The following article is by Steven R. Smith, MSREA, MAI, SRA, Smith Realty Advisors, The opinions expressed are the author's and do not necessarily represent those of the Appraisal Scoop blog.
My office uses a commercial data source that costs something like $8,800 per year for two counties, but is one of the costs of doing commercial appraisal work. It is a much higher cost than any and all data source costs of being in the residential appraisal business exclusively.
Sadly the quality and volume of data has declined, the level of detail has declined, most income properties have no income or expense information, no vacancy information and in many instances, no improvement information or details. Most land transactions have no information about what was included such as Tract Map approvals, density, HABU in terms of Intended Use, fees paid, etc. The data becomes little more than a lead sheet to start investigating a sale with. Often the best piece of information are the phone numbers they come up with.
We develop many of our own comparables starting with public record information and just a buyer/seller name and maybe the Tax Stamp info, or maybe not even that. Every sale we start with at this level may take several hours or days of networking and phone calls to get verified to the point we understand it transactionally and have enough physical details and/or income information to be able to process it into an indicator of value. About half of our comparable leads start out this way, with limited data.
Appraisers who make a living exercising this level of due diligence in tracking down data leads and verifying them, have a tendency to look down on those who grab raw data from 3rd part vendor sources and use it at face value. Appraisers who operate at this level of due diligence are not easily fooled when phony sales, or Cash Back sales or Flips are deposited in the databases.
As real estate markets go from hot to cold, regardless of the product type, frauds increase. Some frauds are created simply to fool the uneducated, unwary, uninquisitive appraiser. Plant two bad comps in a database and fraudsters can fool the vast majority of appraisers.
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A member of my AI Chapter got caught on this issue. The fraud was in raising the sales prices of apartment deals in escrow 25% in order to get 100% bank financing, in what would otherwise be a 75% loan product.
The appraiser became the enabler to the fraud. Before it was discovered, there were over a dozen fraud transactions in the databases in one city. All being relied upon at face value. The location, Riverside, CA.
Appraisers came to the area from San Bernardino, Orange, L.A. and San Diego Counties to do work here, with no knowledge of the nuances of the local market and got fooled quite readily. Now they are being sued by the banks who were fooled.
Some work for shops that cover all of So. CA, and spend most of their life on the freeways, in a different city every day, never gaining geographic competency, but delivering fast and cheap commercial reports.
- Has this type of fraud happened in other Cities or Counties or States? Yes.
- Has it happened in other product types? Yes
- Has it happened to residential appraisers too? Yes, more than to commercial appraisers.
Appraisal Fraud in its simplest definition is an Inflated or Misleading Report. Are Inflated values intentional, Yes, they do not happen by accident. We all make errors but errors are random things that happen. We can only Inflate Values on purpose, which requires Intent. ---- ---
If our Intention is to do good work, credible, reliable work and provide value estimates for which there is a high confidence level, then due diligence, objectivity and neutrality need to be at the forefront of our minds. If these factors are not, then we are not.
Any appraisal assignment that starts with a Predetermined Value in mind and the Comp search is built around this value, is subject to being a Fraud. It is hard for people on the Grand Jury to believe that a licensed professional is easily fooled when transactionally a sales price is raised 25% to induce a bank into making too big of a loan for safe and sound lending practices. Do they distinguish between residential and commercial Licensed Professionals or see us all in the same light, with the same Standards and Ethics we certified compliance with.
All that needs to happen to prove the Appraisal Fraud is to prove a Predetermined Value was the starting point of the assignment. What percentage of residential appraisal volume does that entail?
Who suffers from a high appraisal in a purchase? The unsophisticated and unwary consumer borrower (assuming they are not part of the fraud), the banks that get stuck or mortgage bankers or investors or mortgage insurers who take the losses.
If we were licensed for the Public Good, aren't all of the above categories of exactly that?
Many do not realize there was only one reason to license us, to make it easier to sue us. By our certifications the public and users of appraisals, the entire stream of commerce has a right to come back on us if they suffer a loss, whether we were active or passive participants in any fraud scheme.
Appraisal Fraud Prevention has never been a part of the body of knowledge required to get a license or become designated by a professional association. Yet, it was a central issue in the S&L Crisis. USPAP courses do not deal with it, rather, from the Appraisal Foundation, to the Apprasial Standards Board and the Appraisal Qualifications Board on down.
The presumption is appraisers are Ethical. Why, because we do not teach or require a course in Ethics, it is presumed by the way we are defined and licensed, by our certifications. Is it unethical to start an apprasial assignment with a predtermined value. I think so, unless we were hired as an Advocate and we certify as such. I hire into cases as an Advocate, not a problem, it is a matter of disclosure.
When I think of the problems appraisers face in dealing with data and markets that are imperfect, I am often reminded of an Assistant District Attorney I met at the California District Attorney's Association, Real Estete Fraud Seminar a few years ago, Ed Kotkin from Riverside County, CA. He came to the first national Real Estate Fraud seminar that I gave in Costa Mesa, CA January 2000. He said something that stuck with me, still to this day:
"A license professional cannot be willfully ignorant or willfully blind to the things normal due diligence would have revealed "
Being unaware is a dangerous thing for a licensee, better to give up the license and limit liabilities than to risk criminal involvement in mortgage fraud transactions. Being aware can lead to a whole new world of business, that of the professional Forensic Review Appraiser and Expert Witness. The pay is better and their is no Client Pressures.
Checking the "Stable" box on a form report in a market that is declining is a willful act, or the act of someone who really just does not know what is going on. The liability results might fall into one of two areas; civil or criminal or both.
AUTHOR: Steven R. Smith, MSREA, MAI, SRA, Smith Realty Advisors, 936 San Jacinto St., Redlands, CA 92373, Real Estate Appraisals, Consulting, Expert Testimony, Forensic Reviews, Fraud Research and Analysis, Litigation Support, Fraud Training 909-798-8855, fax: 909-798-0139
ADVERTISEMENT: If all of this is new or news to you, we have a brand new seminar to be given locally by my Chapter of the AI, www.sccai.org.
Seminar: Appraisal Fraud Prevention: Due Diligence, Transactional Analysis and Verification/ Validation of Data.
Agenda: A Powerpoint presentation and handouts that introduces the topic, followed by a Panel of Review Appraisers who are on the front lines batting down Appraisal Frauds, a presentation by the License Board on Current Enforcement Issues, a Panel of Prosecutors, and motivational stories about appraisers in jails and prisons who do not know what they did wrong, maybe even some video interviews.
Date: August 9th.
Location: To be announced. Check www.sccai.org
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