Risks to Real Estate Investors: Misrepresentation by Sellers and Developers II

Our firm supported a number of investors and their counsel in investigating a case where a real-estate developer made a number of misrepresentations to investors. One of the misrepresentations was that they described the value of a property using a hypothetical appraisal, falsely claiming it was a current appraisal. The appraisal valued the property as if it were fully renovated, but the property was actually in a dilapidated state.  

This case highlights the importance of understanding the limitations of hypothetical appraisals and the potential for fraud. By being aware of these risks and taking appropriate precautions, investors and litigators can protect themselves and their clients. 

Hypothetical appraisals, often referred to as “as-if” appraisals, estimate a property’s value based on hypothetical conditions, such as if it were fully renovated or had certain improvements made. While these appraisals can provide valuable insights, they are not as reliable as current appraisals, which reflect the property’s value in its current state. 

If a developer claims to rely on an appraisal, it is a good idea for an investor or lender to review the appraisal in detail, to understand the disclaimers and assumptions used by the appraiser; and to ensure they are comfortable with the associated risks.