HVCC makes cash buyers king
Appraisal rules disadvantage many who need financing
November 23, 2009
By Dian Hymer
Inman News®
Ever since May 1, 2009, when Fannie Mae's new appraisal guidelines for home mortgages went into effect, buyers, sellers, real estate agents and loan originators have complained bitterly about the new process. It's inefficient, often inaccurate and time-consuming. In some cases, it could be contributing to lower home prices.
The new guidelines require lenders to select appraisers impartially. To comply, many large lenders hire appraisers from a third-party appraisal service company. The intent of the new guidelines was to keep loan originators from exerting pressure on appraisers.
However, a consequence of the new process is that some appraisals aren't always based on the best, most accurate information. This can result in an appraised value that is lower than the purchase price. Some buyers may be forced to go elsewhere for a loan and pay for another appraisal. Rather than saving buyers money, buyers can pay as much as double what they would have paid before the guidelines went into effect.
A major complaint from the real estate industry is that the appraisers from third-party appraisal companies are often from out of the area. They don't know the local market. The comparable sales used are sometimes from neighborhoods where values are different. If the appraised value is significantly lower than the purchase price and the buyers can't get the loan they need, the deal falls apart.
In some cases, the buyers and sellers renegotiate the price to keep the deal together. This sets a new price for the property, one that was lower than the price the buyers offered to pay.
Horror stories about deals falling apart because of low appraisals have added to another level of uncertainty to an already battered housing market. Listing agents who are aware of the situation let their sellers know about recent problems with appraisals and try to encourage them to select a realistic list price based on comparable sales from the last three months.
The strategy has been effective in some areas. In fact, in low-inventory, high-demand markets, market pricing results in multiple offers. Many sellers who receive more than one offer accept a lower-priced, all-cash offer over a higher-priced offer that includes an appraisal contingency.
Recently, a Berkeley, Calif., seller received four offers. He turned down a gold-plated buyer that offered the highest price but needed a mortgage -- and instead accepted a lower-priced all-cash offer. Another seller in nearby Oakland's Rockridge neighborhood accepted $50,000 less than the highest price from an all-cash buyer because he was so worried about his house appraising.
In both cases, the lower prices will become comparables for future sales in the area, yet they weren't the highest price buyers were willing to pay.
HOUSE HUNTING TIP: Make sure if there will be a lender involved in a home you're buying or selling that a real estate agent meets the appraiser at the property and provides relevant comparable sales information. Be aware that appraisers usually don't count additions that aren't reflected in the public record as livable square feet, which can negatively affect the appraised value. When appraisers see a discrepancy, they should check the permit history on the house. If you can verify that the work was done with a permit, provide the documentation to the appraiser.
Low appraisals can be appealed. Although loan originators cannot talk directly to appraisers, they can talk to the management group. The information is then passed on to the appraiser who is supposed to respond within 48 hours.
The appraisal industry is starting to respond to complaints about the new guidelines. They say they're using fewer appraisers who don't know the local market and they're trying to work toward more consistency.
THE CLOSING: Increased sales activity over the last several months is also improving the appraisal process by providing more recent comparable sales information.
Dian Hymer, a real estate broker with more than 30 years' experience, is a nationally syndicated real estate columnist and author of "House Hunting: The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer's Guide."
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