4 States Consider Use Of Faked Appraisals

It’s amazing. If you don’t like appraisal results, if you want home prices to be higher, then just change appraisal rules.

That’s the theory behind a new legislative drive now taking place in several states.

The Appraisal Institute reports that “four states — Illinois, Maryland, Missouri and Nevada — are considering legislation that would prohibit or restrict the use of ‘distressed sales,’ such as foreclosures and short sales, as comparable sales as a part of a residential real estate appraisal.

“Homebuilders and real estate sales agents are concerned that the prevalence of distressed sales, and their subsequent use as comparables, is resulting in the appraised value of residential properties not matching the contract sales price, or in the case of new construction, the cost to build.”

This is a joke, right? Something set for April Fool’s Day.

Appraisals are supposed to provide home buyers with an independent and experienced view of real estate values. Licensed appraisers are NOT paid for hitting a particular number, but for providing the fair market value of a property at a particular moment in time, a valuation generally based on the recent sale of like properties nearby.

To say that distressed and foreclosed homes and short sales should not be counted when valuing local real estate makes about as much sense as refusing to include touchdown passes from left-handed quarterbacks in final scores.

The stupidity of this idea is just overwhelming. Does anyone seriously believe that potential home buyers will not notice abandoned homes across the street or down the block?

And what about local property taxes? Will assessors raise home values by not including distressed properties? Higher assessments are one path to higher property taxes.


Think how well the concept of appraisal fiction might work in Nevada, a state where legislation to fabricate appraisals has been introduced. According to RealtyTrac, “Las Vegas-Paradise continued to post the nation’s highest metro foreclosure rate, with one in every 9 housing units (10.88 percent) receiving a foreclosure filing in 2010 — nearly five times the national average. A total of 88,198 Las Vegas-area properties received a foreclosure filing in 2010, a decrease of 7 percent from 2009 but still up 31 percent from 2008.”

If you were buying a home in Nevada do you think such information might impact the price you were willing to pay for real estate? Or would you just ignore the foreclosure carnage?

And what about the profession of appraising? Why would any sane person or institution hire an appraiser who delivers anything less than a fair market valuation based on what’s actually happening in the local marketplace?

Legal or Not Legal

The Appraisal Institute explains that “if these bills were enacted into law, appraisers would be put in the difficult position of having to choose which law to violate. Appraisers are required to adhere to comply with the Uniform Standards of Professional Appraisal Practice in federally related transactions. The standard mandates that appraisers ‘must analyze such comparables sales as are available.’ Further, the standard cannot be voided by a state or local government.”

The Appraisal Institute says the proposed laws can be found at the following web addresses:

  1. Illinois
  2. Missouri
  3. Maryland
  4. Nevada

A tip of the hat to the Appraisal Institute for trying to protect its members — and the public.

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13 Comments on "4 States Consider Use Of Faked Appraisals"

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  1. Dave in Pahrump says:

    This is necessary because the the homeowner is being screwed by the banks and the counties.

    If you are getting an appraisal to refinance they take the lowest comp and if you are asking to reduce your taxes they take the highest comp.

    They should not be prohibited from using distressed comps but there should be process for comparing distressed and non-distressed homes that both banks and counties can use.

    Ex. add 30% to distressed home to bring it comparable to non-distressed homes (to make up the difference).

  2. matt says:

    I saw this post and took a double take. I am in the mortgage biz and I cant believe they are even considering this. However at this point I am not suprised. Nothing these days suprises me. Sales are sales regardless if they are foreclosed properties or not. Ideas like this only prolong the housing problems.

  3. I have an idea that other things are going on that are not immediately apparent. For example, I heard on the news on Saturday the 2nd that that there has been an unusual number of property assessment challenges and that municipalities are losing Real Estate tax revenues. In New Jersey where I live there has been a rush to the April 1st deadline for assessment challenges. In NJ the Real Estate Tax is the major income for municipalities and the school systems and the municipalities have not figured out how to deal with it, the money is already in the budget and spent. One political answer has been for public sector layoffs. This may give the politicians immediate gratification but it is counter productive in this economy.

    Everyone agrees that housing values have dropped. However, not everyone is aware of the opportunity to challenge the assessment which allows a few people to game the system.

    I suspect that these law changes to appraisals may be a way that they see for the government to deal with this problem. I think they are wrong. If a distressed property is listed and put on the market like a normal listing that property should be used as a comparable for an appraisal.

    The simple answer to this gaming of the assessment challenges would be to lower the assessed value of all Real Estate in the municipalities to some appropriate value and adjust the tax rate based on the budget. The politicians that have campaign promises of low tax rates will have to get over it and deal with the budgets in a realistic, practical way.

  4. Charlie says:

    According to my appraisal which I had done last October when 70% of the market is distressed sales. It is the market. How can you not consider it. In fact a market sale without short sale or foreclosure is an outlier…

  5. Itjustain't says:

    I dunno about this one. They can make all the laws they want. Lenders are not required to lend in any state. Lenders make the rules on this one. Simply because if they are taking losses in certain area’s they want to know. They don’t want to take anymore losses there.

    Thats why they have the information on foreclousers there in the first place. I call this a nonsense consideration. None of these states want the lenders to pull out of there state. If they don’t think it can happen. I have seen something like that done before. Not only that they can pull lending programs. They can change the lending rules. It’s a no win for these states. They are sophisticated enough to know it. Just more pandering to the disgruntled.

  6. Al Falfa says:

    The fraud is simply rampant and out of control at this point in this country. One of the most important milestones on the U.S.’s road to perdition was passed awhile back, when U.S. banks holding trillions of dollars in actual LOSSES were allowed to value their worthless portfolios based on a completely fantastical MARK TO MODEL vs the reality of mark to market. And I won’t even get into the cooked stats our government spews forth for CPI, GDP and Unemployment numbers. This latest effort to change appraisal rules is simply MORE of the same insanity.

    It’s as if the U.S. government had officially adopted the policy of trying to cover the sun with their finger. Good luck with that.

  7. socalappraiser says:

    The whole game was rigged. I was removed as a “review appraiser” from 6 different lending institutions during the run up from 2001 – 2007 because I would not agree with the cherry picked numbers to hit the subject value and keep the market moving upward. No lenders were interested in accurately valuing the asset as they were pushing them off on Wall St to the teachers union of Omaha Nebraska and such. They just wanted their fees and to keep their competitors from collecting them. As usual, no new laws were / are needed. How about Freddie / Fannie making the banksters buy back the non performing loans that were outright fraudulent and very easy to prove? Not gonna happen. Keep voting these shills in and welcome to serfdom!

  8. DG says:

    Peter – unfortunately it’s already tilted…in the banks favor. Most of the bank owned properties and many of the short sale properties have been neglected. The foreclosures are typically worse but the short sales are also neglected because the owners are in such a bad state of affairs that they can’t afford to fix or maintain the home. I don’t think it’s bad to say your appraisal must meet the criteria I already listed AND contain 1-active; 2-pending/back-up and 3-sold. Those comparables IF available should meet the non-distressed guidelines IF that is the type of sale you have and this should be checked by someone other than the appraiser. If you are selling a distressed property, by all means use a distressed property as a comp OR if no arms-length sales exist, then distressed properties may be used. It’s common sense which seems to be in very short supply for the banking industry. They also don’t make adjustments for those distressed properties when they use them as comps. The condition of most is horrendous and should be adjusted.

  9. Peter G. Miller says:

    DG — Agreed.

    The issue raised by the “don’t count foreclosures” concept is that the marketplace would be tilted. There would be no limitation on higher valuations, only lower ones, and that’s not good for anyone.

  10. DG says:

    I am not saying that the appraisers should lean the numbers one way or another – I am saying that IS what they are doing depending on WHO the seller is. I am saying that the appraisers are not consistent. I think if you have guidelines, which they do, and you arbitrarily choose to use them when they suit you and not when they suit you, it’s wrong and that is the part of the system that needs to be fixed. There should be HARD rules and they should be followed. I am saying that the reality is that they hurt everybody (buyers and sellers) when they “choose” to use different criteria depending on WHO the seller is. Example: A short sale is on the market for $499,000. They have an offer at $490,000. The comps show it should go around $450,000 yet it appraises at $490,000 (bank is involved from the sellers end). A standard sale listed at $400,000 (same area)appraises at $355,000. It’s absurd!

  11. Peter G. Miller says:

    DG —

    And what about buyers? They’re the ones paying for the appraisal and, as NAR reports, “distressed homes – sold at discount – accounted for a 39 percent market share in February.” Should purchasers not be influenced by 39 percent of the market and merrily pay higher prices as a result? Could a buyer broker ever offer such advice as a fiduciary of the purchaser?

  12. DG says:

    Before the housing bubble and bust, appraisers were not allowed to use distressed properties in their appraisals. They also could not use a transaction that was not an “arms length” transaction in any way (distressed properties are included in this but there are more criteria). In my opinion, IF there are standard “arms length” transaction sales within the appraisal guidelines of a sale no older than 3 months old, within 1 mile of subject property and +/- 20% of the square footage then they should not use distressed properties including short sales and foreclosures. IF there aren’t any standard sales or not enough of them then of course these distressed properties would have to be used. In my experience, I see the appraisers when working for a bank on a forclosure or a short sale and they have no problem in appraising at value (even if I think based on the sales data that I have the value is nowhere near that number) but when appraising for a standard seller, they are MUCH harder and go on the low end rather than using completely good comps within the guidelines which do support the sales price. They are still working the numbers to their advantage when a bank is involved…pity the home sellers don’t get the same treatment.

  13. CS says:

    Artificially, even fraudulently, inflated appraisals were part of what created the housing bubble and subsequent bust. Industry insiders pushed for higher appraisals to line their own pockets. Consumers fell for it because sellers got greedy and buyers were ignorant. Had the general population been aware of the industry fraud that was and is going on, they might have recognized housing industry hype when they heard it, and refused to pay ridiculous and unsustainable prices. Then, our economy would not have crashed due to a housing bubble and fraud. But the mainstream media chose instead to cowtow to real estate advertisers, and helped make the hype seem credible to the millions of Americans who foolishly get all their “information” from the TV. There is nothing new about this or any industry lobbying for new laws to benefit itself, but you’d think this country would’ve learned from this last crash that the industry’s legislative wish list should be laughed at and then shredded.

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