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Real Estate Transactions Have a New Thorn in Their Side – Appraisals

Do you remember the days when a home would come on the market in the Tri-Valley, get ten offers and sell for $100,000 over the asking price?  I do.  I was involved in numerous transactions where homes sold well over their listed price.  Did you know that in order for these homes to be finalized and actually record as a sale - an appraiser was part of the process and their requirement was to determine the value of that property? In many cases, the value of the property was appraised at over the asking price. Unfortunately, this unrestricted approach to appraisals has come back to haunt us.

The previous appraisal process has fallen under significant scrutiny and the result is a 180 degree switch.  Appraisals are causing havoc to the real estate community in a new way.  This new appraisal mess isn’t picking sides.  Both sellers and buyers are impacted negatively.  Here is what is different.

On May 1, the Home Valuation Code of Conduct or HVCC came into affect. This changed the appraisal rules for conventional loans, Fannie Mae and Freddie Mac. The primary impact is that the loan officer no longer directly selects the appraiser and Realtors are not allowed to provide information to the appraiser that could influence the final appraised value.  For example, imagine a home pending at a contract price for $600,000 and in phenomenal condition.  It has upgrades and a great location.  Now, picture the identical floorplan that sold 30 days ago for $550,000.  This home was an REO, backed to a busy street, the appliances were stripped out of it and the condition was horrible. There is a high potential under the new rules that this home won’t appraise for what the willing buyer and seller have agreed the home is worth under an agreed upon contract.

Here may be one reason why - a problem we see resulting from the new rules is that appraisers are being selected from outside of the area where the property is located.  For example, a Manteca appraiser could be asked to appraise a property in Dublin. The result of this could be devastating.  An appraiser unfamiliar with local trends may not know enough about the comparable homes.  Couple this with the appraiser’s inability to ask the local Realtor area expert about comparables and any distinguishing factors about the home, and this could potentially stop a deal in its tracks.

In my next article, I will be describing steps to take to protect yourself, as both a buyer and a seller, in the appraisal process.

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