The Value of the Appraisal

new-homesOne of the biggest challenges to buying and selling a home in the current real estate market is obtaining an “accurate” appraisal.  It is probably the single biggest fear in a transaction for buyers, sellers and agents alike.  There were many reforms and legislation put in place after the real estate meltdown in an attempt to avert any future disasters.  Unfortunately, the result of over-legislating can sometimes result in unintended consequences.  Not the least of which the current appraisal system.  Bob Saltzman from Everbank does a good job of summing  it all up in this week’s installment of his newsletter.  You can reach Bob anytime to learn more about the mortgage process, and get qualified for a home loan.  As always, you can reach me anytime to help you find the right home for you.

All the best! Chris Henry

Appraisal Apprisal 

This week I had a borrower that I preapproved for an FHA loan select a Fannie Mae REO property to purchase.  As the astute among you know, that means HomePath eligibility:  No appraisal, and no PMI.  Because my borrower had an 800 plus credit score and more than adequate cash to close, he was a great candidate for a Homepath 95% loan.

I thought my buyer would be thrilled with the news. His immediate concern:  there would be no appraisal.  As I explained why this should perhaps not be a major concern, it dawned on me how much the appraisal industry has changed on two fronts:  the Dodd Frank Act’s unintended consequence of dumbing down appraisal quality and consistency, and the awkwardness that a rapidly appreciating market creates for the backward looking instrument a property appraisal is.

Consider that a legitimate comparable sale should have typically closed in the last 6 months.  Even if a comp is 3 months old, the contract for that sale may be 6 months or more old.  If a shortsale, which were more than plentiful in the recent past, the contract may be from a year ago, hardly reflective of the value rebound we’ve experienced  of late.

The appraiser is tasked with ascertaining  value based on the closest sales in physical proximity, recency of sale, and similarity of size, effective age, amenities, like a pool, site quality, etc.

However, a $125 per square foot neighborhood is likely to yield a $125 per foot appraisal give or take.

The appraiser has the benefit of walking through the subject property only.  He’ll take photos of maybe every room.  The comps:  Just the front of the home.  Thus, the home most likely to underappraise is the beautifully finished and maintained home, not the bare bones, neglected train wreck  of a home a block or two away.

The point: While an appraisal can make or break a deal, for a buyer to rely on it as gospel is a mistake, just as it was at the start of the downturn in the reverse of our current situation, when a  house that was worth $300k at best was still appraising for 400k plus easily.

Not helping matters is that instead of a loan originator choosing the best appraiser to entrust a particular appraisal to, as was the case pre melt down, the Dodd Frank regulations require a degree of separation of the originator from the appraiser.

Whether one agrees with the legislation or not, the result is that many appraisers earn about half of what they formerly earned per appraisal, the rest being extorted, rather retained by the third party “AMC” (Appraisal Management Company), so to earn the same income they previously did, appraisers have to bang out a lot more work.

We still have to leave the appraising of the property to the appraiser when financing is involved despite the above issues.  But appraising the value of the appraisal and explaining this to our buyers  is very much up to us!

Valuing your business and readership incomparably,      Bob 813-787-7711

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Chris Henry