New rules for home appraisers implemented a few months ago following the housing market meltdown are causing buyers/sellers, realtors, home builders and mortgage companies further pain in the already depressed housing market. Not only are appraisal costs going up for home buyers, but nearly 60% of home builders are running into problems with appraisals and 26% of the builders surveyed said they have seen sales contracts fall through because the appraisals are coming in below the contract price, according to the National Association of Home Builders.
The new guidelines, dubbed the Home Valuation Code of Conduct, are meant to eliminate conflicts of interest that created pressure on real estate appraisers to inflate the value of a property. Lenders, agents and brokers have been known to pressure appraisers to “hit the number” that the homebuyer and seller agreed on so the deal would close and everyone could collect their fees. Inflated appraisals were partly blamed for fueling the housing bubble.
Under the new rules, mortgage brokers cannot order appraisals themselves, forcing them to do so through a mortgage lender. Lenders may order appraisals through in-house staff or appraisers hired by outside firms known as appraisal-management companies. But neither may talk to the appraisers about the value of the property they’re evaluating. Since they went into effect May 1, the rules have created a slew of unintended consequences that critics say are causing delays in closing sales, or undermining sales because botched appraisals are coming in too low.
“This thing is not only preventing the housing market from recovering, it’s destroying the housing market,” said Marc Savitt, president of the National Association of Mortgage Brokers. “We’re eliminating competition, and we all know what happens when you eliminate competition: Prices go up.”
How the Appraisal Process Works: After a home buyer and seller agree on a price, the buyer applies for a mortgage. The lender then orders an appraisal to ensure the value of the property, because if the borrower defaults the property will be sold to satisfy the debt. The appraisal fee, which can run between $250 and $500, is usually paid by the buyer. To determine what a home is worth, the appraiser compares prices of similar homes that were recently sold in the area and makes adjustments for different features, such as a swimming pool or extra bathroom. If the property appraisal comes in below the agreed upon price, the buyer usually has to make up the difference and may instead walk away.
An example of the distorted nature of appraisal costs is from a recent USA Today article which brings us the story of Suzanne Wilhelm, who has been trying to sell her home in Henderson, Nev., for six months, blames an appraisal done under the new rules for scuttling what had been a done deal with a buyer several weeks ago. The appraisal valued her four-bedroom, 2,000 square-foot house at $190,000; $45,000 less than the price the buyer agreed to pay. Wilhelm, who paid $187,000 for the house in 2001, believes the appraiser based his estimate on the sale of several foreclosed homes in the area but ignored sales of regular homes that would have reflected a higher price. “It’s very unfair that we’re put into the same bracket as those people who were so irresponsible in buying their homes,” said Wilhelm, a teacher.
If you are in the process of selling your house, be ready to face “appraisal shock.” To try and mitigate this order multiple independent appraisals, which puts you in a stronger negotiating position with the bank and potential buyers. You can also work with a potential buyer to take an average or multiple appraisals for the property (which you can help pay for) in order to give all parties a much better idea of the home’s price and ensure that a sale goes through.
~ Seven Ways to Avoid Banks Taking Your Money in Fees and Charges
~ Will my Mortgage now Qualify for Refinancing under Obama Housing Plan
~ FHA vs Conventional Home Loan – Comparing the Difference
~ Buying a Home in the Current Market