http://www.realestateappraisertips.info/ – Realtor.org Releases Tips To Keep Appraisal Issues From Stopping Your Deals…This Home Appraiser Has Some Tips As Well.
Here’s This Home Appraiser’s Tips To Keep Appraisal Issues From Stopping Your Deals:
1.) Apply “Declining Markets Adjustments” To Price Your Listings Accurately……The Appraiser Will. Why Are Appraisers Applying “Declining Markets Adjustments” to their sold comps, per National Appraisal and Lender Guidelines, and some Agents don’t even know that “Declining Markets Adjustments” exist? I was reading here recently on Active Rain about Agents that are shocked by “Low Appraisals”, some because of this new term, “Declining Markets Adjustments”. On 8/3/2009, Active Rain sent out this national email: “Under Appraisals! The Next Shoe To Drop?“. In this post, Dean Moss, describes what seems to be a new phenomenon and says, “In the average neighborhood of Chicago, our Team has seen appraisers apply a one-percent depreciation factor per month to their appraisal reports. So, for example, a house appraising for $200,000 on May 1st, would now, theoretically, value at $197,000! ” Why is this a new phenomenon to some Agents? Haven’t some housing markets been declining now for almost 1.5 to 2 years? Did you just expect the appraisers to ignore obvious market trends and not apply “Declining Markets Adjustments”? Why is there a disconnect between Agents and Appraisers on this such obvious issue? I mean, if one looks at the housing market chart below, prepared from MLS data that both the Agent and Appraiser both have access to, one can clearly see the steep dropoff of pricing since 8/2008. Yet, there are still Agents out there that will price their listing as if it were the year 2007 or 2008. And, some of these Agents are the ones crying foul or “Low Appraisal” when it’s obvious that some ignored the declining market when applying that listing price.
FNMA 1004 MC. This Chart above is what appraisers use to complete the new Fannie Mae Form 1004MC, effective 4/1/2009. The “Low Appraisals” Issue didn’t begin with HVCC. It began with the 1004MC. The 1004MC provides numerous “sub-market” trends, those solds and listings that are actually comparable to the subject property, as opposed to general trends, which could be rosier and more broad. The 1004MC provides such trends as months supply of housing on the market, listing to sales price ratio, absorption rate, total comp sales and listings within past 12 months and opens the eyes of the appraiser regarding the prevalence or lack of seller paid concessions. For instance, the S.M.A.R.T. Appraiser software I use breaks seller paid concessions down into Percentage of Sales With Contributions and Percentage of Contribution To Sale. When both seller paid concessions and percentage of contribution to sales reach near 100%, then I know there is extreme seller motivation or duress in that market. THIS IS WHY I HAVE STATED: An 18-Month Moratorium Of HVCC Isn’t Going To Entirely Solve The Low Appraisals Issue. Both Appraisers AND Agents must be truthful and responsible in defining market trends and pricing accordingly.
2.) If About Half Of US Mortgages Will Be Underwater By 2011, then shouldn’t Agents be more realistic in their listing prices, be more clued in as to the perhaps declining markets they serve? The Lending Market Is. Reuters Just Released: “About Half Of US Mortgages Underwater By 2011″, see here. The article states: “NEW YORK (Reuters) – The percentage of U.S. homeowners who owe more than their house is worth will nearly double to 48 percent in 2011 from 26 percent at the end of March, portending another blow to the housing market, Deutsche Bank said on Wednesday.” “Home price declines will have their biggest impact on prime “conforming” loans that meet underwriting and size guidelines of Fannie Mae and Freddie Mac, the bank said in a report. Prime conforming loans make up two-thirds of mortgages, and are typically less risky because of stringent requirements.”
3.) Don’t Price The Listing Based On The Seller’s Price Or What The Seller Wants Just To Get The Listing…..Price The Listing Based On Solid Recently Sold Comps And Pending Listings Adjusted To Local Listing-To-Sales-Price-Ratios. And, have those comps in your listing workfile. I can’t tell you how many times, PRE HVCC when appraisers were able to call Agents after the appraisal inspection, when I would be appraising a purchase where I needed to find out the comps used to market the home that high. Instead of reaching into their workfile, the Agents would get on the computer and send me an MLS CMA of 10 active listings (not pendings) and 6 sold comps, which had sold over 6 months ago and some were 500sf smaller in living area size, but matched the listing prices price per sq. ft. (not by any stretch of the imagination an apples-to-apples comparison). By them sending me a current MLS CMA from that day (the date is on the printout), I knew some of them had not done their homework and how much weight to give to their method of pricing…..not much. Appraisers know when the Agent priced just to get the listing as opposed to pricing based on market support.
4.) Don’t Just Run A Simple MLS CMA And Think You’ve Done Your Sellers or Buyers A Great Service. Deduct 100% Of Seller Paid Concessions From Each Sold Comp You Use……because the appraiser will to bring the sales price to “Cash Equivalency”. If you use a comp that sold for $299,900 having 2,500sf living area with $9,000 in seller paid concessions, then deduct that $9,000 for a net sales price for that comp of $290,900 and base your listing price on that $290,900, not the $299,900 reported in MLS. The appraiser will deduct that $9,000 as well to bring the transaction to “cash equivalency”. The true sold price per sq. ft. is $116.36/sf, not $119.60/sf.
If you’re using Pending Listings as comparable indicators, then apply the local Listing To Sales Price Ratio to that Pending Listing Price……..because the appraiser will as well…..we’re required to. Say you’re using 1 pending listing in the same subdivision, listed at $305,445 and in that market, there is a solid 95% Listing-To-Sales-Price-Ratio. What do you do? Responsibly, you would apply the 95% to the current listing price of $305,445 to arrive at support of $290,173. Get that number or support and then if you know that market is going to ask for some closing cost, adjust upward some. But beware that appraisers are deducting seller paid concessions to arrive at cash equivalency. MLS systems across the U.S. don’t deduct for seller paid concessions, so when Agents run their MLS CMAs in markets where seller paid concessions are prevalent, then the CMA results are usually over-inflated.
5.) To Avoid Low Appraisal Issues, Actually Physically Measure The Home You’re Being Paid 6% +/- To Represent. Then, own and use a sketching software that calculates the accurate living area and provide your seller with that sketch. There have been deals this year that had to re-negotiated all because the Agent just didn’t bother to measure the home they were representing….or the agent just chose to copy the previous mls sheet. One deal appraised $20,000 less than P.A. all because the Agent failed to measure the home. This was a $500K+ deal where the Agent was making a $30,000 fee at 6%. Do you think the Sellers were not upset with the Agent by losing out on that $20,000 and having to pay the Agent $30,000 for mis-representation? Probably So. The buyer was ecstatic. If appraisers are paid between $225 to $300 now AFTER HVCC (appraisal fees are about 30% lower now because of HVCC and advent of using AMCs – appraisal management companies) and are required to submit a sketch of the home, then why aren’t Agents required to do the same as part of the profession BEFORE REPRESENTATION OF THE HOME AND A PURCHASE AGREEMENT IS WRITTEN when they are paid 6% +/- of the sales price. If the average home sells for say, $225,000, that’s a 13,500 fee. If you asked the average seller if they thought that they should receive an accurate sketch of their home as part of the $13,500 fee, they would overwhelming say yes. If you asked the seller if it was OK for the appraiser to perform an appraisal of their home but just not bother with measuring the home, what do you think the average seller’s answer would be? See the disconnect here.
JUST FOR THE RECORD HERE!
MANY PROFESSIONALS IN OPERATION. I believe that in any home sale transaction, there are several “Real Estate Professionals” at work – the Listing Agent, Selling Agent, Lender, Home Inspector, Appraiser and Title Company. I believe that if after my appraisal inspection of the home, I’m coming in below the sales price, I should be able to communicate with the Listing Agent to find out exactly what was used to market the home, what comps I’m missing or may have overlooked. My understanding is that HVCC now prevents this communication with the Listing Agent, AFTER the initial home appraisal inspection. However, when setting up the initial appraisal inspection with Listing Agent, I have my staff ask for the comps used to market the property and document this in the workfile. If the Agents don’t want to provide these comps and then later complain that I didn’t give them professional courtesy, I pull out the workfile and remind them of when I asked for the comps upfront. The Hint Here: When The Appraiser Calls For The Initial Inspection Of Your Listing, Provide Them With Any Extraordinary Features Of The Home And Your Comps From Your Workfile.
HVCC. This Appraiser wasn’t for the passage of HVCC, which has resulted in appraisal ordering through AMCs, resulting in “Low Appraisals” in some cases, 30% +/- Lower Appraisal Fees For Home Appraisers And The Use Of Out-Of-Town Or In-Experienced Appraisers That Don’t Know YOUR Local Housing Market. This Appraiser didn’t need the touted “Appraiser Independence” that HVCC was supposed to be bestow on appraisers as I didn’t bow to the pressure. I fired the mortgage brokers that pressured and worked for the lenders that did not. YES, I clearly understand that HVCC has it’s problems. Yes, mortgage underwriting that requires comps that sold within 3 months and within 1 mile of subject isn’t always realistic or logical. But, from my tips above, one can see that HVCC isn’t entirely to blame for the “Low Appraisals” issue as this issue begins with the initial listing price and whether that price is realistic based on a 1.5 to 2 year history of some declining markets, supportable and RESPONSIBLE. Responsible could apply to those statements on the MLS Sheets like, “Measurements Not Warranted By Realtor or Broker”. If the Agent or Broker aren’t responsible for the initial presentation of the listing’s facts, at say $150/sf, then who is? The appraiser that later on after the P.A. has been written discovers that home is actually 200sf smaller in size and then the P.A. has to be re-negotiated? Agent-Due-Diligence has a part to play here.