Buyers Sue Agent For Inflating Real Estate Appraisal

The New York Times has an interesting article about a couple in California who are suing their real estate agent (who is conveniently also a mortgage broker) for allegedly artificially inflating the appraisal on their home by $100,000. A few days after moving in to their new home, says the NYT, “they got a flier on their door from another realty agent. It showed a house up the street had just sold for $105,000 less than theirs, even though it was the same size.”

The case is of national interest because it may set legal precedent for thousands and thousands of other home owners who bought at the height of the bubble:

When buyers have sued their agents in the past, the cases focused on problems with the property itself, often alleging failure by the broker to disclose a known hazard or maintenance issue. After reviewing litigation records for the last five years, the National Association of Realtors could find no cases that revolved solely around the question of valuation.

Ms. Ummel’s original suit included the appraiser, who was accused of skewing his report to make the Ummel’s house seem worth the purchase price, and the mortgage broker. Modest settlements have been reached with both.

In a brief phone interview, Mr. Little called the case “ridiculous,” adding: “The lady’s a nut job. I didn’t do anything wrong.”

Mr. Little said that contrary to Ms. Ummel’s claims, the suit was motivated mainly by the declining market. “When people see their home values and assets declining, they always feel there’s someone to blame,” he said. “This is a dangerous time for all of us in the industry.”

Mrs. Ummel may be the first homeowner to sue about this issue, but she’s not the first to suspect shady dealings between appraisers and mortgage brokers. Researching home prices yourself is important, don’t you think?

Feeling Misled on Home Price, Buyers Sue Agent [NYT] (Thanks to everyone who suggested this!)

Comments

Edit Your Comment

  1. sleze69 says:

    Ugh…I was hoping to find an appraiser that would overvalue my home upgrades so I could stop this silly PMI.

  2. DCvision says:

    perfect example of not being educated entering a sale…a clothier in south florida used to end all it’s ads with “an educated consumer is our best customer..” applies here….

  3. Tracy Ham and Eggs says:

    Buyers Remorse /= Lawsuit

  4. wesa says:

    I still can’t believe that the owners did not view the home/neighborhood before purchasing it. In agreement with DCVISION: a perfect example of not being educated

  5. BlondeGrlz says:

    Just because the home up the street is “the same size” doesn’t mean they are comparable. The people across the street from me have a 3500 sf house, and so do the people on the corner…but one was built in 1900 and is a fabulous victorian restoration and the one on the corner is an ugly colonial with peeling paint and bright blue shutters. Not the same.

  6. ceejeemcbeegee is not here says:

    Err… aren’t all home values in CA inflated?

  7. MercuryPDX says:

    Researching home prices yourself is important, don’t you think?

    Absolutely. Part of what the agent (buying or selling) is supposed to do is provide a comparison between the home for sale and other homes in the area (forget what it’s called… Comparative Appraisal[CA]?). At which point they provide you guidance on what to set your offer at (or what the market will bear for a sale price).

    According to the article, the agent didn’t provide the CA…. that’s a paddlin’. We’re talking 1.2 million dollar homes though, so the buyer should have at least done SOME kind of CA on her own, even if it’s just driving through the neighborhood and picking up “for sale” flyers.

    Mr. Little’s appraiser concluded the four-bedroom, 3.5-bath house was worth $1,150,000 to $1.2 million in the summer of 2005. The Ummels’ appraiser said it was worth $1,050,000.

    YMMV when it comes to appraisals, you get different numbers depending on who you ask. A discrepancy of that size can be caused by more than square footage, namely the fixtures and features of the home (Granite countertops or formica? Hardwood or carpet? Landscaping? New windows? etc.).

  8. ceejeemcbeegee is not here says:

    Also: people don’t complain about apprasiers inflating values when they are trying to re-fi, get a HELOC or otherwise cash out equity.

  9. MercuryPDX says:

    @blondegrlz: Exactly :)

  10. descend says:

    @blondegrlz:

    They said it’s a fairly new luxury development, so I doubt the fundamental difference is that extreme, but you point still stands: nearly-identical houses on the same street can have vastly different views, levels of privacy, quality and extent of landscaping, kitchen and bath design, quality of flooring (hardwood in one house versus carpet in the other could lead to a major difference in price!) etc.

    And having a pool does not necessarily improve the cost of a house, because many people don’t want the increased hassles, insurance, and other costs that come with a pool.

  11. DrGirlfriend says:

    I get the feeling that these particular buyers did not even attempt much research. You may be buying a house that is indeed worth $100k more than others around you, but I think that large of a difference is mainly attributed to one house in particular being very different from the rest.

    Also, if they had researched it, they wouldn’t be so surprised at the $100k difference. Had they known about it, I’m guessing they would have taken their realtor to task before buying.

  12. BlondeGrlz says:

    @mercurypdx: Comparative Market Analysis (CMA). ALWAYS GET ONE.

  13. MercuryPDX says:

    @ceejeemcbeegee: Reason being, something like that generally works in you favor. Apparently it’s only an issue when you’re overpaying for the house initially. ;)

  14. MercuryPDX says:

    @blondegrlz: Thank you. I was close :)

  15. ironchef says:

    Goes to show you should check on comp prices before you buy. Real estate/Mortgage broker agents (those who serve a dual role) are suspicious. There’s too much temptation to defraud.

  16. SarcasticDwarf says:

    My sister did home appraisals for a few years and explained it as this:

    The appraisers main job is to look at the comparable home prices in the same neighborhood. This is often difficult as not all houses are remotely the same (some neighborhoods are cookie cutter, others all have different builders and ages), plus when they sell plays a major part. If the only similar homes within half a mile were sold one year ago and 7 years ago, how do you estimate?

    Also, he appraiser often only looks at the outside of the house (in her case this is all she looked at due to who she was doing the appraisals for). This does not always take many things into account though, such as upgrades, remodels, etc.

    Someone I used to know had a house in Churchhill, VA (basically, the ghetto) a few years back. The average selling price for homes in the area was something like $150k at best. The outside of his home looked very nice (especially for the neighborhood), but the inside was the nicest looking interior I have seen in my life. The same house in Phoenix would go for well over a million dollars, yet there was appraised at something like $3xx,000, largely because few people ever saw the inside.

    So while there might have been some deception here, I could easily see an appraisal being +/- 10%.

  17. laserjobs says:

    I hope they win just because I have a strong dislike for real estate agents. However I sure do like Iggys House to put your house on the MLS for free and cut at least half the RE commision out of the picture.

  18. vastrightwing says:

    Trusting a realestate agent to give you honest adivce is the same as trusting a Best Buy salesman to give you an honest answer about what you’re buying. Yep. They are the same.

  19. mac-phisto says:

    @ceejeemcbeegee: i’d be willing to bet that they tried to do a refi & that’s where the trouble began. the appraisal probably came in lower than the original appraisal.

  20. Boberto says:

    @DCvision: Sy Sym? We have them in NY too.

  21. VeritasNoir says:

    @vastrightwing: Best Buy employees aren’t commissioned, are they? I’d trust a Geek Squad member or Best Buy floor salesperson for better advice than the seller’s realtor.

  22. D.B. Cooper-Nichol says:

    This woman sounds “high maintenance,” to say the least – firing her first real esate agent and backing out of two purchases before this.

    Frankly, I can’t believe this case passed summary judgment, given the number of disclosures you have to sign in CA. The trial judge is Lisa Guy-Schall. She’s fair and smart, but is perhaps more hesitant than other judges in that courthouse to pull the trigger on a motion that throws out even a weak case.

    (Disclosure: I litigated in San Diego County for 8 years, occassionally representing real estate professionals.)

  23. pete says:

    @mercurypdx:
    It’s called a CMA – Comparable Market Analysis.
    /wife is a realtor
    //she works hard for her money

  24. startertan says:

    I just put in a contract on a FSBO house. It’s worth it since we’re getting it for basically $25K under list price but it’s a pain in the ass. There is so much running around and dealing with the sellers. If the sellers are fair people it’s fine, if they aren’t it’s a bigger headache. I have a somewhat new appreciation for realtors.

  25. ceejeemcbeegee is not here says:

    @mac-phisto: But the appraisal came in lower because of the market right now, not because the original value was inflated per se. A year ago it was probably worth $100K more according to the market, but now it’s devalued. Appraisers value homes on square footage and there are indexes with say what the price per square footage should be in comparison to the COMPs in the area and other factors. Just like a stock gains and loses value, the value rises and falls. Not really the appraisers fault, IMHO.

    As an investor, I meet with folks like this all the time. They whine: I bought my house for $500K, I still owe $420K, can I sell it for $580K? Err, no, because the comps are at $350K. They get pissed at me because they are over-mortgaged and upside-down they are facing foreclosure and then they want to make a profit in a down market?!? I understand the sentiment –who doesn’t want to make money on the sale of their home? who wants to lose their home to poor money management?– but it’s mathematically illogical. I feel for these people because it’s a horrible position to be in, and I do what I can to help find buyers and stave off foreclosure, but honestly, the vast majority of folks are being (understandably) unrealistic and blind to the gravity of their situation.

  26. DCvision says:

    @DCvision: before the grammar police get me.. incorrect usage of “it’s” should be its’..

  27. NotATool says:

    @DCvision: You must mean “its” (no apostrophe)…

  28. skotty4 says:

    Call me old school, but isn’t the number one priority and the point of hiring a Real estate agent is that THEY are looking out for you and your best interest? Hand holding you thru the entire buying process.

  29. mac-phisto says:

    @ceejeemcbeegee: yeah, i just had someone flip on me the other day b/c their refi appraisal didn’t come in as high as they expected. who knows – their home could be worth more, but we use a pretty conservative appraiser. maybe that’s why we don’t have any home-related loan loss on our books.

    i couldn’t believe how upset this woman was at me – she just about tore me a new one. it’s amazing how homeowners have come to expect that their home is going to increase in value by 40% every year & the one year that doesn’t happen, they look at you like you shot their dog.

  30. humphrmi says:

    @skotty4: As a buyer, in most cases, you’re not hiring a real estate agent. The agent gets paid a portion of the commission that the seller pays. So technically even a buyers agent works for the seller, they just don’t know who they work for until the sale closes.

    But yeah, in most states, buyers agents have standards they have to adhere to in protecting the buyers interests.

  31. Sudonum says:

    @blondegrlz: @mercurypdx:
    CMA’s are typically only provided to sellers. However I’m sure that if this buyer had signed an exclusive agreement to be represented by this agent/broker he would have taken the time to put one together. In a sellers market most agents are not going to expend much time or effort to do comps for a buyer without a written agreement. It would also make this buyers case that much stronger if they did have such an agreement.

  32. zundian says:

    I don’t know, we’re buying a house and it amazingly got appraised at just above the sale price. It’s a great Mid Century Modern 3br/2ba house with nothing that needs to be done, sitting on a 10,000sqft lot.

    I have a feeling that if we had offered $5000 more for the house, the appraisal would have been for $5000 more than the current appraisal.

    I say this because one of the appraiser’s Comps was a house half the size of ours in a shitty neighborhood in a different zipcode, with almost no yard. So at least around here the sale price plays a massive part in the appraisal.

  33. ShadowArmor says:

    @ sleeze: PMI is tax-deductible in 2007, and that will hopefully be renewed for many years to come. In some cases, that can work out better than some 5/15/80 deal.

    @ DCVision: that slogan belongs to the SYMS chain, and I agree its awesome. Its been their slogan for over 10 years.

    I was very happy with my realtor, he did an excellent job. If you get a GOOD realtor, he/she should be able to negotiate the price by well in excess of the fee they charge. It all depends.

  34. gingerCE says:

    I don’ t think there’s an exact art to appraisals. It’s subjective. I know someone who had the appraisal of her house bumped because of the mountain view from one window in the house. Some might not care about a mountain view, but it helped raise the appraisal of her home.

    I don’t trust mortgage brokers or real estate agents much myself, and sure something shady could be going on, but I don’t think this couple has a case. Unfortunately.

  35. gingerCE says:

    @mac-phisto: Off subject–with the rate drop, is it time to refinance? Current rate is 4.75% but that ends in 2010–should I refinance now to a fixed?

  36. archie-o says:

    CORRECTION TO HEADLINE:

    The headline of this story erroneously suggests the buyer’s agent is accused of “inflating [the] appraisal.” The NYT story states the buyers are accusing the agent of withholding information and exaggerating the virtues of their home to push them into a deal. This is far different than “inflating an appraisal.” Realtors are neither qualified nor licensed to appraise real estate. The only person who could “inflate” the appraisal is the appraiser, whom the story states was sued and has already settled with the buyers. If the contract contained an appraisal contingency, which is typical and protects the buyer, then the job of valuing the property was the appraiser’s and not the agent’s. What am I missing?

  37. swalve says:

    @pete: Working hard for one’s money doesn’t make any value judgement.

    @humphrmi: You can hire a Realtor® to act as a buyer’s agent. In that case they split the commission by predetermined agreement via the Realty cabal.

  38. mac-phisto says:

    @gingerCE: it’s certainly a good time to go shopping. i haven’t seen any fixed-rates anywhere close to 4.75%, but it may be worth the piece of mind to refi into a slightly higher rate if the thought of a rate adjustment in 2 years is keeping you up at nite.

    it doesn’t cost anything to sit down with (most) mortgage cos. & see what they are offering. keep in mind that if you have good credit, equity in your home & proof of income, you’re the cat’s pajamas to a broker. negotiate EVERYTHING – rates, fees, etc. the way things are right now, i think some banks might even start paying prime borrowers to take loans.

  39. humphrmi says:

    @swalve: True, but few buyers even know that’s an option and end up just “hiring” an agent, which basically means following the standard “You want to be my agent? OK!” and not doing any homework or even asking them any questions about their thoughts on representing you.

  40. DCvision says:

    @NotATool: yeah… what you said.. :)

  41. Hobart007 says:

    I worked in mortgages as an owning partner and sales manager for a local mortgage company. It is very common practice to inflate the value of homes for all involved parties in the real estate industry. The appraisers are practically forced to do it as they depend on real estate agents and mortgage companies for all of their business. If they don’t play ball then they see their business dry up completely. Mortgage brokers and realtors make money based on the sized of the loan and purchase. As such the whole industry is built on these practices. I had a problem with it at the time and have since left the industry for more honest pastures but still know the ins and outs.

    There is no doubt whatsoever in my mind that the home value in this article was indeed inflated and that 70% of homes at minimum which were purchased since the boom started with 9/11 are overvalued to some degree. The entire industry is corrupt and ridiculous and I hope that now that it has dealt a serious blow to the economy legislators will possibly look into better regulation to prevent such things as this in the future.

    No one in the entire real estate industry is for the consumer. Appraisers work for the mortgage folks. Mortgage people and realtors work for commission which is based on home price. Title companies issue required insurance that does not actually cover you in the case of a title dispute. Required homeowners insurance pays on policies in a way that would constitute fraud in any other industry. I am generally against government intervention in private business but this is one case where I believe that it is sorely needed for the protection of individual consumers and the economy as a whole.

  42. Hobart007 says:

    @ CEEJEEMCBEEGEE (sorry for the double post)

    I don’t see how your described situation is similar to the one in this article. This couple moved into a house and saw that a legitimate comp sold for 100k less within days of their purchase. It is fairly obvious that something is fishy here. I honestly don’t know how that can be explained in any way other than fraudulent valuation. People are not happy with the falling prices but this sort of thing is rampant in the industry and dismissing complaints out of hand is ridiculous.

  43. Keter says:

    When I bought my house, I ran my own comparables and hired my own appraiser. The house was a “fixer” in the last stages of foreclosure, and the bank’s appraiser had it valued almost $100K over my offer, and about $80K higher than I thought was even within spitting distance of a fair market price. Imagine my surprise when my appraiser came back with an appraisal over $80K higher than my offer! I think they get so used to inflating appraisals to make people happy it doesn’t matter who is paying them or why…they just do it reflexively.

    Weird that the bank accepted my “lowball” offer despite the appraisal…but the high appraised value made getting a good loan very easy.

  44. ceejeemcbeegee is not here says:

    @hobart007: It doesn’t. I was responding to another poster.

  45. mrspaz says:

    As a real estate appraiser (albeit from Florida), I feel compelled to comment on this, though I will keep it brief:

    I am amazed the appraiser settled, unless there genuinely was a material error in his report. We’re talking about a 10% variation, which can be a significant amount of money but is a small portion of the final sales price. In a million-dollar neighborhood, $100k can sometimes fall under the “we want *this* house and we want it *now*” rationale. This type of behavior is nearly impossible to detect or quantify.

    Additionally, appraisers generally provide an opinion of value that is valid as of the effective date of their report. This value considers *past* sales (within 6 months if possible, 12 months maximum under most conditions) to provide support for the opinion of current market value. For properties where the 5%-10% “margin of error” can equal hundreds of thousands of dollars, I personally provide more than the three “required” sales for the sales comparison, usually 5 but sometimes 6. This assures that the market has indeed been behaving as sales data indicates. I *cannot* and *will not* rely on a *single* sale, either high or low, to form an opinion of value. The appraiser MUST be able to support that opinion, and one sale is not going to cut it, so that lower sale down the street is not very meaningful if there aren’t at least 2 other similar sales within a reasonable time frame. As for the sale that closed after the effective date of the appraiser’s report, it is inconsequential: Appraisers do not foretell the future, they recount the past. If they wanted a speculative appraisal, they should have ordered one, though any appraiser that’s been at it more than a week will tell you that such a report is highly unreliable and guarantees nothing.

    I think a telling indicator here is the fact that this lady has spent $75,000 in legal fees to try and recover $105,000. It speaks to the likely fact that everyone has fought her so far and only acquiesced when they realized she’s acting irrationally and will continue to harass them until all her money runs out.

  46. mrspaz says:

    So much for brief. :P

  47. danielftl says:

    I am a licensed real estate agent in Florida. Many consider it the job of the “buyer’s agent” to counsel the customer. However, real estate agents are not real estate appraisers (unless we are licensed as such and most of us are not) and our purpose is to facilitate the transaction of selling a property to a buyer.

    Quite frankly, I am sure I will get loaded on for this, but the lady could have done at least two things including not making the deal in the first place and having a contigent appraisal.

    A REALTOR’s answer to the following questions are simple:

    Customer: Should I have this property appraised?
    REALTOR: Yes.

    Customer: Do I need a lawyer?
    REALTOR: Yes.

    Customer: Should I buy this property?
    REALTOR: Let’s review your needs and desires to allow YOU to determine if this property fits the bill.

    Why isn’t she responsible for signing as closing? It seems to be everyone else’s fault.

    Like people screaming about their bad mortgages now, they like to say it is everyone else’s fault except theirs.

    Now, if a real estate agent makes a statement and the customer relies on it to make a decision, then that is another matter altogether and worth consideration. However, I suspect that she’s lashing out because of the declining market.

  48. guymandude says:

    @mercurypdx: “when it comes to appraisals, you get different numbers depending on who you ask.” then what good is the appraisal?

  49. danielftl says:

    Also, what real estate agents give is a CMA (comparative marketing analysis), and that is not an appraisal and in the state of Florida it is illegal to call it one.

    “Trusting a realestate agent to give you honest adivce is the same as trusting a Best Buy salesman to give you an honest answer about what you’re buying. Yep. They are the same.”

    I resent that you think all real estate agents are dishonest. You do not know that the real estate agent from the story is dishonest and I am certainly not dishonest.

    “I just put in a contract on a FSBO house. It’s worth it since we’re getting it for basically $25K under list price but it’s a pain in the ass. There is so much running around and dealing with the sellers. If the sellers are fair people it’s fine, if they aren’t it’s a bigger headache. I have a somewhat new appreciation for realtors.”

    Some real estate agents are very good and work very hard for their money. Real estate agents often keep the seller and buyer at arm’s length, as it should be and agents sometimes give up part of our commission to make a deal work (I am doing that in a current transaction preparing to close). Since we are independent contractors, we have pay for our car, our insurance, our phones, our dues (which cover insertion fees into MLS), but also mailings, advertising, and marketing efforts of a property and if it doesn’t sell, we get nothing. I am not complaining about that, but I would like people to remember that we don’t get paychecks week over week whether we do something or not. We only earn money when we work…and most of us do a fair bit of it…and honestly.

    As I stated in my previous post, if an agent makes a material statement and the buyer or seller relies on that statement as fact, then the agent can and should be held accountable for it, but to blame a real estate agent for buyer remorse and falling values is ridiculous.

  50. mac-phisto says:

    @danielftl: is that really all that $34,500 buys these days? two yeses & a “i’m not gonna make that decision for you”?

  51. danielftl says:

    No, but I doubt you’re interested in conceptualizing all a real estate agent’s commission really does entail. I already stated some of the expenses in my previous post. Your one-liner indicates that you’re not interested in a discussion, but rather taking swipes at real estate agents who explain the real estate process because you don’t like what is said.

    Would YOU counsel someone who thinks he or she needs a lawyer that, “no, you don’t need a lawyer”? Would you tell someone that he or she should not bother with an appraisal if he or she thinks it is necessary? Not if you’re a real estate professional you wouldn’t.

    If you don’t want to pay that commission to sell your property, then you have to do it yourself including advertising, marketing, showing, meeting people when it is convenient for the customer, negotiating a sale, and be sure that you’re not breaking any federal, state, or local laws in the process).

    Finally, if you’re going FSBO (for sale by owner), don’t expect a real estate agent to show the property to his customer if you’re not willing to pay us a commission for our efforts.

    Finally, commissions are not fixed and are negotiable and vary everywhere.

  52. danielftl says:

    I apologize for my lack of subject and verb agreements. That’s what happens when one hits submit too quickly.

  53. mac-phisto says:

    @danielftl: well, my one-liner was initially much longer, but it all boiled down to that. actually, i’ve always had excellent experiences with realtors & i took offense at your simplistic view of what a realtor does.

    my buying agent spent countless hours finding a home for me, showed me ~30 properties, was in constant contact with me when something came thru the MLS that met my needs & used his connections to let me in on a price drop before it hit the MLS. he even saved the deal when it was about to fall thru last minute (goddamn mortgage companies always looking to make a buck). i don’t think a single question i asked was met with a simple “yes” or “no” – he was excellent at explaining the process. to be quite honest, it felt like we were partners in the deal. & he topped it off with a bottle of vodka on move-in day. =)

    the only bad experience i had was riding in his car…for every second his eyes were on the road, he spent 10 seconds dialing his phone, looking at maps, & pointing out details on the list sheets.

    THAT is what i’d expect for $34,500. considering my house only cost $150,000, i think i made out like a bandit.

  54. danielftl says:

    I have a Toyota Prius with a GPS built in. It also connects to my phone over Bluetooth. When I am in an area that I don’t know, I let the GPS guide me. I can talk hands-free on my phone while driving.

    However, I TRY not to use the phone when I am with a client because I don’t want them to think that they are not important to me. Sometimes that is not possible, but I do my best.

  55. Realestate Dealer says:

    This happens a lot in the real estate industry. The couple has done right. To buy property in India, people can visit this site or call at 800-232-2343 or 0120-4338222 for any query or further detail about the various projects, price or location etc.

    http://www.ncrdealer.com/