Appraisal Fraud

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). 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.

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.

BREAKING DOWN 'Appraisal Fraud'

Before a real estate transaction takes places, 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 a 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 a 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 an owner must pay.

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. 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. 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.

Appraisers often feel pressure to inflate home prices so that deals do not fall apart due to being unable to obtain a mortgage because the loan amount exceeds the lender's limit based on the price of the house (e.g. if they must put 20% up as a down payment). This problem was especially rampant in the lead-up and aftermath of the housing bubble associated with the 2008 financial crisis.