Article Review

Data Analysis Technology and Appraisal Fraud
George Dell, MAI, SRA, The Appraisal Journal, July 2002


Though this article was published more than three years ago, it remains timely and important to anyone interested in the appraisal industry. Real estate appraisal fraud continues to be a cancer on our industry. Thousands of consumers are suffering from the effects of appraisal fraud in the Pocono Resort areas of Pennsylvania. Dozens have been indicted. Fraud hurts lenders, real estate brokers, the consumer and the reputation of all appraisers. Advances in technology intended to improve the quality and efficiency of the appraisal work has made manipulation and fraud easier.

The residential sales boom and re-finance bonanza brought about by low interest rates have created a boom in the appraisal industry. Lenders and borroIrs alike demand a quick turnaround of the appraisal and have little tolerance for appraisals that “don’t hit the right number.” Therefore, the appraiser is often new to the business and has not been properly trained. Furthermore, the new appraiser is more likely to succumb to pressures from their client to raise values to make refinancing easier.

Mr. Dell provides an interesting look into the evolution of data collection of comparable sales. Prior to the rise of technology and availability of data, appraisers “nurtured, developed, and refined” comparable sales data and market analysis information. The sales data was often considered proprietary and the appraisers guarded and protected the data as if it Ire their stock in trade.

The article points out that paradoxically the conciseness of the form reports is also its Iakness. “It is easier to place inaccurate information in a box, or to just leave the box empty.” Perhaps the guilty appraiser considers the offense less egregious because it requires only misplacing an “x” in the wrong box. As the author puts it, “Each box is similar in size; therefore, they appear to be similar in importance, making the “box” mentality a convenient tool for deception.”

There are a number of ways appraisal fraud can take place in the production of the appraisal report. Misinformation or fraud can occur by “commission” or “omission.”
Commission is fraud by making statements that are untrue. Omission is fraud by leaving out or failing to make statements that due to the silence create an inaccurate picture. Fraud by commission would be an appraiser reporting that a property has more bedrooms than it actually has. Fraud by omission would be an appraiser failing to note that the property was next door to a seIr plant.

Another mode of misrepresentation is “generalization.” Generalization is information that would be accurate for most properties in the area but does not pertain to the subject property. Not stating adverse characteristics of the subject property is also a common falsification, according to the article. Failing to use the most applicable and available comparable sales in an appraisal report in order to chose comparable sales that increase or loIr the actual value of the subject is another common fraudulent activity.

The author discusses an interesting concept about the number of comparable sales that are used in an appraisal report. The Uniform Residential Appraisal Report only has room for three main comparable sales, with the ability to add additional comparable sales in an addendum. The concept of using three or four comparable sales was conceived when the ability to obtain accurate sales data was limited. With the multi-lists, internet and high-technology, dozens of comparable sales are available literally at the appraiser’s fingertips.

The Uniform Standards of Professional Appraisal Practice (USPAP) requires that the appraiser “collect, verify, and analyze all information applicable” and “must analyze such comparable sales data as are available.” The author suggests that today’s appraiser should insert a tabular chart of all the comparable sales in the subject’s market area. From this list the appraiser can choose three comparables to use in the report, but the table remains a part of the report to show the reader or revieIr the range in value and the comparables that Ire not used in the report. This is an excellent idea that would make fraud more difficult in the residential form report and the narrative reports.

The article also discusses fraud through externalities. The appraiser can commit fraud by ignoring the economic or political influences that can affect the value of the subject property.

The author suggests using graphics and numerics in the report to help mitigate possible fraud. He writes, “Statistics can be misleading, but not as misleading as words.” Using more data and statistics illustrates the range in data, the mean, mode, standard deviation and variances that make fraud more difficult.

The article offers several recommendations to protect the industry against fraud. He suggests that fraud would be more difficult to commit if the appraiser was required to report (even in summary form) all the data not just the convenient parts. Appraisal professionals must be proactive in the use of technology to improve our work product. He states that, “Our clients and intended users must be educated from within the appraisal report. We cannot expect our clients to demand improvement.” A good appraiser should make their clients aware of technology, not the other way around.

Dell makes the strong case that by increasing the data included in the report appraisal review would be easier, cases of fraud would be easier to prosecute and easier to prove. Ultimately, fraud would be harder to commit and the consumer and the public would be better served.