Widespread Appraisal Fraud

16 Replies

We all know that over-inflated appraisals caused a lot of the mess that we're still working through. Appraisers are now on the other side of the pendulum, generally being very conservative with their valuations.

It is not uncommon when a house is sold today for the appraisal to "magically" come in right around what the home is selling for. In my area, it's usually $1,000 over the sales price. Like the bogus numbers of years past, this is another magical number that I have no idea where it comes from. I understand that all the lender wants to know is if the value of the home is at least what the sales price is. HOWEVER, since the buyer of the property is paying a professional certified appraiser to do an appraisal, shouldn't the buyer be entitled to an accurate valuation of the property they are buying?

In my opinion, if an appraiser is inflating an appraisal or if an appraiser is squeezing a number into a sought-after margin ($1,000 over sales price), BOTH scenarios are fraudulent! The number still is not based strictly on raw data, and therefore is not true.

Here's a synopsis of a recent transaction I had: One of my long-term tenants decided that they wanted to buy the home they were renting from me. Because they were great tenants for many years, I gave them a great price on the property. It was worth 45K-48K and I agreed to sell it to them for 36K. Of course, the appraisal magically came in at 37K. I explained to them that the appraisal was essentially bogus and that the property was worth substantially more than that. They were fine with it, but I thought to myself, "Why in the (insert expletive) am I having to explain the value of this property to the first-time home buyers when they just paid a professional to do this for them?!?!" If an appraiser is going to fudge appraisal numbers, either up or down, they are not doing their job and the appraisal is fraudulent. Comments are welcomed!

I argue with appraisers constantly. Keep in mind an appraisal is an OPINION of a home's value. It really pisses me off when they pull some yahoo from across town that supposedly knows more about what a house is worth in my area than I do. I had one come in $40k short on $185k in St. Louis a few months ago. Quicken Loans sent some guy from way outside the city limits that didn't know what the hell he was looking at, but hey, he was licensed. New appraiser came in at our ARV. 20%+ is a big difference for two 'professionals' to be apart.

The true value is what a willing buyer and a willing seller agree to, thus the attempt to land it there. It causes problems when they come in high or low, so it's common for them to simply justify the sales price through comps and such.

But I agree, people put WAY too much faith in those guys. I know many, the only houses they've ever bought and sold are the 1-2 they've lived in. Everything else is just applying dumb formulas to things, they generally don't take into account a lot of things people will pay more or less for. Great view, steep driveway, awesome back yard, badass kitchen, whatever. It's just comps and square footage, which is NOT what the market bears.

The most common thing I run into is them comparing my brand new, everything replaced house to some POS that hasn't been touched since the 60's and saying they should be priced similar. I've gotten to where I leave justification for my value on the counter...

Appraisals are only as good as the comps they find or choose. And that leave a lot of leeway.

You can take an old historic district and have a 2000sqf 3/2 Victorian with fireplaces, 11' ceilings, crownmolding throughout and 15'x15' bedrooms. And then an appraiser can take a newer built 1960's brick ranch in that same neighborhood (built on a lot with a burnt out Victorian before) that's also 3/2 and 2000 sqf and 8' ceilings and no fireplaces and no trim etc - on paper it has the same value. Except, nobody would pay the same price in that neighborhood.

Or you take the hard-learned lesson of the beautiful 1/1 shotgun historic house that I had bought, with double lot - 960sqf. I added on at the side and made it a 1450sqf 3/2. Big mistake.

One side of the neighborhood was full of 1/1 1000sqf shotgun houses that were selling for 300K. The other side was bigger Victorians at +2000sqf that sold for 350-400K. This house was right in the middle between those 2neighborhoods. And both neighborhoods (Grant Park and Cabbagetown) claimed this as being part of theirs.

So, if I had done nothing to the house it would have been worth 300K, but because I added on it was now evaluated as 160K, because it was too large to use 1000sqf as comps and it was too small to fit in with the 2000sqf houses. So, the appraiser found a few fixer uppers in the 1500sqf range a mile away and used them as comps.

Go figure

I'd love nothing more than to be totally honest in my reports. I can't tell you how many times I've thought, but couldn't say: "I can't believe this property is selling for so much. Apparently the buyer doesn't realize the furnishings go with the seller" or conversely "this property would be worth $15,000 more if you could kick this homeowner out and throw his stuff in a dumpster". Too bad there's too much red tape to let us have a little fun. I feel your frustration though. I love Darrell's advice of leaving justification for the value on the counter. I've done it when I've been concerned for a deal.

Great input guys... Thanks!

@Darrell Shepherd

To your point, it is funny when people (including some appraisers) don't consider the condition of properties in their valuations. I hear it all the time from sellers of POS houses: "Well, the house two doors down sold for $XXX,XXX,XXX." RIght, it did. But you're forgetting that yours is a POS and needs 75K in rehab!

@Michaela G.

Sorry to hear that story. Dang you got messed on that one.

@Brett K.

That's the thing... Is this "honesty" that you're speaking of really too much to ask for?

Jerry, It depends on who my client is. If a bank hires me to do a FNMA compliant report they don't want to opinionated comments. That doesn't mean I am giving them anything less than my honest opinion of the value. If you hired me to go look at a property and told me to do a quick-and-dirty 1 page report you bet I'd put those comments in there.

Originally posted by @Jerry Kisasonak :

HOWEVER, since the buyer of the property is paying a professional certified appraiser to do an appraisal, shouldn't the buyer be entitled to an accurate valuation of the property they are buying?

I could NOT agree more. This has been a pet peeve of mine for a long time.

Same thing just happened. As I pointed out to me realtor... she amazingly listed the property EXACTLY at what it was worth.

Not a dollar more. Not a dollar less. Hmmmm.....

Just to clarify, "if you hired me" essentially means anyone other than a bank.

@Mark Whittlesey

Good to hear that I'm not the only one that gets irritated by this!

I understand that these appraisals are done with the spirit of "How can we get this deal done." I'm all for getting deals done. We should not, however, forget that "Doing whatever you need to do to get deals done" is what causes real estate train wrecks.

I would think that with all the consumer protection laws that have come into play in the residential real estate marketplace that this kind of fudged-appraising would not be tolerated. If a consumer orders and pays for an appraisal he or she should be entitled to an accurate one - no magical numbers. Period.

I always have problems with appraisals. Our last one for a refi I pulled comps within 10% of sq footage, .5 miles away and sold in the last 90 days - they used older comps further away to show a lower value. The problem was we bought way under market from a distressed seller and the comps would have put us at double the purchase price less than 9 months later.

Brie Schmidt, Real Estate Agent in Illinois (#471.018287) and Wisconsin (#57846-90)

Everyone think their property should appraisal for more then it is worth. Less say a seller start pointing out things to get a better appraisal and the appraisal bump the appraisal and the lender found out you and the appraiser have committed fraud. If you dont like the appraisal just ask for a review.

Joe Gore

My comments:

I thought I would go to the same mortgage company we have our primary residence under. So they apprised our 4-flex..............for $60K????????? It was listed at the time for $170K and the one down the street just like it (but in better condition) was listed for $225K The next mortgage company, oh yeah it appraised out......right at the offer price of $145K

I bought my primary residence, new construction for $239,600. Apprisal came back at EXACTLY $240k. Only about 40% of the interior was done. The appraiser had a few pictures and justified the price with a 1.5 yr old comp. The other condo building that was built before ours, the last condo sold for $240k. None of our upgrades were taken into consideration. Should have at least appraised in the 250-260k range. I don't care at the moment because I plan to stay here another 4-5 years but I just thought it was very odd that it came in almost right at the purchase price.

Jerry, the phrase 'be careful what you wish for' comes to mind. We aren't dealing with cupcakes here. Couple of points: 1st, an appraisal is only an opinion. Hopefully it is a well thought out opinion and well supported by market data and possibly cost data. 2nd, unless I'm appraising a property in an extremely homogeneous market, which 99.9% of the time I'm not, I'm usually pleased if my confidence level is within 4% of the deal price. When I get outside that margin messy things are going to hit the fan because the deal either isn't going to work, or the buyer will have to bring more money to the table, or the buyer will back out of the deal, or the seller will have to lower their price, or the bank will have to order a 2nd appraisal.

If you want the 'honest' appraisal hire your own appraiser. Tell them you want a 1 page summary 'restricted use' report and that you want opinionated comments. I'm betting most of you who are still reading are thinking 'hell, I don't need my own appraisal, I already know what's worth' and that's another point I'd like to make. If you're part of a deal you might already know as much or more about the value as the appraiser. I will run comps for my own deals and leave the info on the counter, like Darrell does, when I'm concerned an appraiser may not know the market or see the value I see. I can't control them but at least I can show them what I think.

Finally, If you really wish all those bank appraisals were completely unbiased, I think you'd change your mind if one of your deals fell through because the appraisal came in 1% or 3% short of a contract price. And it would only take one deal too.

Cheers everyone. I hope my posts were helpful.

Just went through 3 appraisals recently:

1) House #1 appraised at EXACTLY the sale price.

2) House #2 appraised at EXACTLY the sale price.

3) House #3 appraised for the price of nearby foreclosed, run-down properties when the subject property was completely renovated.

This makes me very suspicous and non-trusting of appraisers.

I purchased a short sale home for our residence that was listed at 178,000 by B of A, their appraisal was at 178,000, our appraisal came in at 167,000 and it really messed up the deal costing us an additional month of waiting but their second appraiser magically came in at the same price of ours at 167,000 making the deal happen. Interesting to say the least.

interesting reading.

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