Loading ...There has been tremendous fallout from the sub prime & mortgage market meltdown. Lenders have tightened up underwriting criteria, and are demanding higher credit scores. Downpayment requirements have increased, and most of the high risk “stated income” loans have gone by the wayside. There is, however, no truth to the rumor that the major lenders now demand your first born child as collateral as well. Needless to say, the stricter lending environment has had a direct impact on the local real estate market. And once a buyer and a seller agree on price and enter into a contract, the challenges are not over.
Appraisals have become an issue for many transactions now as well. Lenders have been stung by overly optimistic appraisals, and even out right appraisal fraud. During the wild and frenzied market of the early 2000’s, when money was cheap and plentiful, appraisals struggled to keep up with the surging prices. Appraisers have to use data on closed sales, which means in a rapidly increasing market, by the time the comparable sales close escrow and become viable for an appraiser, often they were behind the market. Appraisers were forced to compensate for the rapid price moves by using adjustments for market conditions. They were forced to use adjustments to compensate for differences between the subject property and the comparable sales, and many times these adjustments added 10% or more to the property value in order to bring the appraisal in at the sales price, which was often bid up over asking price. And in cases where there was outright loan fraud on the part of the borrower, the appraisal had to be inflated well above market value (again using shaky comparable sales and excessive adjustments) in order to give the fraudulent buyer money back at the close of escrow. While it certainly was not always the case, many times lenders on non-performing loans or loans in default found that the appraisals contained excessive adjustments and inaccurate data.
As is often the case, the pendulum has now swung back the other way. Lenders are very diligent in analyzing appraisals, and now have tightened up the requirements for appraisals to be valid. They are requiring that the appraisals have comparable sales within the last 90 days that are within the immediate neighborhood of the subject property. And in cases where the appraiser is using excessive adjustments to the subject property because of poor comparable sales, the lender is often adjusting the appraised value downward during the review and underwriting process. This is causing some deals to fall apart during escrow, or forcing sellers to renegotiate the price to reflect the lower appraisal. Most troubling is that the appraisal review process can often occur at the 11th hour, catching both the buyer and seller by surprise.
So how do you protect yourself? As a seller, it is imperative that your agent inquire with the lender about the status of the appraisal, and whether there is an appraisal review that is part of the underwriting. On all loans appraisal reviews are commonplace, and sometimes lenders even require two separate appraisals on large loan amounts. Until the loan has made it through the lenders underwriting and appraisal review process you might not have an escrow that will close.
As a buyer, your agent needs to be extra diligent in how and when they remove the appraisal and loan contingency. You might get a loan approval from the lender, but again you need to make sure that it is not subject to an appraisal review. You should not remove the loan and/or appraisal contingency until you know that the appraised value is approved by the lender. Otherwise, you might find yourself in the position of removing your loan and appraisal contingency, and then finding out that the appraised value has been reduced by the lender.
The properties that have the most difficulty are homes that sell above recent sales in a neighborhood. Homes that are larger, or more upgraded, or have spectacular views and amenities should be expected to sell for more than other homes in the same neighborhood. But when it comes time to have the lender approve the appraisal you might have issues, since the appraiser will have to use large adjustments in the value to justify the higher sales price. And the lender very well may knock down the appraised value of the home during the review process, even though the home is clearly worth more in the “real world”. As a rule, you should have your home “bracketed”… in other words, there should be some homes in the immediate neighborhood that have sold for more than your home, and other similar sales of homes at the same price or less so that the lender has a good range of value behind the appraisal.
So if you have an over-improved home, or a home that was added on to that is now larger than the other homes in the neighborhood, you might have some problems with the appraisal when it comes time to sell, since it will be difficult to find comparable sales in the immediate neighborhood. So you might want to think twice before you put in that Resort sized pool with a water slide and swim up bar, or that $60,000 outdoor kitchen, or the tennis court, etc. While it is always cool to own the nicest home in the neighborhood, you might not be smiling when it comes time to sell, and you have to justify the appraised value to the lender.
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Comment posted by Verbal Verbal
on June 26, 2008 at 11:23 am
This is really helpful. Thank you!