cal. App. 4th 622), Willemsen entered a contract to buy 4.8 acres of vacant land in San Bernardino County in order to use the property as a recycling facility. His lender hired an appraiser to appraise the property to see if its value would support the purchase price and hence, the loan amount. The sale closed, and the Buyer discovered that the city intended to run roads across the property, and earthquake faultiness run through the parcel. He sued everyone, including the appraiser.

The appraisal stated that the intended use of the appraisal was to assist the lender in analyzing a new loan for the subject property. “The report may not be used for any purpose by any person other [than] the party to whom it is addressed…”
At the end of this post is a quotation from Prosser regarding the prevailing view on liability to third parties in this situation. The court in our case did not address Prosser, but first looked at a decision that relied on the Restatement of Torts:
“…liability should be confined to cases in which the supplier ‘manifests an intent to supply the information for the sort of use in which the plaintiff’s loss occurs.’ [Citation.]” This follows because the risk of liability to which the supplier subjects himself by undertaking to give the information.
The court contrasted this situation with one in which there was third-party liability. In Soderberg (44 Cal App 4th 1760), a broker obtained an appraisal on a parcel in order to shop a loan to deed of trust investors. The court found that the appraiser knew that a particular group or class of persons to which plaintiffs belonged—potential investors contacted by the mortgage broker who ordered the appraisal—would rely on his report in the course of a specific type of transaction he contemplated. However, in our case, there is no indication that the appraiser had the knowledge or intent that Willemsen would rely on the appraisal. They knew and intended for the bank to rely on it to determine the value would support the loan.

The court ruled for the appraiser. The buyer could have inspected the property to learn about city permits, roads, and earthquake faults, but did not. He could have had an appraisal contingency, but did not. He wanted to rely on the appraisal which was not prepared for his benefit, and thus was out of court. The appraisal supported the lender’s decision to lend the money, but there was no indication that the lender was concerned about the fault lines or roads. Tough luck for this buyer.

In a 1986 decision, (quoting Prosser on Torts) one court stated “…most of the courts have drawn the line, holding that mere reasonable anticipation that the statement will be communicated to others, or even knowledge that the recipient intends to make a commercial use of it in dealing with unspecified strangers, is not sufficient to create a duty of care toward them. Thus attorneys, abstractors of title, inspectors of goods, accountants, surveyors, the operator of a ticker service and a bank dealing with a nondepositor’s check all have been held to be under no obligation to third parties.’ (Christiansen v. Roddy, 186 Cal. App. 3d 780, 786, (Ct. App. 1986))

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