Recent Blog Posts
The Unspoken Appraisal Problem
As lenders, buyers, sellers, and real estate agents, the big unknown after a deal is put together is the appraisal. A proper pre-approval can smooth out the other components of the mortgage approval (income, assets, and credit- even title issues can be uncovered before the contracts are signed), so the only “unknown” is the appraisal.
The spoken challenges:
- An appraised value has always been loosely defined as “what a reasonable buyer would pay to a reasonable seller”, meaning that both sides were of sound mind and under no external pressure. But in today’s environment of foreclosures and short sales, the whole concept of “reasonable” is muddled. So, appraisers are challenged, through no fault of their own, in determining a home’s value because they can’t ignore the data and the distressed transactions, but should they be considered “reasonable”?
- Add to it the prevalence of seller’s concessions today (wherein the seller agrees to pay the buyer’s closing costs) and the appraiser is faced with a further dilemma> If the seller is willing to pay $10,000 of the buyer’s closing costs, doesn’t that mean that they believe the “reasonable” value of their home is less than the actual price? Many will argue that the seller’s merely looking to make their home more financially attractive to solicit more interest in it, creating more competition, and thereby securing the highest price for themselves.
So, appraisers are in a difficult position, for sure. But, there is a problem with appraisals today that goes beyond a property’s worth. It’s the unspoken challenge.
With the advent of post real estate bubble regulations (predominantly HVCC in terms of appraisals), most lenders order their appraisals through a third-party company. This company gives the appearance of independence- a company immune to the pressures of a loan officer or a real estate agent who might push a value too high. But, in fact, many of these Appraisal Management Companies are owned or controlled by the lenders themselves. And these AMCs don’t actually do the appraising. In many cases, they subcontract the work out to actual appraisers, but only pay them a fraction of the monies collected.
So, appraisers, besides being under tremendous scrutiny, today have a tougher job and they are asked to work for less money. Is it surprising that they would be conservative in their evaluations? The bubble was not the appraisers fault. There were multiple reasonable buyers willing to pay the prices in 2006, and the values reported were valid at the time. The appraisers didn’t create outrageous underwriting guidelines that allowed too many unqualified buyers to bid on those homes.
Let’s get rid of HVCC and let the appraisers do their job; otherwise, home appraisers will not be showing appreciation in any real estate market.
Are Free Credit Score Offers Really Free?
If you spend any time online, you have surely seen the many ads offering free credit scores. I also get several pieces of junk mail in my mailbox and see a lot of commercials for these different services. It sounds like a good deal, except credit scores are never really “free”. You will pay one way or the other for these advertised businesses.
To get your credit rating from one of these companies, you will have to sign up for one of their services, usually a credit monitoring service. It is not necessarily a bad idea to have one of these services running in the background. It can help protect you from identity theft, and alert you anytime your credit is checked by businesses that want to offer you a pre-approved credit card or loan.
If you do not want to join those credit monitoring programs, you can pay a one-time fee to see your credit score on the official FICO website.
There are two ways to receive your credit report for free:
1. Lender denies you credit. A new law that went into effect in 2011 makes your report available anytime you are denied credit. You will probably have to submit something in writing to receive your report but by law they are required to supply it to you. This is a good thing for consumers put in that unfortunate position, as it will eliminate any mystery surrounding a consumer’s credit rating. You will not see your score but you will be able to verify the validity of the information on your report.
2. AnnualCreditReport.com. This free service from the Federal Trade Commission offers a once-per-year service to help consumers stay abreast of their credit report. This is a great opportunity to verify any new marks and ensure there are no mistakes you need to dispute. Your credit score will not be included in the free report but you will have the opportunity to purchase the score or view your free report.
The very best thing you can do is maintain the finest credit history you can. The higher the credit score, the lower the interest rate in many cases, especially when it comes to credit cards and auto loans.
If you must know your actual credit score, go ahead and pay to get it.
Here are the websites for the Big 3 credit companies:
The Top 5 Reasons Deals Fall Apart
I’ve been told that 29% of all contracts signed never make it to the closing table- that nearly 3 in 10 transactions where a buyer and seller have come to terms (no easy feat in this market) fall apart. In a more normal market, I would say 90% of deals close. So, I figured if I could point out some of the reasons deals are crumbling, maybe those putting them together could prevent some of the challenges.
- Short Sales – In theory, they sound terrific because the buyer can low-ball an offer. They get little resistance from the seller (because the seller isn’t getting any money out of the deal anyway). However, the existing lender isn’t just accepting any offer. Appraisals are done and scrutinized. Lenders are not agreeing to deep discounts. Additionally, the lenders are still, in many cases, taking months to make decisions and many buyers are losing patience and withdrawing offers (and finding another house).
- Appraisal Issues – It seems that there are more appraisals coming in short than has been the case historically . Conceptually the value of a home has been loosely defined as “what a reasonable buyer would pay to a reasonable seller”. With the market including so many “unreasonable” sellers (short sales, foreclosures, distressed situations, etc.), many of the comparables used for an appraisal are dragging the numbers lower than they should be.
- Title Challenges - The analysis of Permits and Certificates of Occupancy are at an all time high. Judgments and liens are more prevalent amongst buyers and sellers. The complications on title are messing up and delaying deals.
- Poor Pre-Qualifications – Many deals were never really deals to begin with. Loan officers need to take more care in reviewing tax returns, pay stubs, bank statements, contracts, and such before issuing pre-approvals and taking in applications. Simply not seeing unreimbursed expenses on the tax returns can kill a loan.
- Unforeseen Circumstances – It seems there is an inordinate amount of unusual stuff coming up- buyers losing a job, credit challenges arising as a loan is in process, property damage, buyer’s remorse. Everyday seems to bring a new one.
Many issues are visable up front if people really look at them (some are not). Those that can be seen usually are seen by the top professional real estate agents, loan officers and attorneys. Many, when addressed in the beginning, can have happy resolutions. It’s just another reason why you need to be associated with the best people you can find.
