What Passes For An Appraisal Today

As I wrote about yesterday the new Home Valuation Code of Conduct or HVCC is wrecking havoc on thousands of buyers and sellers of real estate in its first two months. According to a recent survey by NAR 37% of their agent members had already experienced a lost sale due to this new rule in just the first two months of this rule. Today, I want to cover two things: first, what passes for an appraisal today and second how to protect yourself.

I was talking with my best appraiser Jim Boehm this week about the HVCC and its effects. I have worked with Jim for 8 years and he is a great and honest appraiser.

Jim said he and The Appraisal Institute is hearing stories of what passes for an appraisal at many large Appraisal Management Companies with the BIG banks.

*The appraiser never visits or sees the home; instead some other lower paid employee visits the home and takes pictures.
*The information about the lot is pulled from county records, MLS data, Google Maps, etc.
*The appraiser may pull more pictures of the home from the MLS.
*The sketch diagram of the interior of the home is pulled from county records if available; if not available, apparently the sketch diagram is "created".

*Appraisers are often located many miles away from the property and have no familiarity with the neighborhood.

You may be asking yourself, "why is this happening?" First, let me tell you from personal experiences BANKS ARE CHEAP! They are always looking for ways to save money. Because of their cheapness BIG banks are having a very difficult time hiring appraisers. The BIG bank may charge you $450 for the appraisal; but they only pay the appraiser $175. Thus, they get lousy; but, cheap appraisals.

Word for the Wise—Don't choose a BIG bank as your lender either at your local branch or from mortgage brokers who use wholesale lenders. Your home, your dreams, your sanity, are at stake!

Personally, I refuse to use any of my wholesale lenders on conventional loans because I don't know what I am going to get from the appraiser. Normally, I almost always close loans as a Banker in our company's name which gives me more control. I don't get to choose the appraiser anymore; but I know as a company we did a great job of choosing our roster of 25 highly experienced and competent appraisers to minimize problems and issues for you.

How 37% Of All Home Sales Did Not Close

The National Association of Realtors recently surveyed their members about the effects of the Home Valuation Code of Conduct or HVCC on their business in the first two months of this new rule. The HVCC eliminates the ability of the mortgage professional from ordering your appraisal with a professional appraiser that he or she knows and trusts to do good work.

This new rule came about after NY Attorney General Andrew Cuomo sued WAMA and its Appraisal Management Company or AMC that it owned for negligent and inflated appraisals in the state of New York. Mr. Cuomo then went after Fannie Mae and Freddie Mac too for not protecting borrowers and the public from this problem. Let's be clear about the problem, the problem was inflated appraisals created by the Appraisal Management Company or AMC that WAMU owned.

Mr. Cuomo's solution to this problem is to require every bank and mortgage lender in the country to form a AMC of their own or create a separate department within their firm to handle the appraisal process.

Mr. Cuomo did what ONLY a politician could do--solve a problem wherein the solution to the problem is the very thing that caused the problem! See the irony? The problem was the AMC which was owned by the bank, now every bank and lender is required to use an AMC which may be owned by them. This is like telling a drunk we are going to get you to quit drinking, by having you drink MORE. It's a stupid idea that only a politician could fathom. To make matters worse the AMCs are NOT regulated either whereas the bank or lender is.

After this background information on the HVCC, here are the results of the NAR Survey--

* 37% of their members have already lost a sale due to an appraisal that came in below sales

price. This was just in 2 months!

* A majority of Realtors reported that the appraisers were out of the area and not familiar

with the neighborhood.

* The appraisers did not use true comparables for their sales data because they were not

familiar with the area; thus the appraisals came in low.

You may be thinking "big deal". Here's why it is a big deal--each of those Realtors represent a buyer or a seller in the sale of a home. 37% of all homes where the buyer chose a conventional loan, the deal fell apart and did not close. Dreams shattered! Moves cancelled! Families split apart! This is shocking news!

So, how do you keep it from happening to you? I will write about that tomorrow along with a story of what now passes for an appraisal with the big banks and their AMCs. You won't want to miss my next post.

Denver Soon To Be a Seller's Market?

The widely publicized Case-Shiller Index was published yesterday with sales results from May. Nationally, the 20 city index showed its first monthly increase in nearly 3 years as the average home price rose by .50%. Here in Denver the average home price increased 1.3% from April, more than double the increase nationally. For the last year the Denver market is the second best performing market in the country with an annual decline of just 4.6%.

Jeff Thredgold, economist for Vectra Bank Colorado noted that our economy is transitioning from recession to growth currently, which is a very good sign.

"With less than a three-month supply of homes priced lower than $200,000, it's not surprising Denver is showing the second-smallest decrease in year-over-year pricing," said Lon Welsh, managing broker of Your Castle Real Estate. By the way, Your Castle Real Estate has the best statistics and reports on our local real estate market.

The market for homes under $200,000 is quickly changing into a Seller's Market with this low amount of inventory available. We may have forgotten what a Seller's Market is here in Denver. Let me remind you, when my wife and I bought our first home in 2000 during the last Seller's Market we got into bidding wars on the first 2 homes we wrote contracts on and lost them. We were able to buy the 3rd one without a bidding war because we found the home listed in the paper, not the MLS in its first weekend on the market.

I also remember advising all my first time home buyers then to buy a home as soon as possible as prices were rising 10-15% a year. Why? They could not save enough money fast enough to keep pace with the rising prices of homes. For example, you wanted to buy a $150,000 home and you wanted to wait a year to save more money which can be a wise decision. However, back then in another year that home would be priced at $170,000 and unless you could save $20,000 in a year you were going backwards. A final reminder from that Seller's Market, interest rates were above 8% that summer!

Is Homeownership Still A Good Idea?

Many pundits in the national media have begun to write off owning a home as a wise financial move for Americans. In fact, some people now believe that renting is a better long-term strategy. Let's look at two statistics--

• HUD or Housing and Urban Development reports that the average rent payment increase is 5.31% a year at a national level over the last 30 years.
• In Denver the average home price has increased 6.4% a year since 1971 according to MLS data from Your Castle Real Estate.

Currently, the median Denver home price is about $238,000. The average 2 bedroom 2 bath apartment rents for $1,056 a month as of the fourth quarter of 2008 (Source: Dr. Gordon Von Stroh at the University of Denver).

Thus, in 10 years the average 2 bedroom 2 bath apartment in Denver will probably rent for about $1,771 and the median home price could be $442,581 an increase of over $200,000! Even if prices rise just 4% a year, the median home price would be $352,000 in 2019. As a renter you are subject to rising rents on an annual basis; whereas, if you own a home and have a fixed rate mortgage and your monthly mortgage payment does not change!

Plus, as a homeowner you have the possibility of future appreciation, tax benefits, pride and joy of homeownership. A recent survey by the National Association of Realtors revealed that 83% of Americans still believe that homeownership is a good financial decision. Do you agree?

Denver Home Prices on the Rise

Here is the most recent data on Denver real estate from The Denver Post--

• In June the number of homes sold increased 15.4% from May.
• The median price increased 8% in June to $237,500 from May.
• The median price in June was 3.3% higher than it was in June 2008.
• Housing inventory remained steady at 20,853 homes which is down 20% from a year ago.
• Inventory in June is now at 4.98 months.

It appears the Denver housing market is beginning its long road to recovery as a bottom was reached earlier this year. Our market for the last few years was a Buyer's Market; but that could be changing soon depnding on your price range.

Normally 6 months of inventory is considered a stable market in which neither the buyer or the seller have an advantage. Nationally, nearly 10 months of inventory exist, putting buyers in the driver's seat. Here in Denver there is now less than 5 months of inventory available which is usually a sign of a Seller's Market and higher prices soon to come.

For homes priced under $100,000 there is almost no inventory available today as the supply is under 1 month. For homes priced under $200,000 inventory is under 3 months and sellers are receiving mulitple offers on their homes. Thankfully, these sellers are still willing to help pay the closing costs of buyers; but I expect this will change in the next year. Thus, this is another reason to act now!