Category: hvcc

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Home sellers may encouter surprises

by Dan Krell © 2012
DanKrell.com

money to close on homeSo you’re planning to list your home in the spring, or maybe your home is already listed for sale…

In an effort to avoid surprises, you consult with your real estate agent and ask many questions. Your agent, also looking forward to a transaction without incident, tries to prepare you for the ups and downs of home selling. No matter how much preparation you and your agent do for the sale, there still can be surprises; here are the three often encountered surprises:

The home buyer failed to qualify for their mortgage:

Real estate agents often do not discuss the truth about lender pre-approval letters (lender pre-approval letters are not all the same). When you receive an offer on your home, there is usually a “pre-approval” letter from a mortgage lender indicating that the buyer is qualified to obtain a mortgage to purchase your home.

Although the pre-approval process typically checks the buyer’s credit, the process sometimes varies when it comes to verifying the buyer’s income and assets. Although many loan officers exercise due diligence and collect income and asset documentation prior to issuing a pre-approval letter; some loan officers feel confident to issue a pre-approval letter solely on the basis of the buyer’s verbal accounting of their income and assets. Make sure your agent is in contact with the buyer’s loan officer; and ask if all the necessary documents have been reviewed before the pre-approval letter was issued.

Unanticipated withholding tax at closing:

Besides negotiating closing costs, your agent will explain that there are additional fees and costs that you should expect to pay at closing. A surprise often awaiting the unsuspecting home seller is a withholding tax; such as the Maryland non-resident seller withholding tax, the Foreign Investment in Real Property Tax Act, and beginning in 2013- the unearned income tax outlined in the Patient Protection and Affordable Care Act of 2010. Additional information can be obtained from the Comptroller of Maryland, and the Internal Revenue Service, and your tax preparer or CPA. Before listing your home for sale, consult your tax preparer or CPA to determine your tax liability for any additional real estate related withholding tax.

Your home does not appraise at contract price:

One of the outcomes of the financial crisis was the Home Valuation Code of Conduct (HVCC). The HVCC was devised to establish increased accountability and independence in the appraisal industry. You might think that since placing additional regulation on the appraisal industry, appraisals should be more consistent. However, there has been much criticism about the inconsistency among appraisals and difficulty in understanding the standards and methodology used in determining a home’s value. The issue may partly stem from appraisal management companies that are sometimes used by lenders to comply with the HVCC, while the issue may also partly stem from lenders imposing specific underwriting guidelines on various loan products. In preparation, your agent should gather valid sales comparables that can be given to the appraiser as rationale for the contract price.

No one like surprises, so hopefully you’re prepared for the ups and downs of selling your home in today’s market. Although some real estate agents may pride themselves on how they handle surprises to put out the “fires;” the truly skilled agent can anticipate most situations to minimize the surprises that can occur during a real estate transaction.

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This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of September 24, 2012. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.

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Are appraisals hindering a housing recovery

foreclosed home
As the housing market receded, low appraisals seemed to be the rule; lower priced comparables were often to blame. As home sellers and their real estate agents become accustomed to the new market, some within the real estate industry continue to complain that low appraisals are still an issue that interferes with the housing market recovery. Many blame low appraisals for keeping home values down as well as killing pending deals.

A recent article by syndicated columnist Ken Harney (House sales hampered by appraisers who fail to recognize appreciation) brought attention to a growing issue that many claim is impeding a housing market recovery. It is clear that appraisers exercise caution and seek the conservative value, which is to avoid liability for the lender having to buy back a loan that does not comply with guidelines. However, another issue that Harney pointed out was the reliance on appraisal management companies.

If you remember, in response to claims of inflated appraisal values due to lender coercion and “undue influence,” the Home Valuation Code of Conduct (HVCC) was implemented for mortgages bought by Fannie Mae and Freddie Mac (then later by FHA). The intention of implementing these new standards of practice was to establish increased accountability and independence in the appraisal industry. One issue that was addressed was to limit communications between the lender and appraiser. As a result, many lenders resorted to using Appraisal Management Companies (AMC) to order and review appraisals.

In rush to meet the new HVCC compliance measures, lenders initially believed they needed to use the AMC to manage appraisals. However, that was not a direct requirement and some lenders have since moved away from using AMCs; subsequently implementing in-house appraisal management systems. Some lenders, however, still rely on the AMC appraisal “middle man” to assign and review appraisals.

Much of the criticism of the AMC is that they are sometimes located quite a distance away from the subject property. Appraisal reviewers who do not have the local experience and data to understand distant markets may make valuation mistakes.

home for sale

Just as quick as the lending industry moved to comply with HVCC, the pendulum has swung in the opposite direction – there are some reports of appraisers being coerced to “revise” appraisal values down. If the value is not considered within the lender’s “guidelines,” the appraiser may be requested to revise the valuation prior to submitting to the lender.

Testimony provided to the House Committee on Financial Services hearings on “Appraisal Oversight: The Regulatory Impact on Consumers and Businesses” (June 28th), Francois (Frank) Gregoir, for The National Association of Realtors®, stated: “There are a myriad of circumstances and issues working to hinder the recovery of the nation’s housing market. Among them… are those related to the credible valuation of real property…However, in today’s world there are many road blocks in the way of valuing property and, as a result, allowing for a healthy recovery of the broader real estate industry. Because there are many roadblocks there is no one, “silver bullet” solution.”

Regardless of where blame lay for low appraisals, the outcome and effect on the housing market is clear: some pending sales are falling out; some home buyers are paying additional funds to cover differences between a low appraisal and contract price; and some sellers are pulling homes off the market.

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This article is not intended to provide nor should it be relied upon for legal and financial advice. Using this article without permission is a violation of copyright laws.

by Dan Krell
Copyright © 2012

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Is there a duty to disclose recent low-ball appraisals?

by Dan Krell © 2009

(Home Buyers Beware)
Nothing can hurt a real estate transaction more than a home that doesn’t appraise to the contract price. In this depreciating market, I have heard many colleagues bemoan the “low-ball” appraisal. For a listing agent, a low-ball appraisal doesn’t just mean the possibility of losing a home buyer because the lender would not finance the purchase at the contract price; it’s also a dilemma of disclosing the valuation to future potential home buyers.

Although low appraisals also happen in appreciating markets, this market is unique. Along with depreciated values, the new Home Valuation Code of Conduct (HVCC) has also impacted on residential real estate appraisals and transactions. The HVCC was created out of an agreement between Fannie Mae, Freddie Mac and the Federal Housing Finance Agency to increase the integrity of residential appraisals by prohibiting lenders (or third parties) from “influencing or attempting to influence the development, result, or review of an appraisal report” (www.freddiemac.com/singlefamily/pdf/hvcc_746.pdf). The HVCC went into effect on May 1st 2009, such that Fannie Mae and Freddie Mac would no longer purchase residential mortgages with appraisals that did not adhere to the Code.

Before the HVCC was enacted, it was not uncommon for real estate agents and/or loan officers to try to influence valuations by offering alternate comparables or other pertinent information. This type of communication may have been necessary in cases that involved unique properties or where the appraiser was missing important information. However, it is also this type of communication that attempted to influence the appraisers to increase valuations!

To address the issue of appraisal influence, the HVCC requires strict rules on appraiser selection and communication; lenders and real estate agents are not allowed to hire appraisers nor are they allowed to communicate with appraiser in such a way that may influence the appraisal process (www.fhfa.gov/webfiles/277/HVCC122308.pdf).

Some critics of the HVCC complain that lenders are using third party appraisal services which hire appraisers who are unfamiliar with the neighborhood or worse- hiring appraisers from out of state. A colleague, relaying a recent experience, told me that a low-ball appraisal that was provided for a client may have been due to one appraiser coming to a home in Bethesda for the “inspection,” while another appraiser from Texas completed the appraisal for a national lender.

Low-ball appraisals do not kill all transactions. In fact, many buyers and sellers come to agreement on a new price and settle without any other obstacle. However, there are transactions where the buyer and seller cannot agree on new price and the home is back on the market. This is where the listing agent has to decide what information to disclose about the previous appraisal. Although Article 1 of the Code of Ethics and Standards of Practice of the National Association of Realtors (NAR.org) pledges Realtors “to protect and promote the interests of their clients,” it also obligates Realtors to treating all parties honestly. Additionally, Article 2 of the code of Ethics prohibits Realtors from misrepresenting or concealing pertinent facts relating to a property or transaction.

In the current market environment, low-ball appraisals may be an increasing trend. Revealing or not revealing these low valuations to future potential home buyers may also become a source of future disputes.

This column is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of November 16, 2009. Copyright © 2009 Dan Krell

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