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HVCC Current Appraisal Rules: The Law of Unintended Consequences for SF Home Sales

November 23, 2009

The Law of Unintended Consequence: When an action leads to results that were unanticipated or unintended; can be positive or negative

The current home appraisal rules (HVAC) have had a myriad of unintended consequences. The intent of the guidelines was laudable: to help make the home valuation process more objective. The idea being that shady appraisers, Realtors, mortgage brokers, buyers and sellers helped create the over-inflated housing mess. I have a couple of issues with this approach. 1. We're not all shady. 2. As with many bureaucratic pursuits, the intended goals are "lost in translation" as the rules fail to take into account how things actually work in local markets & in practice.

The unintended consequence of the new appraisal rules has been kind of the opposite of what the rules were trying to avoid. Instead of plumping up home prices, they are pushing them down.And the word it out.

We've been dealing with this since May 2009 but the pile of bad press continues to build. Sometimes, Sellers are so nervous about these appraisal rules that they accept much lower prices that are not contingent on an appraisal. This means that the sales price (which then becomes the latest comparable sale) is actually NOT market value because it was not the highest price a buyer was willing to pay for the home, whether a Noe Valley condo or a Bernal Heights single family home. But, it will be used as market value by the next appraiser on the next home sale.

And now for a brief introduction from our corporate sponsor: Hey you, CASH BUYER! It's your turn to really cash in, no pun intended. Before we fix this HVAC system, you're poised to get an even better deal than ever. C'mon, buy a house! 😉

Beloved real estate expert, Dian Hymer, wrote about this yesterday in the Chronicle. (Yes, I still read the Sunday paper.)

"The new guidelines require lenders to select appraisers impartially. To comply, many large lenders hire appraisers from an appraisal service company. The intent of the new guidelines was to keep loan originators from exerting pressure on appraisers.

However, a consequence of the new process is that some appraisals aren't based on accurate information. This can result in an appraised value that is lower than the purchase price. This forces buyers to go elsewhere for a loan and pay for another appraisal. Rather than saving buyers money, buyers can pay as much as double what they would have paid before the guidelines went into effect.

A major complaint from the real estate industry is that the appraisers from third-party appraisal companies often don't know the local market. The comparable sales used are sometimes from neighborhoods where values are different. If the appraised value is significantly lower than the purchase price and the buyers can't get the loan they need, the deal falls apart."

Note to Sellers: Now more than ever, it is important to accurately price your property for sale based on the most recent comparable sales.

The deal is only as good as getting successfully to the close of escrow. Ultimately, you want a buyer who is willing to pay the highest price that can be supported by the comps. There is an art (and science) to this...

You also want to create a sense of urgency so that you have multiple buyers for your home. The more interest in your property, whether a Mission Dolores condo or a house in Bernal Heights, the more likely the transaction will stay together even if you have appraisal problems and your house will sell for its highest potential price.

Often, the problems in our local SF market arise from the use of inaccurate comps by an out-of-area appraiser. Even an appraiser from the other side of town can be problematic if she does not know the local nuances of construction, lot and location! Just imagine an appraiser from a single family home subdivision in Walnut Creek trying to evaluate a 2 bedroom, 2 bath condo sale in Noe Valley just off 24th Street?

Need more proof?

http://www.washingtontimes.com/news/2009/aug/28/mortgage-qa-new-rules-may-yield-low-values/

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/07/05/RELE18FM31.DTL

http://online.wsj.com/article/SB10001424052970203496804574348712795471006.html

http://online.wsj.com/article/SB124830543450973871.html

http://www.mortgagenewsdaily.com/06232009_existing_home_sales.asp

http://www.nytimes.com/2009/08/19/business/19appraise.html?pagewanted=1&_r=1

http://www.washingtontimes.com/news/2009/sep/04/mortgage-qa-new-law-complicates-appraisals/

http://www.washingtontimes.com/news/2009/aug/07/mortgage-qa-lenders-need-skilled-appraisers/

http://www.latimes.com/classified/realestate/news/la-fi-harney5-2009jul05,0,5375301.story

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