Bloated Appraisals Go On Weight Loss Program In California

By Lee Cameron Published 10/16/2007 | Real Estate

As Americans watch their real estate markets fail and friends foreclose, many are asking what went wrong?  Lately, the spotlight has swung to over-inflated appraisals and inherent pressure on  appraisers to "hit the number" when drawing up their reports. This month, California was among the first states to pass a bill making these fat appraisals illegal.


A real estate appraisal is  an opinion, an estimate and it has a great deal of weight when it comes to your mortgage. In fact, an appraisal is the only estimation of market value that lenders can legally accept when calculating your mortgage.

Lately,  appraisers have been fairly vocal about feeling  pressure  to come up with  over stuffed property valuations to please lenders.   The 2007 National Appraisal Survey conducted by  October Research found that 90 percent of appraisers felt pressure to inflate property valuations in order to encourage   deals to go through. The findings represent a  35 percent increase from the company’s 2003 survey. In some cases the pressure  is overt. By many accounts, it's become standard for lenders to tell appraisers the amount they want a house valued at before they've even contracted them. The message is: give me this price or you don't get the job.

The amount lenders want the appraiser to "hit"   can reflect any number of things that have nothing to do with the value of the home. Lenders may in fact be bending to pressure from real estate agents that want the appraisal to match or drive up a buyer's offer regardless of the actual value of the home. They may also be bending to pressure from buyers that want loans that are much higher than they qualify for in order to pay off credit card debt, renovate or take a trip.

But if everyone comes out of the deal happy, what's the problem?

While the market was on the rise, an inflated appraisal didn't matter so much - values would inevitably catch up. Now that housing values have stopped rising  and interest rates are going up instead, everything is different. For home buyers,  inflated appraisals are partly to blame for the rise in foreclosures. Many homeowners  who knowingly took a no-down payment loan they couldn't afford are now unable to make payments and are locked out of the refinancing game. Others  who paid too much unknowingly go through the process of refinancing only to find   their  home is actually worth thousands of dollars less than they  owe on it. Not only are they  saddled with unnecessary debt, but they're in danger of losing their homes if they haven't already.

A house is still only worth what someone  will pay for it. A   high real estate appraisal doesn't  make a house worth more than it's worth, but one  over-inflated home value can lead to another. If multiple bloated appraisals  push sales prices up  an area, it can have a snowball effect that  artificially drives the market up. Hello housing bubble.

The appraisal industry says it's not to blame for it's errant behavior however and has been  pleading with the government to step in and protect them from the bullying practices of the lending and mortgage industry. California  has recently heeded the call, passing bill  SB223 this month, making it illegal for  anyone to pressure appraisers into fudging a home valuation. The bill also makes it illegal for appraisers to falsify an appraisal. So in California, the days of "hitting the number" or reaching a predetermined conclusion when determining house value are hopefully numbered. It remains to be seen however, if the rest of the country will follow suit.

Regardless of where you live, you should protect yourself by taking some proactive steps before you purchase a home or sign a mortgage:

  • First of all, make sure you're dealing with a    lender that has a good reputation 
  • Get an idea of the market value of the home you wish to purchase 
  • You can even hire your own appraiser, though it will cost you between 300 and 600 
  • Ask for a copy of the appraisal before you close - you're entitled to see it by law. Review the document to see whether or not it accurately describes  the home you're buying  
  • Get  a really good realtor on your team

Written by the writing team at Watson Realty Corporation, Orlando Real Estate specialists.  Contact Lee Cameron to learn more about  keeping your appraiser honest, or   search for homes in Orlando FL right now.