You are walking through a property, the listing agent is pointing out the features. You think the price is a little high. The agent says, "Oh no. I can show you the appraisal on this property- the owner is asking $20,000 under the appraised value!" Are you impressed? You shouldn’t be.
You are thinking about a HELOC, and talking to a loan officer. You are wondering about your chances, since you figure you owe what the place is worth. But the loan officer says, "Oh I can get an appraisal for $25,000 over that figure." Is she doing you a favor? Don’t count on it.
In a market with escalating appreciation, there was generally a limit to how much trouble a homeowner could get into. According to today’s AZ Republic, Inflated appraisals didn’t matter much when home prices were rising at double-digit rates, since market values would quickly catch up. Now, however, prices are leveling off in many places and falling in some. Some homeowners are finding that the market value is below what past appraisals led them to believe.
So how prevelant are these over-inflated appraisals? In Rismedia’s July 20 article it states, Lenders estimate "as much as 15 percent of all appraisals are overvalued" though not necessarily fraudulent, said David Berenbaum, a board member of the national Center for Responsible Appraisals and Valuations. "We’re questioning a large volume of the loans today." An inflated appraisal can lead an innocent buyer to pay too much for a home, putting the buyer at greater risk of foreclosure.
Why has this been happening? An article by Bankrate.com explains, It starts with the originator trying to make the deal happen," says Sandy Nickol, a regional president with Republic Bancorp Inc.’s mortgage company in Farmington Hills, Mich. "Sometimes you can’t close the deal unless you can get the customer a mortgage of ‘X.’ If they’re trying to pull cash out to pay off three credit cards and it doesn’t make sense to refinance today unless they can do that, the whole deal is going to hinge on an appraisal that’s high enough to do that."
How do you protect yourself? Always remember, what determines your home’s true worth (in the marketplace anyway) is what someone is willing to pay for it. A good appraisal is an appraiser’s best estimate of the market value of your home. If an appraisal seems way out of line with a neighborhood’s sales numbers, be suspicious. Although a high appraisal may make obtaining financing easier, you run the risk of having an inflated mortgage to go with that appraisal. This can leave you with little equity when it’s time to sell.
Do Your Own Research. You may not be a professional appraiser, but there are tools available to you that can help you estimate home values. Some are outlined in Estimating Phoenix Home Values. (Some are applicable for outside Phoenix metro, some not- but it’s a place to start.)
Be Conservative- if it sounds too good to be true- it probably is. Remember when you are hearing "Californians have come in and driven all the prices up; they aren’t making any more land", etc.- someone is trying to talk you into something- be wary. (Tokyo’s home values dropped for 15 years by the way, and they have as great a land shortage as anybody.) 100% financing in a softening market is extremely risky. If values drop, you’re upside down.
So what number can I use then? Consider this scenario. A property is listed at $300,000. You are shown an appraisal for $350,000, and told that as the property has been on the market for months, the seller would probably take $280,000. Do you have $70,000 in equity?
That answer is a definite NO. The appraised value (or estimate) was $350,000. Market value is no more than $280,000- after all, no one else was willing to pay more than that, and the property was on the market for months. While lenders may be willing to work with that $350,000 number, you need to make your financial decisions based on $280,000. If you need to sell in the next couple of years, you can’t count on rapid appreciation anymore- you need to consider that the next guy might not be willing to pay as much as you did.
Do you have any options if you think you’re a victim of fraud? Bankrate.com recommends, For people who’ve already closed on inflated-appraisal loans, legal experts recommend they contact a local real estate attorney. They may be able to sue their original appraisers for negligence or violations of their state’s consumer practices acts. Borrowers should also file complaints with the agencies or boards responsible for overseeing appraisals in their states.
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