Many people out there are wondering if we are on our way to an economic recovery. That is a good question. Many factors are contributing to our sluggish recovery, including the recently enacted Home Valuation Code of Conduct or HVCC program. The HVCC program and its regulations are lengthening underwriting times, increasing costs to the buyer and seller, and lowering property values.
Can Short Sales & Foreclosures Be Used in an Appraisal?
New HVCC regulations will affect how appraisers measure your property values.
Another question being asked today is how short sales and foreclosures affect market value. Market value can be best defined as the amount for which a property can be exchanged for on a particular date between a willing buyer and a willing seller. Market value also assumes that both parties to the transaction acted knowledgeably, prudently, independently, and in the case of an arm?s length transaction, that they have no conflict of interest. In today’s market, market value is dropping because a large number of sales are foreclosures and short sales. Sellers and buyers alike may ask if these short sales and foreclosures can be used in an appraisal. Under the new HVCC rules, an appraiser is only allowed to go back three months to find comparable properties. This causes serious problems for the appraiser since recent sales are often short sales and foreclosures. Before HVCC went into effect, the appraiser could go back an entire year to look for comparable properties. These new rules put appraisers in a tough spot. Short sales and foreclosures are often not arm’s-length transactions, so they should not be used to determine the current value of a property.
More Inexperienced Appraisers Mean More Problems
As I’ve written before, HVCC has inserted a new player into the appraisal process: Appraisal Management Companies (AMC). AMCs act as brokers between appraisers, real estate agents, and mortgage brokers. Writers of the HVCC legislation believed that AMCs would prevent undue pressure being put upon appraisers to place a certain, and bias, price on a home. However, AMCs have had many unintended consequences, both to homeowners and appraisers. Appraisers are getting paid less because AMCs take a slice of the appraisal fee while leaving the individual appraiser responsible for completing the additional paperwork required by HVCC rules. As you may guess, more and more appraisers are leaving the field?they can’t make money. This means that more inexperienced appraisers are entering the field and getting paid less and less for what they do.
Inexperienced appraisers have a huge impact on the economy and upon your property value. Many rookie appraisers who work for AMCs often violate the Uniform Standards for Professional Appraisal Practice (USPAP) and Fannie Mae guidelines because they figure comparable sales of the past three months (including short sales and foreclosures) as well as sales that were not arm’s length transactions into their evaluations.
Do AMCs Sacrifice Quality for Speed and Money?
I have also heard rumors from other appraisers that AMCs are telling their appraisers to just meet the unreasonable turn times at the expense of quality. Why would they do this? Simply so everyone from AMCs to their rookie appraisers can make more money. Unfortunately, as of right now, AMCs are completely unregulated and their only concern seems to be the bottom line.
To the casual buyer or seller, it might appear that AMCs are out to protect the consumer in regard to how they figure appraisals under HVCC law, but to anyone experienced in appraising, they are undermining the process, wrecking home values, and slowing economic recovery. To a trained eye, lower values seem to be a product of using unqualified appraisers who often have little to no knowledge of the local market.
Automated Valuation Models Use On the Rise
Last, Fannie Mae, some major banks, and other real estate-driven businesses have begun to embrace and use Automated Valuation Models or AVMs. AVMs can produce tainted results depending on the knowledge of the person inputting the data and the market parameters. AVM administrators will often insist on using foreclosures and short sales to find the fair market value of properties. But many “declining area” markets have a mixture of falling values and stable or even increasing property values in their neighborhoods. That matters little to AMCs. Some appraisers feel that AMCs are deliberately lowering values so their shadow inventory of foreclosures can be written off with less financial loss to their companies. If that’s true, isn?t this market manipulation by the banks and the AMCs? And at what cost to you the buyer or you the seller?
We’d like to thank for sharing today’s photo via the Creative Common’s License.
Email This Post To a Friend.
October 15, 2009 at 4:27 pm
Agree with most of the premise. However, there are cases in which REO sales are arms length. I.E. if it has been exposed for a reasonable time with no price reductions and subsequent reductions are required to sell the property. This does not address the condition of the property which is typically “fair” to “poor” in the case of foreclosures. I try to avoid using them if at all possible. The bigger issue is the unreasonable requirements placed on appraisers as far as comparable sales time frame. If there is no evidence of a declining market, then the appraiser should be able to utilize sales up to 6 months old and even 12 months (as a fourth or fifth comp). Most clients, however, are requiring 3 months on at least 2 of the comps. Another problem is when 3-9% of closing costs are rolled into the sales price of some of these properties. I have seen numerous cases where a property has been for sale for an extended period lets say for $100,000 and finally ends of selling for $106,000 with the seller paying $6,000 of the buyer’s closing costs. No competent appraiser is going to appraise this property for $106,000 in light of its listing history. Anyway. Enjoyed the article. I think some good has come from HVCC but also a lot of bad. The AMCs are scum and need to be regulated.
October 15, 2009 at 4:38 pm
Although I agree with much of what you stated, you need to fact check , im not sure who your sourse is? HVCC has no requirments on only going back 3 months for comparables. I do go back a full year, and did on one today. You are correct on AMC are killing the industery, and so is HVCC.
October 15, 2009 at 7:07 pm
“lowering property values.”
You are out of your mind. Apraisers report values. They don’t set values.
October 19, 2009 at 6:58 pm
Katie,
You need to read the HVCC before you write a blog. Alot of your statements are flat out wrong. The HVCC doesnt change property values. It’s the market.
Good luck anyway