Tuesday, May 19, 2009

South Bay-Beach Cities: New appraisal changes affect both buyers and sellers

Recently clients made an offer on a home where the seller is utilizing a limited service company. As part of the counter offer the seller wanted to limit the loan approval and appraisal time to 17 days. The seller had been consulting with a "friend" who told him 17 days was more then enough time to get full approval. Obviously the "friend" has not closed a transaction for some time. A few years ago when obtaining a loan was fairly easy and 30 day escrows were common it was possible to get full loan approval in 17 days and that time frame became the norm on the CAR contract of purchase.

However there have been some changes in recent months that make the old time frame no longer workable. Once I explained to the seller about The Home Valuation Code that went into effect on May 1, 2009, he had no problem with a longer time frame. The code established new rules about appraisals and that with the changes there was no way to get approval in such a short period of time. In fact as these changes work their way through the system I'm guessing you will see 25-30 days contingency periods re-emerge as normal time frames.

Since last fall when lenders started tightening up their requirements it has been difficult obtaining full approval in 21-25 days. Now with the changes in the appraisal rules it's going to take a lot longer for a borrower to obtain full approval. The new rules are going to have an effect on both buyers and sellers, so it is important that all parties understand just what is happening. The LA Times had a decent article about the new rules in the Saturday May 17, 2009 business section.

The gist of the changes is that lenders can no longer contact appraisers directly. They are not allowed to order an appraisal by calling an approved appraiser but must instead order the appraisal through a third party company. The borrower must pay the appraisal fee upfront via a credit card to the third party company before the appraisal can be implemented. That company then places the order with one of the appraisers who have agreed to work for them. Banks are not allowed to contact the appraiser at any time for any reason. They can't call up Joe the appraiser and ask where the appraisal is that was due last week. The only contact banks can have are with the third party company.

On the surface this looks to be great.. lenders can't influence appraised values. No inflated values allowed! Transparency in the market at last! Everybody wins! The problem is that , as with all government "new rules and changes", the changes may not prove to be quite as beneficial as the press announcement that preceded them touted.

There are a couple of kickers in the deal that will probably make for new legislation fairly soon. First is that appraisals are going to be a lot more expensive. The "new appraisal companies" are charging a lot more money for an appraisal as they have a lot of overhead. However they are actually paying appraisers less money. This means that experienced appraisers will probably not sign up with these companies.... making the staff for most of them likely to be newly licensed and relatively inexperienced.

The second thing, and to my mind the biggest problem, is that appraisers will probably not be local. Those of us who have been in the business for awhile remember how much fun it was to have an appraiser who lived in Barstow show up to appraise a home in the Sand section of Manhattan Beach. These guys always had trouble with how little lots and houses could cost so much. I remember one guy who thought living so close to the water was a real problem and downgraded the price because there could be rust and mold from all the damp salt air. Homes in east Manhattan often fared even worse. As a rule of thumb if there are not sufficient comps in a neighborhood the appraiser can choose comps within a 2 mile radius. Used to love getting those comps from North Redondo and Hollyglen for a home in the 1300 block of 5th Street.

So what does this mean for borrowers and homeowners. For starters if you are buying, selling or refinancing you will need to plan on a longer time frame to get loan approval. Formal loan approval is always subject to the appraisal being at the sale price or the price needed to establish value if you are refinancing. This may mean that a 30 day escrow is not very realistic so all parties need to plan accordingly.

Another fly in the ointment is that as there is no guarantee that the appraiser will be either local or experienced you can have some real issues about value. Now you skeptics out there may think this is great... lower appraised price means paying less for the property... maybe and maybe not. If the issue becomes a real problem sellers will start demanding changes in the appraisal contingency rules and will likely force buyers pay for a review appraisal if the price comes in too low. The same will be true for those folks who are refinancing... if you need a higher value you might find yourself having to pay twice in order to get a review appraisal done if the old one seems too low.

Overall the new rules or the form they ultimately take may prove to be beneficial for everyone. I would like to see the government make a few other changes... namely that all lending fees be spelled out before a borrower fills out a loan information sheet so that borrowers could really check what companies are charging.


Anonymous said...

You should send this to our congresswoman and senators.

Kaye said...

Anon 4:32,
Doubt they care much.. this was orchestrated by Andrew Cuomo the Attorney General from NY.

I suspect Mr. Cuomo has his eye on a slightly higher position in government and is making a name for himself now to enhance his future career aspirations.

Mrtkchasr said...

I am that friend that suggested the seller reduce your buyer’s loan and appraisal contingencies to 17 days from your suggested 25 days. You happened to leave out some important facts in your article. Your buyers for this property mentioned are “loan approved” and in a statement sent to the sellers you state that all the buyers need to secure the loan is an appraisal and loan review on the Purchase Agreement. This is a major hurtle to have completed before an offer is made and to schedule an appraisal in today’s market does not take 17 days to accomplish. I have closed many sales and have just scheduled an appraisal for one of my properties and had two appraisers call me with scheduling the same week. There is no need to tie up a seller’s property with a lengthy contingency period. Next time please include all facts as to not mislead your readers.

Kaye said...

Actually I did include all the facts and just to be clear no one wants to drag out the approval time any longer then necessary. All parties want the process completed as soon as possible.

You wrote.... Your buyers for this property mentioned are “loan approved” and in a statement sent to the sellers you state that all the buyers need to secure the loan is an appraisal and loan review on the Purchase Agreement. This is a major hurtle to have completed before an offer is made ... I've been in business for 30 years and have have never found a lender who would give formal loan and appraisal approval prior to an offer being accepted by the seller.

As "the adviser" you know the Buyers received pre-approval from a direct lender which means that their credit, income and cash reserves met with the lender's approval and all have been documented. Every lender then puts in as a condition of the loan being funded that the loan is subject to the lender approval of the contract, escrow instructions and the appraisal. Lenders do not give unconditional approval until after an offer has been made and those items have been approved by the lender.

If you are not a lender and wish to schedule an appraisal you can do so with no problems. However if you are the lender then you can't directly schedule an appraisal under the new rules. You must call a third party company who will make arrangements to schedule the appraiser.

Depending on the company and how busy their appraisers are you might get an appraiser out within a week but then again you might not. Under the new rules as of May 1, 2009 a lender is not allowed to contact the appraiser directly at any time for any reason. The only person who can speak with the appraiser is the third party company.

In the past I have also had many transactions receive loan approval and the appraisal completed within 17 days. However, I also was in business during the time when it took a minimum of 21 working days to get loan approval. The changes in the law are going to make obtaining loan approval a lot closer to 21 working days rather then 17 calendar days. The difference will be more noticeable for those using a mortgage broker rather then a direct lender.

I've heard from a number of agents since I wrote the post and all have agreed with information I posted. Many agents offered some interesting stories about what they are seeing in the market as far as approval times.

However these rules only apply to residential real estate 1-4 units so if your primary business is with larger units or commercial units then you may find a difference.

It seems that time will tell which of us is correct but I not only stand by what I wrote... I stand by my buyer who is highy qualified. The direct lender who qualified the buyer is currently closing a jumbo loan for me with another buyer. The escrow time frame is 36 days, The appraisal approval was done in 21 days and full loan approval received in 24 days. In today's market that is very quick by anyone's standards.

Kaye said...


I apologize but I can't publish your last comment as it contained a bit too much information of a personal nature that was related to the transaction.

I don't believe it is right to use identifying information that pertains to either r the seller or buyer without their permission.

I will leave you with this.. the seller was very gracious throughout the offer/ counter offer time frame. The buyer was very appreciative of the seller's position. The buyer and seller negotiated in good faith but could not reach an agreement on price.

If you have an issue with me we can continue this discussion offline. Please email me if you would like to debate the issue