A first-of-its-kind study by appraisal and real estate experts, as reported by the Chicago Tribune, suggests that realty agents who inflate pricing information on closed sales reported to listing services is important to the industry. Researchers compared closing documents which are supposed to indicate the final price in sales transactions with the prices that agents actually reported to their local multiple listing service (MLS) and found there were discrepancies in 1 of every 11 cases (8.75 percent).
Overstatements of final price exceeded understatements by nearly a 3-to-1 margin. In one case, the price reported to the MLS was 21.4 percent above the actual closing price. The study, published in the latest issue of the Appraisal Journal, is unusual because settlement statements are not public documents. The researchers, three professors at Florida Gulf State University, obtained HUD-1 statements from two banks that had extended mortgages on the properties. They then matched them up with the prices reported by realty agents to the local MLS. A total of 115 listing agents or brokers made the reports on the 400 sales in the statistical sample.
One of the co-authors of the study, Kenneth M. Lusht, a past president of the American Real Estate and Urban Economics Association, said that some of the errors could be simply clerical mistakes — “typing errors” — but others could be the result of agents “purposely inflating” the prices they reported to the MLS.
Though the average overstatement was not huge, 6.7 percent, the authors expressed concern that because the home appraisal system depends on accurate price reporting to MLS systems, errors can distort appraisers’ valuations. Appraisers use MLS pricing data to identify “comparable” houses to help estimate the values of homes on the market for sale.
Accurate appraisals are important to home buyers because lenders use them to help decide whether to approve their applications. Inaccurate appraisals also pose potential risks for lenders — if values are overstated, they may have less true “collateral” backing the mortgages they make.
MLS systems exist to share property data among member realty brokers, appraisers and other real estate professionals. According to the Council of Multiple Listing Services there are more than 800 MLS systems in the U.S., typically with rules emphasizing “data integrity.” Individual agents are supposed to report pricing and other property information to the MLS so that it can be viewed and used by other members.