Determining real estate damages, resulting from title defects covered by title insurance, can be a complex undertaking. Typically appraisers will prepare a Diminution in Value Appraisal (DIV), whereby values are determined both in the impaired and unimpaired state, damages being the difference between the two. Issues such as what a property is used for, the effective date to recognize damage, and whether or not market value should be the measure of damage, among others, can make for a challenging task.
Where statutory laws are inadequate to address damages, attorneys frequently refer to case law. While there are a handful of historic court cases that offer direction on title claims, none are more talked about than “Overholtzer vs Northern Counties Title Insurance Co. (Overholtzer). While this case took place in 1953 it has weathered the test of time as the “Holy Grail” of title cases.
In the interest of full disclosure, I am not an attorney. I am a State Certified General, Real Estate Appraiser with 38 years of experience in the appraisal and appraisal management of complex properties. Most recently I have spent a number of those years owning and operating an Appraisal Management Company (AMC), with a focus on title claim damages. During this period we have managed a few thousand title defect appraisals and related surveys. Nothing herein should be considered legal advice, rather my opinion as a real estate valuer.
As an AMC, we find that many in the legal profession do not understand the appraisal process and even more appraisers do not understand title law. Pulling these two together, is where we find ourselves much of the time. That certainly holds true when we have title claims that relate to the Overholtzer case. We find the Overholtzer case to have many moving parts, and that not all of those parts are applicable in all cases, not to mention the vagaries in such a case. In addition, the case occurred six plus decades ago, and much has been established in appraisal theory since that time. Given these hurdles, which we as professionals must overcome, I have found the following to be true.
From an appraisal prospective there are only three aspects of the Overholtzer case that typically applies to contemporary title claim valuation. These are as follows:
- Effective Date of Loss
- Value Sought
- Use of Property
Probably the most important aspect of the case has to do with the effective date of the loss as addressed by the court. According to court records the lower court established the date of sale and the date of the title policy as the effective date of the loss in Overholtzer. The appellate court reversed this decision and stated that the effective date of loss was when the insured first learned of the defect in the title. This is usually referred to as the date of discovery. While the date of discovery may or may not be appropriate in a given case, this is the call of the client ordering the appraisal and not the appraiser, since it is a matter of legal interpretation.
Value sought will typically be either Market Value or Value in Use. Market Value is developed based upon the Highest and Best Use of a property as developed by the appraiser and the appraisal client need not offer a specified use. If Value in Use is to be developed, the appraiser must be provided with the prescribed use to be considered. It has been my experience that Market Value is selected over Value in Use, in most title claim appraisals.
In the Overholtzer case, a major issue was the designated use which the valuer was to assume, for purposes of assessing damage. This is important, in that a use such as agricultural, typically will produce a lower value than that of industrial, both of which were considered in the subject case. The lower court ruled an agricultural use, and the appellate court reversed this decision and ruled industrial, since the insured was actually using the property for that purpose on the date of discovery.
Given that this case was tried more than 60 years ago, much appraisal theory and regulation has evolved since. It is important to understand that at the time of the case, there was no such qualification as a state certified appraiser or federal appraisal standards. In the case, value estimates had been submitted by each of a sawmill manager and two Realtors, neither likely trained in the appraisal of property.
Today, all appraisers are expected to be state certified and each appraisal must be prepared in accordance with Uniform Standards of Appraisal Practice (USPAP), both evolving in the late 1980s. Appraisal theory, language, regulation and the qualification of appraisers, have changed significantly since the case was tried.
In review, an appraiser assuming the assignment of providing a DIV where Overholtzer is part of the discussion, will need to know the following, in addition to being provided with an explanation of the problem and access to related documents:
- The effective date of the loss.
- The value sought, either Market Value or Value in Use.
- If Value in Use Appraisal, the specific use must be provided.
We have found that since few, if any, appraisers are lawyers, reference to the Overholtzer Case within the appraisal may be conflicting. Those commissioning the appraisal, typically attorneys, may relate the appraisal to Overholtzer, by simply instructing the appraiser to address the pertinent issues of the case, as stated above within the appraisal. This way the appraiser is not charged with the practice of law.
Charlie Elliott, MAI, ASA, SRA, a Certified General Appraiser is the founder of ELLIOTT & Company Appraisers. Elliott & Company is an Appraisal Management Company specializing in complex title claim valuations for the title insurance industry. Mr. Elliott is not an attorney and nothing contained herein should be construed as a legal opinion or legal advice. All statements and opinions contained herein are those developed by Mr. Elliott given his three decades of education, training and experience as a complex property appraiser.