4

The Need for Factual Verification

“Wherever possible there must be independent confirmation of the ‘facts.’”

—Dr. Carl Sagan, “The Fine Art of Baloney Detection,” The Demon-Haunted World

In order to begin right in appraising, one must first get the facts right. The previous chapter showed how appraisers can expect to be lied to. How can a liar be detected, though? One way to detect lies is to have the powers portrayed by Tim Roth on the Lie to Me television series. Indeed, there are interesting courses offered by the Association of Certified Fraud Examiners on visually detecting clues of deception. A far more effective way to detect lies, though, is by taking the time to verify the information that is given.

The Data Verification Process

Looking for facial twitches and “panic blinking” is a poor substitute for simply doing your homework, which entails doing as much research as possible before the property visit. Useful steps to take include:

1. Checking public records for the property concerning size, zoning, ownership, sales history, and utilities.
   Some public records are better than others, unfortunately, but they should still be a starting point.
2. Checking to see if the subject property is listed for sale.
   If the appraisal is being done for loan refinancing, a listing for sale might suggest that the owner is having cash flow problems and is looking for any way out of the predicament. If the appraisal is being done for purchase money financing, is the purchase price greater than the listing price? If the purchase price is higher than the listing price after an extensive period of time on the market, there may be something fishy about the purchase contract.
3. Googling the property address to get background information.
   One can sometimes find out about bankruptcies of the landlord or a tenant or perhaps find previous listings of the subject property this way. One can also find tenant complaints about an apartment building. In one case involving a mixed-use building in Melrose Park, Illinois, it was found that the so-called “sports bar” on the ground floor was actually a strip club that had recently been closed by police for prostitution, while families lived upstairs. In another case, a “spa for women” in Houston was advertising itself in the adult services section of the Yellow Pages as a massage parlor catering to men. Such tenants may diminish the marketability of a rental property by attracting undesirable visitors or police raids.
4. Calling or visiting the local planning department regarding proposed developments.
   You can find out how close developers are to receiving final approvals, if they have received the necessary conditional use permits, or if they have had their development plans rejected.
5. Checking the zoning map.
   Developers have applied for construction loans for projects that are not even allowed by the applicable zoning ordinance, as if they think that lenders are stupid.
6. Visiting the property beforehand or arriving early, if possible.
   This will arm you with facts that may later be misrepresented. Here are some examples:
   • Measuring the building beforehand will alert you to a property owner’s exaggerations.
   • Showing up early and speaking one-on-one with the property manager may reveal facts that the owner may want to hide.
     In one case, a real rent roll was observed before the owner showed up with a fake rent roll. In another case, the subject of delinquent tenants was discussed.
   • Checking for illegal uses.
     For example, Buddhist monks were found to be residing in an office building in Monterey Park, California, which constituted a zoning violation. In other situations, prostitutes or drug dealers have been bribed by landlords to stay away during appraisal time.
   • Checking for squatters.
     In Latin America, squatters may be difficult to legally extricate, and in Mexico, the ejido system of land expropriation in use between 1934 and 1991 has created conflicting title claims for many properties. (This will be explained further in Chapter 12.) In such situations, the purported owner of the property may steer the appraiser away from sections of the property that are being occupied by squatters.

We live in an extraordinary time that is sometimes called the “information age.” More than ever before, we are able to verify facts with just a few minutes of Internet research.

For example, a real estate developer claimed to have purchased some remote California mountain land for $30 million, but the purchase price was unpublished. In California, Proposition 13 directs county assessors to assess at market value upon sale, and they are the ones who know the sale price. In most cases the purchase price is considered the market value. The new assessed value is then increased by the consumer price index or 2% each year, whichever is less. In this instance, a quick Internet trip to the assessor’s website indicated a total assessed value of less than $14 million two years after this reported purchase, suggesting that the land had been purchased for closer to $13 million. This fact may seem insignificant until one considers that the phony purchase price helped to deceive an appraiser into valuing the mountain for $100 million.

A generation ago, such research would have required a time-consuming visit to a government office. Now it can be done in a matter of minutes by anyone with an Internet connection.

This remote parcel of mountain land in California was valued at $100 million when its actual purchase price was closer to $13 million.

Interviewing the Property Owner

While appraisers cannot conduct polygraph examinations of property owners or brokers, having a command of the facts prior to the interview will help you to calibrate a base level of honesty. If you have already done your research, you can ask the property owner or broker some baseline questions, such as:

• When did you purchase this property, and for what price?
• How large is the property? (This question is best asked if you have already measured the property in advance.)
• When was it built?
• Does the project have final approval for development?
• Does the parcel have water and sewer available?

If many answers vary from the facts you already know, you may need to judge whether you are dealing with an exaggerator or liar and rigorously verify any further representations made by the owner.

One critical aspect of your interview of the property owner and/or representatives, brokers, and tenants is the ability to elicit accurate information and to distinguish the lies from the truth. One always has to be tactful, of course, to keep the discussion going and maintain the trust of the subject, so an appraiser might wish to save the hardball questions until a later e-mail or phone conversation. It is not productive to call a property owner a liar, particularly if you need a ride back to your car.

One interviewer I find particularly effective is television’s fictional LAPD detective Lieutenant Columbo (portrayed by the late actor Peter Falk). He never starts interviews with suspects by telling them that they are suspects. He is deferential, inquisitive, and persistent enough to keep suspects talking under a false sense of security, revealing valuable clues along the way. It’s only at the end of several encounters that he finally says his trademark “Just one more thing …” and takes the suspect by surprise by establishing proof of guilt.

If Lieutenant Columbo were an appraiser, the end of his interview might go something like this:

Well, I’ve taken up enough of your time today, sir. You’ve got a beautiful property here, if I may say so. I’ll have to show the photos to Mrs. Columbo. [Turns and walks away, then doubles back.] Oh, just one more thing. You see, here’s the part I just don’t get. You say you’re selling this property for $20 million, but the property is listed for sale on LoopNet for only $15 million. Help me understand that part.

Continuing to ask questions on the fly, even if you already know the answers to them, can sometimes dislodge details that may have otherwise remained hidden. Sometimes it opens up inconsistencies that can, in turn, open up a whole new avenue of questioning. The inconsistencies are often clues to misrepresentations, as the truth should not vary. The inconsistencies are how Columbo caught killers, too.

Here are some examples of how inconsistencies exposed misrepresentations:

1. Inconsistent representations of the rent and tenant improvements to be paid by a major incoming tenant.
   Discovery: A forged lease.
   Method of discovery: A phone call to the would-be tenant. This case involved a mixed-use building in the downtown area of a town in Pennsylvania, and the new tenant was to be the local state representative. The State of Pennsylvania does not give its representatives authority to sign leases.

   

   When an appraiser called the local state representative, who was supposed to be an incoming tenant of this building in a town in Pennsylvania, it was learned that the lease had been forged.

2. Three conflicting purchase contracts between the buyer and seller, in which the price was the same but the size of the acreage being bought was different.
   Discovery: The purchase contracts were shams, as the buyer and sellers were business partners.
   Method of discovery: A slip of the lip from one of the sellers when asked where he would be moving after the property sold.
   Pick the dumbest member of the group and ask this question.
3. Very different interest rates on two different seller financing agreements for the purchase of a golf course near Orlando, Florida.
   Suspicion: The sellers were providing a “soft second” (forgivable financing) and the interest rate didn’t matter.
   Supporting data: Comparable sales did not support the purchase price but did support the purchase price reduced by the amount of seller financing.

Sometimes an unsolicited appraisal report can present clues to an owner’s deception. At first blush, one would wonder how an appraiser hired as an advocate for the owner could help an independent appraiser expose a fraud, but appraisers are great about including exculpatory clauses that they think give them “plausible deniability” if things turn out wrong as a consequence of their appraisal reports.

Two different seller financing agreements for the purchase of this golf course in Florida had two very different interest rates, suggesting the possibility of a “soft second.”

Take, for instance, the following statement: “This estimate of value is based on the developer’s representation that 90% of the units are pre-sold. As previously stated in our assumptions and limiting conditions, we assume that this information is accurate.” An appraiser is not likely to make such a statement unless there was some doubt as to the honesty of the representation. The repeatedly stated assumption that the owner is telling the truth can be a case of “Methinks the lady doth protest too much.”

In another case, the advocating appraiser’s report repeatedly and prominently disclosed that all value conclusions were based on the extraordinary assumption that the local government had already built a road to the subdivision being appraised at no cost to the developer. A site visit revealed no road present. As one can see, the owner-ordered appraisal report, no matter how biased it is, can often serve as a roadmap to a lie.

Conclusion

Fact verification is an essential part of the appraisal process. The earlier it is started, the more that can be accomplished in fraud prevention, as factual inaccuracies can prompt a line of inquiry that leads to other inaccuracies, hidden agendas, or conflicts of interest.

Research prior to the property inspection can help the appraiser pursue a line of inquiry that yields even more important facts and can alert the appraiser to possible dishonesty. The interview with the property owner or agent is also an important part of factual verification and should not be rushed, as it can calibrate honesty, introduce inconsistencies pointing to misrepresentations, or dislodge other relevant facts.

As was indicated earlier in Chapter 2, what an appraiser does not know can hurt the appraiser in addition to hurting others. Factual verification is the obvious place to start for appraisers who want to ensure they do not cause harm to themselves or others.