Home Appraisal Fraud
Joseph and Kimberli bought an unimproved lot in a subdivision and then engaged an architect and a contractor to design and build the home of their dreams on it. The lot and finished home together would cost them about $731,000. They borrowed most of the sales price from a bank, which sought and obtained an appraisal from an appraiser regularly used by the bank. Conveniently enough, the appraisal came in at about $731,000 when conducted under both a cost approach and a sales comparison approach.
After the couple had been in their new house about a year, Kimberli lost her job and the couple went back to the bank to apply for a home equity line of credit. This required another appraisal from a new appraiser. To the shock and consternation of the homeowners, the property was appraised this time at only $510,000. To use a term which has come to describe so many, Joseph and Kimberli were “under water.” Denied the home equity loan and unable to pay the mortgage, they managed to sell the property for $660,000.
When Joseph and Kimberli sued the first appraiser for intentional misrepresentation, the claim was upheld by a state supreme court, which ruled that the couple had presented enough evidence to warrant a jury trial. A plaintiff suing for intentional misrepresentation must prove that
1. The defendant made a false representation of an existing or past material fact;
2. The defendant made the representation recklessly, with knowledge that it was false or without belief that the representation was true; and
3. The plaintiff reasonably relied on the representation, causing him damage.
The gist of the suit was that the appraiser, to please everyone involved at that moment, intentionally misrepresented the value of the property when he appraised it at a dollar amount substantially higher than its true value. The defendant appraiser contended that an appraisal is in one sense an opinion, rather than a simple statement of fact. However, for purposes of a claim for fraud, an appraisal can be regarded as a representation of fact.
On the issue of recklessness, there was evidence for both sides, but the issue needed to be resolved by a jury. Favoring Joseph and Kimberli was evidence that the appraisal request from the bank was for a “Rush!” appraisal, and the appraisal value matched the sales price virtually down to the dollar. Joseph and Kimberli would get their chance in court to prove that, to their detriment, the appraiser was determined to come up with the “right” appraisal to make the deal happen, even if the truth of the property’s actual value was a casualty in the transaction.