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Inflated Appraisals: 1st Major Suit

By
Real Estate Broker/Owner with Northern Virginia Homes - FRANKLY REAL ESTATE Inc

When two of my blog readers send me WSJ articles on the same day, you know something big is up.

Appraisals 101: An appraisal is a report that is supposed to be a 3rd party impartial review of a property (usually under contract) to make sure the price is in line with recent closed sales (not counting houses still "for sale"). This protects the bank from buyers buying overpriced houses, which are at higher risk for default.

I first wrote on this topic of inflated appraisals: Builder Tricks Part 3! Independent Appraisals & Fiduciary Duty. I showed why builders try to require "in house lenders" that happen to have appraisers in their back pocket that miraculously make the numbers come in. Ultimately consumers who suspect foul play should pay $300-$400 and get a real "independent" appraisal of their purchase.  

First let's understand the position that some appraisers are in.

  • Transaction volume is down 20%. (I'm not talking prices, but quantity of deals)
  • As prices fall, it is harder to make the numbers come in (especially with new construction).
  • Appraisals are subjective. "If I push it another $10k, or $20k, I can probably still argue my defense."
  • If your appraisals stop "coming in" (hitting the contract price), even though you are supposed to be "3rd party" and unmanipulatable (MS Word says that isn't a word, but I disagreely), you will stop being hired.
  • Suddenly, you can't buy lunch. 

So eAppraisalIT got sued by NY Attorney General since "eAppraiseIT’s president, sent emails to his superiors at the parent company... [that they] would “roll over” and submit to Washington Mutual’s demands on appraisals."

Why is this important to you if you are buying today?

Many contracts have an appraisal clause/contingency that allows you to renegotiate or back out of a contract if the property does not appraise, even for new constructions put under contract months or years ago. 

By knowing that these shenanigans exist, you won't simply say "oh well, it appraised, so it must be fine." Now you will say "who appraised it, and who do they work for, ME or the lender wanting the deal to occur."

Why is this important if you are NOT buying today

If a system's checks and balances are off kilter, and no longer checking or balancing, fraud affects everyone.

If just one neighbor falls prey to these practices and

  • Can no longer afford monthly payments
  • Can't refinance since the house was overvalued
  • Forecloses or has to liquidate their property for $50,000 under fair market, 
  • You effectively just lost $50,000 in equity. 

This matters to everyone. This is just the beginning too. Most of the spotlight has been on lenders and their aggressive practices. Now they are going after the support services that are part of the conspiracy.  The problem is it is harder to prove. Rarely do you get an email from the president showing a hand caught in a cookie jar.

I still see stuff everyday.

  • True Story: One builder closed a property $70,000 under asking price. Upon closing, they properly listed the property as "CLOSED," thus showing the close price. A day later they CHANGED it to "WITHDRAWN." This is supposed to be an MRIS/MLS (up to) $3,000 violation. Net result, appraisers can't see it (they search "closed" properties) and I know a buyer that followed their skewed appraisal and overpay by $50,000. I have reported this MLS data fudging 3 times over 2 months to MRIS with no action/reply so far.
  • True Story: A client with their own lender said "For $200, we can make the appraisal come in [$20,000 higher] to refinance your property." This stuff is happening everyday.

- Written by Frank Borges LLOSA- Broker FranklyRealty.com

p.s. Please note just like there are shady agents, there are shady appraisers, but that doesn't mean that they are all shady. 

p.s.s. Please email me typos and email or post your examples of questionable appraisal practices.

Comments (10)

Randy L. Prothero
eXp Realty - Hollister, MO
Missouri REALTOR, (808) 384-5645
That last example is something the authorities should be after.  Those involved should lose their licenses, fined and possible jail.  If they made examples of a few of them, many more may get the message.  Great post!
Nov 03, 2007 05:53 AM
Missy Caulk
Missy Caulk TEAM - Ann Arbor, MI
Savvy Realtor - Ann Arbor Real Estate
Frank, we just formed a new MLS rule that the builders had to put in the SOLD price. So many of them were recording the list price and sale price as the same. When you went to do a CMA, it showed higher than what was recorded in the tax records. I hate that it messed up the CMA's. I also hate alot of rules, but sometimes they are necessary.
Nov 03, 2007 06:08 AM
Stella Barbour
NoVa Brokers LLC - Vienna, VA
Principal Broker, Serving Virginia and Maryland
Frank, I have been seeing the same thing.  I have a guy (someone I know), with equity (not a lot but a little) wanting to refinance due to his adjustable rate changing.  He had a lender call me (my previous client trusts my judgment) directly to see what he can do.  I had the lender tell me how he can make a refinance work "with my help" and his friend who happens to be an appraiser and give cash back to the owner.  It never ends.  I referred him to someone I trust to help him. I asked where he knew the lender from and he said a friend referred him.
Nov 03, 2007 08:36 AM
Anonymous
FRANK LL0SA- Northern Virginia Broker .:. FranklyRealty.com

Hey Randy,

Yeah I called the FBI on them. Ended up playing phone tag and dropped it. There is only so much energy I can spend on stuff like that. 

Nov 03, 2007 01:35 PM
#4
Jeremy Cowin
Jeremy Cowin Appraisals - Altadena, CA

I was doing research on a historic quadplex and it had a prior listing 7 months back for $799K (I received notice of its listing as I appraise historic homes here in So Cal) .  When I went to inspect the property for  a possible sale (3 months ago), it was  listed for $599K at the time of inspection.  I called the listing agent to verify the prior listing and he stated it was never listed (Even the listing date was changed).  Thankfully I had a print out proving the prior listing and reported this to the local REALTOR association.  I have not heard back in 3 months.  Not that this directly affects the appraisal by inflating values but is does bring into question the accuracy and info on the MLS for prior listing disclosures and those the alter MLS in their favor.

 

 

Nov 05, 2007 03:01 AM
John Fariss
Fariss Appraisal Services - Bakersfield, CA
Appraiser - Bakersfield, CA

We have a lot of new construction that just gets withdrawn too. I hate that.

One note on your post: when you stated "who do they work for, ME or the lender wanting the deal to occur." I'll assume this was for a buyer hiring their own appraiser as a 2nd opinion. Most of the time, appraisers are hired by the lender, and the lender is the client, not the buyer. The appraiser's job is to help the lender make a risk decision, not insure that the buyer is spending his money wisely. Although the new FNMA forms indicate that the buyer can rely on the report, the client is still the lender in most cases.

Nov 05, 2007 06:05 AM
FRANK LL0SA Esq.- Northern Virginia Broker .:. FranklyRealty.com
Northern Virginia Homes - FRANKLY REAL ESTATE Inc - Arlington, VA

John,

You are right, technically! The default 1st appraisal is technically hired by the lender, but the customer is the one that pays for the appraisal. The customer needs to understand the dynamics of the relationship. Exactly who works for whom and who pays for what. 

Frank 

Nov 05, 2007 06:13 AM
Tchaka Owen
Galleria International Realty - Hollywood, FL
Frank, let me share a bad story with you.  When we were looking to buy last Spring (2006) I ran across a house for $498k that needed at least $50k of work.  I figure it was worth $430-440k at the time.  The agent forwarded a copy of the appraisal which comped out at $560k.  I read through and realized that it was cooked.  An underwriter wouldn't know the difference but since I knew the area, I saw numbers that didn't make sense.  I sent the agent an email pointing out all the errors and why, she didn't ever respond.  That next month the home sold for $560k.

This past summer I saw the same house on the market again for around $330k.  It had been foreclosed upon.  The buyer used a fraudulent appraisal to get money on the purchase side, skipped town with $100k and left the home.

1. It artificially inflated home prices last year.

2. It hurts the market to have another foreclosure.

3. It currently hurts legitimate sellers because it's dragging prices down.  Not to mention it's somewhat of an eyesore.

Nov 05, 2007 01:17 PM
Nick M.
Certified Residential Appraiser- West Palm Beach Real Estate - West Palm Beach, FL
Realtor-Appraiser in West Palm-South Florida Real Estate Appraiser

Hi Frank. good post. all very true. the sad part is that business is hard to keep when you're honest. But heh, so is life.  I always recommend that a buyer get an independant appraisal when buying. best $$ ever spent.  Fraud does affect everyone.. the owner, the neighborhood values, and the next person trying to get a loan down the road a bit (in time, i mean).

Tchaka makes a good point as well.. something common here is South FL. I think the broker that put that loan together, the Realtor(r) and the appraiser should have charges against them. but alas, the government does nothing. (or so it seems)

Nov 06, 2007 01:00 AM
Alisa McKeel Willson
Appraisal Pros in Texas - Huntsville, TX
Certified Res. Appraiser

Frank, very good post! Very intuitive.  I agree with you regarding the cancelled/withdrawn listings.

As sales have slowed down and there are fewer recently closed sales for appraisers to use I think you will see more and more appraisers checking withdrawn and cancelled sales to help with determining value.

These comps won't be the primary sales used but they will help the appraiser get a feel for the market and what was priced too high to sell.

 

Nov 06, 2007 06:22 PM