To purchase the house and get cash back from the seller outside of escrow would be considered fraud. A better option would be to purchase the house at $500,000 and request that the seller “gift” you equity of $100,000. Then you could later get a second mortgage for the $100K.

Please don’t think that I am saying that you should do this. I was simply answering your question as to how/whether or not it would be legal to get the $100K back from the seller.

Bugs – what do you think of this scenario – instead of doing a fraudulent appraisal to overvalue the property, we find a distressed property in a decent area and ‘overlook’ the reasons it is distressed

For example, there is another post talking about two houses in San Marcos that back up to the train tracks and yet they recently sold for $710K

Couldn’t an appraiser value these houses against the rest of the development and assume that the train tracks are a non-issue? Aren’t appraisers supposed to use their personal judgement? At what point does personal judgement become fraud?

This scenario is essentially the “buy the worst house in the best neighborhood” philosophy being applied in a declining vs rising market.

4plex,

Sadly, it’s been my experience that even the most crooked appraiser will swear up and down that they are among the most professional appraisers there are. I think a lot of these jokers might even believe it. When I start talking about these things to my students I occassionally get a donkey who starts in with the “this is how it is in the real world” rationale. Needless to say, that’s an impossible rationale for them to defend for more than about 2 minutes. Everyone knows the difference between right and wrong.

The way most “bad” appraisals are manipulated are in the mischaracterization of the subject property’s
attributes. “Overlooking” defiencies is probably the 2nd most popular way of dorking an appraisal, surpassed only by the use of obviously superior quality/appeal properties as representing the “most similar” comps. Really, the two are usually done together.

The problem for the appraiser who does this is that the facts pretty much speak for themselves. Those properties that back to the rail tracks won’t be by themselves, they’ll have neighboring properties that also back to those tracks. In addition, all those properties have prior sales that can be compared to the similar prior sales of nearby “comps” that don’t have that problem, so the penalty for that location factor is readily apparent with even just a cursory glance at that data.

The only thing a donkey appraiser would have going for them is that it takes some extra effort to research and analyze these factors in review, and most lenders don’t want to pay the costs that go with that extra work. They just want to keep their assembly line rolling with the least amount of distractions. Penny wise and pound foolish, if you will.

They only start to care once they start taking some of those $100k hits. Then they’ll be all over appraisers for misdeeds past. Unfortunately, by the time that happens they’re already too late. They should have shown the requisite diligence BEFORE they made thse loans, not after.

Bad deals are made during good times.