Because they saw Chappa in action. Just because they can't sense ki ( Roshi can ), doesn't mean they can't tell how fast and strong an opponent is. A seasoned fighter in our world can make basic estimations on another fighter's ability by watching them. You can make judgments about speed and power from a visual perspective. I don't see why their world wouldn't work like our world in this situation.
Nothing about Chappa's defeat suggested he was overrated. The only suggestion made from Chappa's defeat was marvel at how strong Goku has become. Both Yamcha and Krillen are shitting their pants.