 Inflated
appraisal can leave homeowner deflated
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 Dear
Real Estate Adviser,
I'm in the middle of trying to buy a condo. So far, two appraisals
have been made. The first came back "inaccurate" and was
$5,000 less than the second one. Why the disparity? How does this
affect me as a buyer?
-- C.N.
 Dear
C.N.,
It might be that the first appraisal was the more accurate of the
two, but your bank would not accept it because a loan for that amount
is less profitable.
And that sounds harsh. But it's becoming all too common
as some lenders and agents pressure appraisers to overstate the
value of a home so that they can make their numbers work a little
better on a deal. Why is that? Well, if they don't, the deal doesn't
get approved and they don't get their commissions!
Theoretically, it's in a lender's best fiscal interest
to make sure that a loan it originates is based on an accurate appraisal
-- and if the appraisal doesn't match the purchase offer, the buyer
should have to come up with the difference between the two figures.
That just seems like common sense.
But often, that's not what's happening, particularly
if the lender is selling the loan to the "secondary market,"
meaning another lending institution such as Freddie Mac or Fannie
Mae or others. Hence, the originator has little incentive to care
if the appraisal is really accurate, so what the heck -- the higher,
the better.
Many in the industry say this type of thing has become
so pervasive that it's now a tacitly accepted practice. A 2005 study
by the nonpartisan public policy group, Demos, called "Home
Insecurity: How Widespread Appraisal Fraud Puts Homeowners at Risk,"
shows that nearly half of all appraisers report some pressure from
lender and broker communities to overstate values, and that appraisers
who don't play this game are often blacklisted or go unpaid.
How does this scheme affect homeowners? Well, it causes
them to borrow more money than the homes or condos are really worth,
often putting them in a precarious upside-down position when they
find they can't resell the place for enough to pay off their mortgages.
That problem really gets compounded if a "correction"
in home-sale values occurs in the market.
A more honest appraisal on these inflated properties
down the road would probably assign them lower values and therefore
diminish owner efforts to refinance them. In other words, it's usually
just a matter of time before somebody is left holding the bag in
these scenarios. And all too often -- surprise! -- it's the homeowner.
There is also a negative ripple impact visited on
the investment community which is, in effect, holding mortgage debt
that is secured by real estate that's worth less than represented.
In other words, it's bad for everybody but the originators and brokers
who pocketed the difference.
You probably don't want to risk scuttling your deal
by making fraud allegations against your bank or the "independent"
appraiser. It might well be that they are basing their appraisal-acceptance
position on legitimate market factors. Sometimes, it's difficult
for even the trained eye to tell. And that's why there is so much
chicanery.
Meanwhile, trade and consumer groups are petitioning
Congress to examine the problem and tighten up lending and appraisal
guidelines. And I hope that happens.
But, if the condo you're looking at seems way out
of line in price with comps, or records of similar units sold in
your buying area, I'd really be suspicious and start shopping elsewhere
for a different lender.
Good luck!
To ask a question of the Real Estate
Adviser, go to the "Ask the
Experts" page, and select "Buying, selling a home"
as the topic.
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