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). 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 the bribery of certain officials.

How Appraisal Fraud Works

Appraisal fraud is one of the most common types of mortgage fraud and happens when an appraiser, or a buyer or seller, artificially inflates (or deflates) the value of a property so that it diverges significantly from its 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.

Before a real estate transaction takes place, especially those involving a mortgage loan, the value of the property will be assessed by a professional property appraiser. The appraiser carefully walks through the property, inspecting the interior and exterior spaces, in order to determine a FMV—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.

Special Considerations

To protect themselves from this misdeed, banks will often elect to use one of their preferred appraisers 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 property or refuse to do the loan if they feel the home price is exaggerated. 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 secure an independent second opinion whenever they are going to make a decision based on somebody else's appraisal.