What is a promissory note appraisal fraud?
Appraisal fraud occurs when a note is appraised for a value that is deliberately overstated or understated. Do not confuse an honest error with a deliberate false statement. An intentional false appraisal is designed to misled, or cheat. Its purpose is to deceive and trick a victim into overpaying for a note or selling a note for too little.
A dishonest appraiser may be involved in the preparation of the fraudulent appraisal, or an existing and accurate appraisal may be altered by someone with knowledge of graphic editing tools such as Adobe Photoshop
Who might be the intended victim?
Private Party Investor:Usually, the intended victim is an investor. The investor may be a promissory note buyer, a note seller, or a lender making a new loan evidenced by a promissory note.
Internal Revenue Service (IRS):Because the Internal Revenue Services (IRS) taxes certain transactions, the fraud may be intended to deceive the IRS. Promissory note gifts are subject to a gift tax; consequently, the gifted note must be appraised. Some estates containing notes are subject to taxation; those notes must be appraised. There are numerous rules and requirements that apply to Individual Retirement Accounts (IRA) that require the appraisal and valuation of notes owned by the account.
Banks:Bank trust departments often contain promissory notes that require an appraisal. The commercial lending departments of banks often accept an existing promissory note as collateral for a new loan; an appraisal of the note being used as collateral is required by the bank.
Courts: It is common for trial courts to determine the value of a note in disputes and litigation. Divorce settlements, partnership disillusionment’s, business liquidations, inheritance disputes, and many other valuation disputes require the appraisal and valuation of a note.
How to Protect Against Note Appraisal Fraud
Avoid using an appraiser that has a conflict of interest: A basic requirement for engaging an appraiser is that the appraiser has only one “interest” or goal. That single interest should be to determine the fair market value of the note. If the appraiser has any other goal, a conflict of interest exists. Examples of an appraiser having a conflict of interest are:
He or she is a related to the note borrower, the note lender, or a potential note buyer
He or she owns an interest in the note
He or she plans to buy an interest in the note
He or she will be paid a fee that is determined by the appraised value of the note
Engage experience, capable appraiser having the following skills:
Experience in dealing with promissory notes in general
Knowledge of specific rules and customs applicable to the subject note
Knowledge of the marketability of the subject note
Experience in selecting the key valuation tools for the subject note
Clear and accurately writing and communication skills
Ability to explain and defend the valuation report
Depending upon your needs and your objectives, select a valuation expert that has the training and experience to delivery the correct, defendable valuation report that you need for your specific purposes.
Evaluate and select the appraiser carefully.
Look for conflicts of interest
Step back from the transaction and see if it makes reasonable sense
Be certain that you understand the transaction before you jump in
If you don’t understand it, don’t invest in it!
Determining the fair market value of Promissory Note is as much an art as a science.
Lawrence Tepper specializes in: Promissory Note and LLC, Valuation, and Appraising – Expert Witness—-Expert Consulting Services – EDUCATION AND TRAINING
Law Degree /Accounting Minor University of Denver
Colorado Real Estate Broker– Promissory Notes Specialization
Certified Commercial Investment Member From National Assoc. Realtors
PRACTICAL EXPERIENCE – 35 + years of appraisal and valuation experience for Attorneys, CPA’s, Estates, and Financial Planners.