Beware of Inflated Appraisals: 1st Major Lawsuit

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

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.

  • 5
  • November
  • 2007

21 Responses to “Beware of Inflated Appraisals: 1st Major Lawsuit”

  1. Randy L. Prothero - Hawaii REALTOR® says:

    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!

  2. Missy Caulk- Ann Arbor Real Estate says:

    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.

  3. Stella Barbour says:


    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.

  4. FRANK LL0SA Va Broker- says:

    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.

  5. John Fariss says:

    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.

  6. FRANK LL0SA Va Broker- says:


    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.


  7. Paul says:


    This sounds very much like what investment banks went through post-internet/telecom bubbles to further separate their banking from their research operations. Since then, there’s been a boom in independant research companies. I suspect something similar will happen with appraisers, where the parties are truely independant of each other, a la the financial incentives you outlined.

    Nice work, bud!

  8. tchaka owen says:

    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.


  9. Anonymous says:

    WOW… about “opening a Pandora’s box”… me if you would like to picket some condo!

  10. Andy says:

    Inflated appraisals and shady MLS practices, eh? I saw today’s post and your previous post where you called out “one Arlington condo builder”. Let’s be Frankly. It’s the (REMOVED BY FRANK).

    I was looking to purchase there and have been studying the comps (tax assessments) for the past two weeks and INSTANTLY recognized those numbers. I mean honestly, a studio “loft” for 650K? Units averaging $580 a square foot? Please. I mean the units are nice but I can’t imagine them appraising that high these days; those are 2004/2005 prices.

    Thank you very much for your blog because you’ve exposed so many schemes that I would have unsuspectingly fallen into without the knowledge you have shared. If I continue my real estate search, I will be sure to use one of your agents, but for now I’m discouraged.


  11. FRANK LL0SA Va Broker- says:

    Thank you for your kind comments. Actually that condo building you mentioned was not the one I was referring to. So yes this stuff is rampant.

    But be warned (yet again) DO NOT JUST LOOK AT TAX RECORDS! They don’t show the sometimes HUGE seller subsidies. You can only get that on the MLS (yeah right) or by demanding to see HUD1s of other closings.


  12. Anonymous says:


    Great post. Saw the WSJ article and it hit home. I recently purchased a new condo with (what I think was) an inflated appraisal and ended up closing on the new construction condo and felt pretty good about my purchase. I obtained an independant appraisal after my discovery to find out it came in $40K below my initial appraisal from the Preferred lenders appraiser (that I paid for). I was too late on catching this but hopefully your posts will prevent this from happening to others. Keep up the good work.


  13. Anonymous says:

    Great post Frank. The NY Atty General is all over this. I heard supeonas went out today for Freddie Mac and Fannie Mae to learn about their knowledge of this practice.

    The developer/lender of the (REMOVED BY FRANK) Condo (REMOVED BY FRANK Development and REMOVED BY FRANK, respectively) which I know you have written about extensively, were guilty of inflating appraisals big time. It is the reason I (and many others did not close). The units are over 20% marked down now. I spoken to at least one purchasers who did close — he feels terrible. I hope something is done to clean up this industry. It is really shameful.

  14. FRANK LL0SA Va Broker- says:

    Hey Anonymous,
    Sorry but I edited out the names. I’m not ready yet to call people “guilty,” especially as an anonymous post. Email me if you want me to have on file your name if anything comes up that is related to your case.

  15. FRANK LL0SA Va Broker- says:

    Hey Phil,
    Keep posted on everything. It isn’t OVER yet.

    I predict that if builder are found to have closed on units using fraudulent practices, purchasers might be entitled to a refund, or some sort of compensation.


  16. Anonymous says:

    I live in a small town (3,000 people) in South Carolina. About two years ago, several homeowners were approached by someone (not a licensed realtor) who told them that he knew people who wanted to see their homes and probably buy them. He mentioned purchase prices about fifty percent over the actual values of the homes. The fake appraisals were done, and the homes were sold. The loans (public records at the county courthouse were searched) were ARMs that started at a much higher rate than that of fixed mortgages at the time. Of course, the buyers could not qualify for prime loans, but the rates were ridiculous. Nearly every one of the houses has foreclosed or is about to foreclose. South Carolina is not a consumer-friendly state. (I’ve lived here all my life and I love it, but a fact is a fact. Business rules; consumers do the best they can.) The state appraisers regulatory board was contacted anonymously; however, they cannot do random audits because of a complaint. A signed complaint must be presented to them. The same woman appraised every one of the houses in question. What a crook! This is a great example of why we have so many laws and regulations: because there are so many crooks out there. BUYER BEWARE!

  17. Anonymous says:


    OK – so here is the another side of the story. From Portland, OR

    Understood we are in a receeding market – but we have held up pretty darn well compared to other parts of the country…….
    I am a spec and custom builder and have 2 homes for sale priced at $925k since 5/07. Sold others comparable in 07 so we know the pricing is valid……and that was the peak.

    Forward to April of 08′- dropped price to 799k – we negotiate with a buyer and take a contingency sale(their home sale) with a 90 day close at 740k. All goes well and the sale of buyers home occurs and then the bombshell hits 8 days before scheduled closing………appraisal comes in 100k under agreed to price. 100K!!!

    Realtor gets info on properties used in comps….2 are 4 yrs old, 1 is 13 years old…….comping to my BRAND NEW CONSTRUCTION? And quality is not even a consideration. My realtor finds 5 comps of new construction within 3 miles which put us within the original sales price. Easily.

    Buyer is up against the deadline for loan and moving…..and of course they don’t want to listen to any comps or entertain a second appraisal. They say at that price they can find better homes to buy. This is after taking their time originally to find our homes which they do not dispute are of higher quality than what they find on the market at the price. They KNOW the value is there.

    But, they have that appraisal to use as leverage and know that if I don’t agree to their new price then they may disappear and I am left with a home that went pending then is back on the market (kiss of death as far as I have seen)
    Short ending – they offer to continue if I reduce the sale price by 30k. At this point they have me by the short hairs and know it.

    I feel the appraiser just cost me 30k with a faulty appraisal and I am investigating what my options may be.

    Having an unrelated banker select an appraiser and doing a new appraisal can either keep my blood boiling or give me ulcers knowing that is what the appraisers are being guided towards in this market.

  18. FRANK LL0SA Va Broker- says:

    Hey Anonymous, not sure if you will get this since you probably didn’t subscribe to comments.

    I didn’t quite get whether you have closed yet.

    I would immediately get an appraisal from somebody you have never met before. 100% arms length. Don’t even give them the contract (they ask for that all the time).

    And it is your job to CALL THEIR BLUFF

    If there really is nothing out there to buy, say NO. They are emotionally invested in the home. Probably already measured for curtains. If there is no alternative, and you show a new appraisal, or you offer to pay for their new appraisal, and request that it be done with no manipulation or guidance, how can they debate that?

    As for the contract, maybe you can try and firm up the contract and have a section that deals with multiple appraisals in the event that an appraisal doesn’t hit. Or require the appraisal to be done at a much earlier stage (as in 30 days before, vs 8)

    (I am not a lawyer.)

  19. Anonymous says:


    We close in 2 days – I did get 10k released after agreeing to the new sales price.

    You got it right – looking in the rear view mirror I have no one to blame but myself – and will not beat myself up for the lost $30k at this point. Learning from this is the best I can do. Looking back – college was cheap!
    I sought my realtors’ advice and followed their recommendations. While well intended they were wrong. When I asked ‘well what will be the likely outcome’?(with the low appraisal) the realtor said – well, they know the house has the value and the appraisal is off the mark, – they ‘should’ just suck it up and pony up the difference in the loan. (I am fairly positive they could handle the financing – they were set long ago to make the transaction and could have gone higher)

    I suggested getting a new appraisal el pronto and dismissed the idea as unnecessary on the realtors’ advice. Once again – follow my gut feelings next time.

    Calling the bluff – well, they played the game much better than I. They said the appraiser is taking another look then waited till the last minute to make the new offer or walk, saying if I don’t take it then they have another house they want to move on the next day. (the house they sold is closing in 7 days and they have to be out 5 days after that)

    I did not say “there is nothing to buy” as you replied…..there is a ton to buy. I know they know the difference in our homes vs others – and yes, they are emotionally attached – well- the wife is….the husband plays the conservative route ready to change course at the next hiccup. They play the good wife/ tough husband tag team very well.
    These are people who put another offer in on a house AFTER selling theirs and before telling us they had sold theirs. (Remember – the contingency is that they sell their home to buy mine) The offer they made was on a short sale home and it only took them a day or two to figure out that that was a long shot and took a very long time to complete.
    In this market I don’t have enough chips to go all in. I have been spending the chips I have on the mortgages of empty houses. No fun, but part of the game when you spec homes.

    It is tough in this environment to stand firm when there is so much to choose from. I suppose if I had 5M in the bank I would play a different style of game.

    I don’t know what the common advice is out there, but here it is every realtor telling their clients to ABSOLUTELY DO NOT RELEASE any earnest monies before you have closed on the sale of your home.
    That has to change for me. If someone wants one of my homes, they need to show good faith by putting money behind their words.

    And as for appraisals – I agree with most of the comments here – always have wondered why in the heck do the appraisers get the sale figure?

  20. FRANK LL0SA Va Broker- says:

    Thanks for your contribution.

  21. Sonia Hustad says:

    My son bought a home that was appraised by the sellers appraiser. All he did was walk around the house, never checking out the inside. The seller said we could rent the house to see if they could manage the payments. After about six months he told us his asking price was $190.000 with a payment of $1014.00/month. When it came time to purchase home owners insurance, we were denied insurance because of condition of the house.We never received monthly payment slips and they don’t know who owns the house. He posed as a realtor, but we found out his license expired some months previously, Now he has forclosed on them. They made a big mistake buying this house with 14 acres of land. Would you say they were scammed?

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