In March, I started writing about the fact that home appraisals, and therefore home purchase transactions, were being compromised by the lack of recent sales comparables in the higher end price range on the Westside. The situation has become even more complicated, due to the fact that major lenders are now sending out appraisals to a network of appraisers, some of whom have little or no experience working in a market like this one.
In an attempt to eliminate a perceived conflict of interest, on May 1, 2009 Fannie Mae and Freddie Mac began requiring that the appraisals be ordered from a neutral third party called Appraisal Management Companies (AMC). As these AMCs were hastily set up they took on many appraisers, who are inexperienced, geographically undesirable and/or not as conscientious as we have become accustomed to. To further aggravate the situation, the AMCs are taking a substantial cut from the appraiser’s fee, so not only are the appraisers only making about 60 to 70% of the amount that they used to make but now they have no local business relationships, which makes them less inclined to be service oriented. Additionally, appraisal services used to be a two or three day turn around, where no real communication was necessary because local appraisers would simply do the job based on their experience and familiarity with the local market. We now see appraisals often stretched into a 10 to 14 day ordeal, where communication is dismal, at best. All of this has been done in order to avoid even the appearance of impropriety on the part of lenders and appraisers.
Finding the right house to buy is never easy; selling a home today is also challenge. It’s best to prepare yourself for obstacles that could cross your path so that you’re prepared should they arise.
In some markets, one in three transactions doesn’t close. This is a high ratio compared to the fallout ratio in previous years when the housing market was stronger and financing options were plentiful. In past years, most transactions fell apart over inspection issues. The biggest hitch today is financing, which is not to say that property defects don’t come into play.
For some time, lenders have tightened up on their qualifying criteria, making it more difficult for buyers to obtain the financing they need to close a sale. Recently, appraisals have become problematic, particularly in low-inventory, higher-priced neighborhoods such as Brentwood, Westwood, Little Holmby, Bel Air and Beverly Hills.
There are three components to lender approval. The borrower must be financially qualified. This requires a good credit score, sufficient cash for a down payment and closing costs, as well as verifiable income. The lender also needs to approve a title report on the property to confirm that the seller has marketable title to the property. And, the lender needs an appraisal of the property to confirm that the buyer is not overpaying.
Previously, lenders’ underwriters required three comparable sales in the area that occurred within the last six months to validate the purchase price. Due to the declining housing market, lenders now want to see comparable sales information on listings that sold and closed within the past 60 to 90 days. The number of high end sales in Little Holmby in particular has been very low in the past 9 months, making it difficult for appraisers to come up with enough comparable sales information to satisfy the lenders.
To complicate matters, some appraisers and lenders automatically lower the appraised value by a certain amount if the property is in an area that is deemed as a declining market. (Any time a property has been on the market for more than 180 days, the lender automatically deems it is a “declining value” property. Since market times in our higher end neighborhoods have been steadily on the rise, many comparables are already labeled declining value by the appraisers, affecting the properties they are being used for comparables.) This can result in an appraised value that is lower than the price the buyer and seller agreed to in the purchase contract.
What can you do if an appraisal comes in under the negotiated price? We will talk to the lender to find out which properties were used as comparable sales. We may be able to augment their report by providing the appraiser with comparable sale information that can support the contract price, particularly on private sales and especially if the appraiser is from out of area.
The most accurate appraisals are done by appraisers who know the local market well. Unfortunately, changes in the lender’s practices are resulting in more appraisals done by appraisers from outside the local area. Many lenders no longer have their own, in-house appraisers; many are relying on large nationwide appraisal services to provide appraisal services. In addition, be prepared that the appraisal times are longer than even 60-90 days ago, and make sure your Realtor® adjusts the contingency periods appropriately.
If the appraiser can’t be convinced that the appraised value is low, and the buyers and sellers want to make the transaction work, it requires a compromise. Patience and creative problem solving, in conjunction with the buyer, seller, and mortgage broker, will often yield good results. Sometimes the purchase price can be adjusted, a new appraisal can be ordered, or secondary financing from the seller may be an option.
If you would like information on your particular situation, either as a buyer or seller, please contact us at The Bremner Group.