Appraisal inflation may be reduced

The growing problem of appraisers inflating their home evaluations to meet a target value, under pressure from a lender or Realtor, is being addressed in new and proposed state laws.

California recently enacted such legislation (SB 223) and it has been signed into law by the governor. The law explicitly forbids persons involved in a real estate transaction from pressuring an appraiser to hit a certain target value.

The bill calls for punishment of violators with license suspension or revocation and with potential civil action. The new law may serve as a model for other states considering such legislation.

"I expect this bill to act as both a deterrent and a mechanism for punishing those who violate its provision," said state Sen. Michael Machado, who introduced the bill.

The new law is strongly supported by several industry groups and consumer advocacy organizations, including the Appraisal Institute, American Society of Appraisers and California Mortgage Bankers Association.

"I have been involved in efforts to curtail predatory and abusive real estate lending practices for nearly a decade," Machado said. "During that time, I have heard numerous claims about the insidious practice of appraisal inflation."

Abel Morales, a member of the American Society of Appraisers, had this to say about the new legislation: "The new law is a good first step. It recognizes that appraisers are often pressured from a variety of interested parties in a real estate deal and they need to have some form of protection from that. The system is so flawed that many appraisers risk being blacklisted, not paid for their work, or not being hired again if their appraisals are lower than the desired number."

One key reason for fixing the problem is that the appraiser is the only objective third party involved in most real estate transactions. He can perform an important role in protecting the home buyer and financial institution by giving an accurate, unbiased appraisal of a property's value.

Home buyers also have a role to play in this scenario. They should check the credentials of everyone involved in the transaction and request that their assigned appraiser be state licensed and accredited.

Q: Are many self-directed IRA holders investing their funds in real estate?

A: Yes. The real estate market may be generally in a slump, but at least one niche is notably active and flourishing -- activity by self-directed IRA holders using their available funds to invest in real estate.

About 1,000 self-directed IRA holders were recently surveyed by Guidant Financial Group. The survey found that about 65 percent of respondents were considering property as an investment for their retirement savings.

Nearly 60 percent of the respondents expressed a preference for rental income property, while 36 percent chose foreclosures and pre-foreclosures. About 28 percent named raw land as their preference.

"These numbers provide valuable insight into the minds of investors," said David Nilssen, president of Guidant. "It demonstrates that, although the real estate market is experiencing a downturn, many still continue to view real estate as a secure and viable means to growing their nest egg."

Other investment preferences noted by the survey respondents included business acquisitions, hard money lending, vacation property and foreign property investments.

Send inquiries to Jim Woodard, Copley News Service, P.O. Box 120190, San Diego, CA 92112-0190. Questions may be used in future columns; personal responses should not be expected.