Appraisal fraud is a situation in which a piece of real estate is intentionally valued above its current market value. Closely related to the concept of mortgage fraud, the act of deliberately falsifying appraisal documents is normally conducted by using modern technology to alter the content of an appraisal document that was prepared by a reputable appraiser. The expectation is that no one will actually check the contents of the altered documents with the appraiser who prepared them, allowing the fraud to go unnoticed. In most nations, there are still penalties involved with this type of fraud, up to and including imprisonment.
Along with altering documents prepared by an honest appraiser, there are also instances where the individual or firm who conducts the evaluation of the property may be included in the scheme. In this instance, there is no accurate appraisal to be carefully altered. The appraiser simply overstates the current market value of the property on the original document. Should the fraud come to light at some future point, the appraiser is subject to the same penalties as any other individual involved in the illegal activity.
There are several reasons why appraisal fraud may take place. In most cases, the idea is to command a higher sale price for the property that was appraised. This can be particularly important when there is a need to sell the property quickly, since the higher appraisal can actually make it easier to set the price at a rate that is higher than the true market value, but less than the fraudulent appraised value. Often, the buyer can obtain financing with greater ease, since the mortgage amount is obviously less than the appraisal indicates the property is currently worth.
While many instances of appraisal fraud are related to selling property, this type of activity can also occur in other situations. Should a homeowner wish to refinance an existing mortgage and wants to obtain the most favorable terms possible, a carefully prepared fraudulent appraisal can mean significant savings on finance charges as well as lower monthly payments. Assuming the fraud is never detected, the homeowner saves a great deal of money over the life of the refinanced mortgage.
Many jurisdictions take a dim view of appraisal fraud. Ultimately, activity of this type not only defrauds lenders but can also cause property value issues for others living in the same general area where the real estate is located. The fraud can also have an impact on local property taxes that leads to further inconveniences for everyone involved. When appraisal fraud is discovered, the instigators of the fraud may be ordered to pay damages as a means of compensating everyone who was affected by the action. Depending on the severity of the situation, the parties involved may be imprisoned for a period of time.