I just ran across an interesting article on CNN/Money about home appraisal fraud. Despite the fact that appraisers are supposed to come up with an independent estimate of the value of a property, they're apparently coming under increasing pressure from lenders and realtors to hit a predetermined value (i.e., the agreed upon sales price) when appraising a property. After all, if a house appraises for less than the agreed upon sales price, the deal may not go through and nobody will earn their commission.

While you might think that it's in a lender's best interest to make sure that a loan is backed by a sufficiently valuable piece of property, lenders that turn around and sell their loans on the secondary market don't really care. Once a loan has been sold, the risk resides with the purchaser.

So why is this a problem?

Well, since appraisals are based in large part on recent 'comparable' sales in a given area, inflated appraisals can artificially drive up market prices, resulting in a never-ending cycle of increasing prices. While this sort of ripple effect might be good news if you're about to put your own house on the market, it certainly doesn't bode well for those that are looking to buy. And if you do end up buying into such a feedback loop, you may end up getting turned upside down on your mortgage -- i.e., if you purchase a house based on an inflated appraisal and end up with a 'fair' appraisal when it's time to refinance or sell, you may well end up owing subtantially more than your home is worth, making it difficult (if not impossible) to refinance or sell. The bottom line here is that you need to be careful. It's in your best interest to be sure that the 'independent' appraiser really is independent.

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"Home Values, Appraisals, and Fraud" was first published at fivecentnickel.com