In my experience, there seems to be a lot of confusion about appraisals. I hear a lot of misstatement about how appraisal values are determined. If an appraisal comes in below the agreed upon sales price there is usually a lot of push back, anger, and harshly worded statements about the intelligence of the appraiser. Many sellers, some buyers, and even some realtors use methodology and data that is not accurate. The reality is that there is a way to challenge an appraisal that is quite simple.
Blog Category: Appraisal
I have blogged about appraisal problems many times in the past. I am not going to repeat those posts. Maybe the data below will carry more weight than my opinion. It is fresh out of a thorough and expensive study that I have cited on this blog recently. I will cut and past comments directly from the study that quotes Realtors. I will let their comments speak for themselves.
I told a realtor once that appraisers do not appraise a home, data does. I was trying to respond to their over-hyped level of concern about where the appraiser lives or works. Realtors’ hope that the appraiser will have some sort of intimate knowledge about the subject property’s market area, only by living nearby.
Are housing values dropping now? Potential homebuyers who contact me for a mortgage are now frequently asking if they should wait to buy a home. The implication is that people are now worried that housing values are going to fall. So why buy now? Isn’t it smarter to wait? Maybe, maybe not. It is understandable why everybody is asking the question, “are housing values dropping now?”
Does anyone know what a proper comp is anymore? Yes, I believe they do. The problem lies in the fact that people do not go to the effort to do the research to uncover the facts and differences behind each comp. So I end up screaming at my computer when I get responses from homeowners who are trying to refinance their home and claim a certain high valuation. Same with a seller who is trying to justify a certain high price on a home they are selling. The lack of research is stunning.
Lenders are sometimes asked by a mortgage borrower to allow an escrow account to be created for some items to be completed. Repairs cannot be addressed by putting money in escrow. Repairs are usually required to be completed prior to closing. However, lenders may allow an escrow account to be created for items unable to be completed due to weather. Weather related delays are most common in new construction homes.
In my 3.5 decades in the mortgage business, I don’t recall a lender I have worked for ever allowing repair escrows. That is because they are typically messy, and many times end up not being resolved in a timely fashion. There are contractor problems and other situations where the cost exceeds the escrow account reserve. Weather related escrows are a different story, but repair related escrows may be impossible to get approved by a lender.
Is there such a thing as getting a loan with no appraisal? There are times when a lender might enter a loan application into the automated underwriting system, and the resulting approval may allow for a “PIW”. A PIW is a Property Inspection Waiver. This means that Fannie Mae or Freddie Mac has decided that due to the characteristics of the loan they feel comfortable proceeding without an appraisal being done.
How do home price reduction and rates affect one another? I have clients who have reported seeing price reductions in the asking prices of homes for sale. This is the first time I have heard of this in years and years. So, are real estate values about to correct? It probably depends on where you live. And of course, as with many of life’s answers, the answer is a matter of degree. Some markets may be in for a large correction, some a small correction, and some markets may still experience price gains.
Should they adjust the price of their home due to interest rates rising?
Property taxes are a part of the cost of owning a home. When you buy a home you not only have the cost of the monthly mortgage payment. You also need to consider property taxes, homeowners insurance, any HOA dues, maintenance, and utilities.
What amount will I owe?
Many people wrongly assume property taxes are a fixed cost. They believe whatever amount is billed when you first buy the house, is what the amount will be for the life of owning the home. However, property taxes can change quickly after buying a home. Most counties assess property value annually, and adjust the amount due annually.
Do you know how to make an offer on a house? It’s simple, right? There are many things to consider when you are making an offer on a house. When it comes to making an offer there are some key things that can make a difference! Below are some important topics related specifically to the mortgage when you’re getting ready to write up an offer on a home.
When sellers set an asking price for their home I always imagine big dollar signs in their eyes. Most human beings suffer from wishful thinking and confirmation bias. How should you price your home: high, low or right at market value? In other words, should you overprice or underprice, or price it right at market value? If sellers are underpricing they may hope to sell faster, or hope for a bidding war. Overpricing a home may allow you to get more for your house than it’s really worth with luck and hope that one buyer loves your home. Underpricing or overpricing your home can be a gamble. And the best thing you can do is come to terms with how much your house is really worth.
Most people that own a home make some home improvements. Some home improvements are modest and some are substantial. It is important to get some enjoyment from whatever improvements you make, but it is also important to remember to watch the economics of your projects. Many people don’t consider the return on investment when they take on a renovation project, and some people make poor assumptions about how much they will get back from their cost to remodel.
I have lately had a few appraisal problems that I hope does not turn into a trend. The inventory in the DC Metro area is at the lowest point it has ever been since these sorts of inventory statistics have been tracked, starting 16 years ago. The problem, which is far from alarming at this point, is that little inventory means there are not as many sales as there could be. This means there is not as much turnover as there could be. Less turnover means when a house does sell and the appraiser goes looking for recent comparable sales to support the purchase price, there may be a problem finding enough comps to support the purchase price.
Not many people realize that their home’s property condition needs to be 100% complete to get financing on it. I see situations more than you would think where a property is not 100% complete and we run into troubles getting the financing approved. I know it sounds silly that settlement on a $300,000 mortgage on a home valued at $400,000 would be held up because the property doesn’t have any railings on one stairwell. But that is the case.
What’s the reason?
I have cited numerous times on this blog that the reason for this is that the Fannie Mae rules on property condition are rigid. They allow for no leeway…at all. I mean not at all. I will give you a few specific examples.
Missing flower boxes
I recently had a purchase loan where the client was borrowing $417,000 on an $865,000 purchase price. That is right, they were putting over 50% down. You would think that there would be some latitude on the condition of the property. But that was not the case. This property was a recent renovation by a developer who did a very nice job. The developer ran out of time. A day or two before settlement there were a couple of flower boxes and areas where shrubbery was going to go in that were not complete. The underwriter would not let the loan go to closing because the landscaping was not 100% complete.
That is a Fannie Mae rule that nobody will work around. Again, this was a 50% down payment loan, with an excellent credit score, and everything else in the loan was in order. No leeway, no latitude, no exceptions. The developer had to scramble and plant the shrubs and flowers and we did manage to go to settlement on time. But it was a last-minute fire drill when it should not have been one. The developer even asked if we could hold back some of his profits at settlement and put some money aside in an escrow account to finish the landscaping after settlement. And Fannie Mae no longer allows escrow accounts for completion of any items. Literally nothing can be escrowed. Fannie Mae wants 100% of the work completed.
An ongoing renovation
I also recently had a call on a potential refinance. The borrower wanted to do a cash out refinance and get some cash out to help him pay off and finish some renovations he was doing. But the potential client told me that he had recently started these renovations. He wondered if that would be a problem. He told me, “The 2nd phase of demo has begun. The staircases currently have no railing. One wall has been removed to open up the floor plan on the 1st floor. The ground level flooded a few years back so that hardwood floor warped. I removed it exposing the concrete slab below. I’d be willing to do a walk-thru with an appraiser or you to get an initial thought regarding whether it would be worth our efforts at this point. Let me know your thoughts.”
Of course I already knew the answer, and so do you. Fannie Mae will make no allowances for anything that is incomplete. Unfortunately I had to tell the client to finish the renovation on his own with his own money. And then we could look at doing the refinance after the property was 100% complete.
So be aware, there will be no exceptions, not for the least little incomplete item no matter how inconsequential. A property should be 100% complete to get a mortgage on it, at least through the traditional channels of Fannie Mae, Freddie Mac, FHA and VA. And of course we all know that those traditional channels are the only game in town at this point.
Below grade square footage is an interesting topic. The Basement Is Part Of The House, Or Not? I have recently had a re-occurrence of an appraisal issue that keeps repeating itself. I am not sure if its part of the tightening of underwriting standards, or if it’s logical. But I’d like to explain the recent issue so everyone can be aware of it.
Tidewater Notices on VA Loans? If you have never even heard of a Tidewater Notice you are probably wondering, what is a tidewater?! I know the first time I heard the term I was confused. My first thought was, “The property isn’t waterfront. What are they talking about tidewater for?
Tidewater Notices on VA Loans
The Tidewater process by the Department of Veterans Affairs (VA) gives borrowers a way to try to combat a low appraisal valuation before it is even official. VA appraisers can notify the lender that it looks like the home’s value will come in below the purchase price. This is known as invoking the Tidewater Initiative, or Tidewater for short.
I sometimes get asked about waiving one or all contingencies in a real estate contract. This helps make for a more aggressive offer in a competitive sellers’ market. The main contingencies in most real estate contracts are the appraisal contingency, the financing contingency, the termite inspection contingency, and the home inspection contingency. I am not a proponent or an opponent of any of these strategies. I simply want to discuss the pros and cons of each since it is a question I do get. Let me take these one at a time.
I sometimes get asked about waiving one or all contingencies in a real estate contract. This helps make for a more aggressive offer in a competitive sellers’ market. The main contingencies in most real estate contracts are the appraisal contingency, the financing contingency, the termite inspection contingency, and the home inspection contingency. I am not a proponent or an opponent of any of these strategies. I simply want to discuss the pros and cons of each since it is a question I do get. In this blog I’d like to discuss waiving the Home Inspection contingency.
When a homebuyer is getting a mortgage to buy a new home everyone seems to be on pins and needles waiting on the appraisal. When the appraisal does come in if the appraised value is below the contract price the response is usually alarm from the realtors. And confusion by the homebuyer. At that point there is a lot to talk about and coordinate.
Who knows more about a home appraisal? Realtors often think appraisers are not the most accurate assessors of real estate values. And appraisers often think realtors know less than they do. Maybe they are both right? I have had appraisers admit that a good realtor will likely know more than an appraiser about the value of a certain home. This is because most appraisers are appraising a wider geographic area a than a realtor may specialize in. Many appraisers cover a multi-state area. Whereas a lot of realtors specialize not only in one state. Also maybe only in one city or town. So, it is hard to expect
I recently had an appraisal come in recently for a loan application and it was slightly below the contract price. The listing agent complained that the problem was that the appraiser came from a great distance and must not have known the local market. When an appraiser calls to schedule an appraisal inspection the realtor always asks them, “Where are you coming from?” The realtor is trying to surmise if they are local or not. Does an appraiser need to be hyper local to the property to appraise a home?