What Is Appraisal Fraud?

Appraisal fraud is a form of mortgage fraud, whereby the value of a home is deliberately appraised at an inflated amount, well above its fair market value (FMV). Appraisal fraud can occur when an appraiser is in on the scam, and dishonestly overstates the value of the property. It can also occur when the homeowner, seller, or purchaser physically alters an "honest" appraisal using methods such as digital editing or bribery of certain officials.

Key Takeaways

  • Appraisal fraud is the intentional inflation of the appraised value of a home. 
  • An appraisal is meant to be an assessment of a home to determine the fair market value. 
  • Appraisal fraud is a form of mortgage fraud that is generally used to either get the seller a better market price or help a buyer get financing or preferable refinancing. 

How Appraisal Fraud Works

Appraisal fraud is one of the most common types of mortgage fraud, which happens when an appraiser (or a buyer or seller) artificially inflate (or deflate) the value of a property so that it diverges significantly from the fair market value. The overstated value obtained through appraisal fraud is commonly used to:

  • Help a seller get a better price than the market would otherwise warrant;
  • Help a buyer get financing because the mortgage amount could be much less than the appraised value of the home; and
  • Help a homeowner get a preferable refinance, or home equity loan.

Before a real estate transaction takes place, especially if it will involve a mortgage loan, the value of the property will be assessed by a professional property appraiser. The appraiser generally carefully walks through the property, inspecting the interior and exterior spaces, in order to come to fair market value (or range of values) for which a property should reasonably sell on the market. If the appraisal is too high or too low compared to the agreed-upon selling price, a bank or lender may renege on the loan. Property value appraisals are also used for tax purposes to estimate the amount of property taxes the owner must pay.

Special Considerations

To protect themselves from this misdeed, banks will often set up the appraisal themselves using a preferred appraiser when underwriting a mortgage or loan refinance. In the case of an over-inflated appraisal, the lender may require the seller to reduce the price of the home or refuse to do the loan if they feel the home price is inflated. Now, a buyer can still pay the inflated appraisal price, however, the lender will not use this price for their loan purposes, meaning the buyer will have to pay the difference in the lender’s appraisal and the asking price. 

Homeowners and prospective homeowners should be just as careful, and make sure that they have an independent second opinion whenever they are going to make a decision based on somebody else's appraisal.