With the market taking a nosedive, many homeowners who bought during the height of the housing boom are now finding that they owe more on their mortgages than their houses are worth. And many of those deals involved brokers who are now becoming live bait for angry buyers.

A recent lawsuit in Southern California is bringing the issue of home valuation to the forefront and will likely open a fresh can of worms in real estate litigation. The New York Times reported on Tuesday that Marty Ummel, who works as a fundraiser at California State University in San Marcos, claims that her realtor, Mike Little, misrepresented the strength of the California market in which she and her husband purchased their retirement home in 2005. Little, a veteran agent with RE/MAX Associates, is also in the lending business and arranged the financing for the Ummel home. Little ordered an appraisal of the house but did not respond to the couple’s requests to see it, the suit charges.

Varying home appraisals
The suit alleges that the Ummels bought the 3.5-bathroom, 4-bedroom home based on an appraisal of $1.2 million in the summer of 2005. An appraiser that the couple recently hired for the case says the home was actually worth $100,000 less than the original estimate. The original suit included a mortgage broker and appraiser, who was accused of skewing his report to make the home seem worth the purchase price. Modest settlements have been reached with both parties.

Marty Ummel alleges that Little hid information that similar homes in the neighborhood were selling for less, because the agent was worried she would back out of the deal, and he would loose his $30,000 commission. After closing the deal, the Ummels later discovered that a house down the street that was the same size and closed the same day as theirs went for $175,000 less. The couple claims that not only did Little withhold information, he exaggerated the features of their house to push them into a deal. Little told the Times: “The couple is attempting to shift the blame for their own failures to research and due diligence.”

Legal precedent
The National Association of Realtors reports that they have not had a suit in the last five years that solely concerned the issue of valuation. Previous suits concerned alleged misrepresentations about the condition of the purchased property itself. The Ummel case may be the first of its kind against an agent involving valuation.

This case will be an interesting one to follow, because while the methodology behind home appraisals isn’t a hard science and can vary in opinions, it has become the industry’s leading measuring stick in determining a property’s value. Critics argue that inflated home values helped fueled the housing boom and eventually to its spiraling decline.

Times reporter David Streitfeld highlights some key points in the article, but more importantly he raises a pivotal question about the role of agents representing buyers:

“As prices spiked, buyer’s agents and brokers became popular as sounding boards, advisers and negotiators. …That makes this the first housing collapse in which large numbers of buyers had a real estate professional explicitly looking after their interests. … The Ummel case poses the question: In a relationship built on trust, where promises are rarely written down and where — as in this case — there is no signed contract, what are the exact obligations of these [buying agents] in guiding their clients through a sizzling market?”

The Internet has opened the floodgate of information for home buyers and sellers. Through a multitude of online listing sites like Homescape and home valuation tools offered on sites like HomeGain, buyers can initiate the search by looking for homes and comparing prices in their local market without an agent. Home buying and selling is not a spectator sport, and while agents can help guide their clients through the process, consumers need to protect their interest by staying involved. I only know bits of the Ummel case, but the question that I was surprised the Times reporter didn’t ask Marty Ummel for his report was: Why weren’t you aware of what neighboring homes were selling for? Unless you’re working with a blank check, most home buyers want to know they’re getting the best deal out there.