Fake Appraisal Constitutes Real Estate Fraud

Added June 27, 2006 by Ilyce R. Glink and Samuel J. Tamkin

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Summary: When you sell your home an appraiser will conduct an appraisal to help the lender determine how much of a mortgage loan to grant to the home buyer. It's illegal for a home buyer to get a mortgage in excess of the home's sale price, especially if the mortgage loan is based on an inaccurate appraisal. When the home buyer wants the home seller to return some of the mortgage loan money it may become fraud. In a situation such as this it's critical for the home seller to contact an attorney.

Q: I'm selling my house by owner. I was asking about $90,000. A man in another state saw my house online and wanted to buy it.

He contacted his lender to get the paperwork started and his lender sent out an appraiser. The appraiser valued my house for $140,000.

The buyer took out a home loan for that amount and wants me to send him the difference between what the original asking price was and what he borrowed. Our contract price was $140,000. Am I legally obligated to send him the difference?

A: Before we can talk about the money the buyer claims you owe him, you need to know that your actions with the buyer sound like a fraud.

If you believe your home was worth $90,000, how can you agree to sell it for $140,000? If your house is truly worth $90,000 and the appraiser is $50,000 over the mark, you know that the buyer is making a colossal mistake in buying the home. If you intentionally underestimated its value, it sounds like you are helping him in a fraudulent transaction.

Why is this fraud? If the buyer is working with an appraiser to inflate the value of your home, the buyer does this to get cash back on the purchase of your home. The buyer has to get this cash back without the lender's knowledge.

Most closing documents you have signed or will sign state that you and the seller have no undisclosed arrangement for payment of monies that are not disclosed in the contract.

Was the refund of the difference between the purchase price and the appraised price disclosed in the contract? If it was, did the lender receive a copy of that contract with the refund disclosed? If it wasn't disclosed, it should have been.

There is no legitimate residential mortgage lender that would give a buyer a loan for $140,000 and allow a seller to give the buyer back $50,000.

Whether the sale has occurred or is about to occur, we suggest you hire an attorney immediately. The attorney will have to counsel you as to what your options are. He or she may recommend that you disclose the information about the fraud to the authorities with the hope that you can extricate yourself from the precarious situation in which you have placed yourself.

Here are a few other issues for you to consider on the slight chance that your letter does not accurately reflect the nature of your transaction. If the contract provides for you to refund funds to the seller, it would be your obligation to do so. If the contract does not contain a provision relating to the refund of the difference, you would have sold your home for $140,000, $50,000 more than you had listed it for and would be legally entitled to keep the money.

As you indicated in your letter, this buyer is looking for the difference and apparently either though the language in the contract or through your outside agreement, you are expecting to return $50,000 to the buyer and that is why you now you have a problem.

The fraud in which you have participated is against the lender and your actions along with the seller's may violate state laws. It certainly violates RESPA (the Real Estate Settlement Procedures Act which is regulated by the Housing and Urban Development arm of the Federal government).

That is why the only option for you now is to seek the help of an attorney immediately.

June 27, 2006.

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