Rain City Guide

1. Comment from Rhonda Porter
Time July 2, 2007 at 10:40 am

I think this is definately worth blogging about! Some lenders automatically pull an AVM (computerized valuation) on every transaction regardless…but more than 9 times out of 10, everything is fine.

With the tightening of credit, appraisals guidelines are also following suite (tightening). One lender I work with now requires interior photos of the living room, kitchen and bathroom on all appraisals.

Recently, I had a transaction where the appraisal came in low and it was a bidding situation. I had to explain to the selling agent that this was actually in the buyer’s favor…I think he viewed it just as a situation possibly hampering closing…an unwanted speed bump! It did close, at the appraised value (and yes, it was 100% financing).

2. Comment from ARDELL
Time July 2, 2007 at 11:16 am

Mine is 20% down and just passed from desk review to field review and yes we are running two lenders side by side. Whoever gets there first wins. One broker…two underlying lenders.

This is one of the factors that makes negotiating fees with buyer clients up front vs. seller clients, more of a challenge. With a seller you get to see the house being sold. With a buyer, the house they pick can end up to be a real challenge. No way to know how much work will be involved until they choose a property. Some are easy, some are hard.

When you list a property that “may not appraise” you can factor that into cost of service.

But when you meet a buyer and set the commission and then they pick a property with huge inspection or financing challenges, you may need to renegotiate that commission agreement.

Negotiating commissions with buyers has been fun and challenging. The last 18 months of testing would make for a great “White Paper” on negotiating the Buyer Agent Compensation package.

3. Comment from Bob Loblaw
Time July 2, 2007 at 11:31 am

My biggest concern is that while my client may get the property for more than $30,000 less than true market value and what buyers are willing to pay for it, what happens when my client sells it? The issue that it is unique to the area will come up again when he goes to sell it, and potentially limit his appreciation accordingly.

Ardell -
That doesn’t seem like it would be much of a concern to me as a buyer. I’d take that risk every day of the week. Let’s see… $30k more in my pocket today, vs. what might happen when I sell?

If you told me that these appraisal-related issues came up constantly, I might be concerned - but it sounds like they are more related to the timing of your sale. In other words, I might hit a time when the banks were getting tight, or I might not (like last year vs. this year). Is that accurate? If it is, as I said - I’d be more than happy to have the lower price today.

It doesn’t seem fair to the seller though, on that I would agree. Arms lenght transaction and all.

4. Comment from ARDELL
Time July 2, 2007 at 11:52 am

Bob,

Usually the issue is most related to the type of property itself, and the lack of sales of similar property nearby, and so a factor to be considered by the buyer at time of purchase. Not totally about “lending constraints”, as I had a similar situation last year before lenders starting tightening their parameters.

In the current situation it is possible that the value of the land might some day in the near future surpass the “property with improvements” cost as of today. I did a similar one a little over two years ago that is now selling for the land value, so the appraisal issue at time of purchase was not a factor at all at time of sale.

That other people don’t have that appraisal problem is not what you rely on as a buyer of THIS property, given the infrequency of this occuring. It is a property specific problem and so the buyer should weigh the pros and cons of buying it.

To assist you in understanding, the instant case is a multifamily in an area of all single family home sales. The appraiser and lender are looking for the sale of multifamily property in an area where multifamily property was rarely built and is never built today. The likely outcome is some day these lots will be used to build single family residences and not multifamily property.

For instance if you buy a triplex or fourplex in Kirkland. Not many of them exist and none are being built. So appraising a triplex or fourplex in Kirkland would be a challenge, if the lender wants to see three recent sales of duplexes within a quarter mile of the subject property.

Step one, it appraises. Step two goes to desk review and NO sales come up within even a 2 mile radius or even the same City. Then to field review stats where they may go as far as 5 miles out.

The instant case just jumped from desk review to field review. No sales of similar property in 2007 within a short distance.

Whether it is single family or an odd situation, I always point out any weaknesses the buyer may face at time of sale. It is for me, a disclosure prior to purchase, to point out potential negatives the buyer may face when they later try to sell it.

If all of the foreclosure and short sale people were well aware of the property weaknesses at time of purchase, they likely wouldn’t be in the mess they are in today.

Not saying the buyer will not want to buy it, I myself bought a property with resale weakness. But clearly that factor must be known and taken into consideration at time of purchase and not be a big surprise to the owner at time of sale.

5. Comment from Ken Crotts
Time July 2, 2007 at 9:21 pm

Appraisal reviews are going to be with us for some time to come as lenders make underwriting adjustments to mitigate growing losses in their portfolios. Any time a deal goes through underwriting with marginal qualifications the appraisal is going to get a greater level of scrutiny than they did in the past. While this is a pain to those working on the deal it is healthy for the market in the long run.
As a veteran Realtor I am putting much more emphasis on well qualified buyers who are bringing their own cash to the table and have strong qualifications. As a listing agent it is more important now to price and market the property to get multiple offers. That way my client can chose from several buyers and pick the strongest overall. It also means that I have several ready to go buyers in the queue in the event the appraisal comes in low or the lender kicks the loan out.
In representing Buyers the low appraisal can be a great negotiating tool. I recently had an appraisal come in low with a buyer who was pushing the limits on their qualifications. The sale price was $415,000 and the appraisal came in at $395,000. I had another appraisal done by an approved appraiser and it came in at $398,000. We bought the unit for $398,000. In the three months since several more units similar to this have come on the market and sold at or above the original offer price on our unit. Would the unit have appraised if the buyer was bringing in 25% of their own cash? Is it fair that the seller took less because of the weakness of the buyer? This is a debate with merit on both sides of the argument. The bottom line for me is the; we’re in a market now where it pays to have a strong buyer and an experienced, savvy agent.

6. Comment from ARDELL
Time July 2, 2007 at 9:48 pm

Ken,

Agree on almost all counts, except I would hate to see Seattle fall the way of CA where only the strong survive and cash buyers take the front of the line most times. That limits the ability for average citizens to compete in the marketplace and be homeowners.

We don’t ever want lending to be so strict that only the wealthy can buy homes.

7. Comment from Ken Crotts
Time July 3, 2007 at 6:26 am

I’m not suggesting that only the cash buyers should survive. However, I think we can agree that many of the home buyers that bought homes in that past 5 years were buying over their heads. Loose lending guidelines and aggressive programs allowed buyers to qualify for more home than they could afford. The option ARM which allows the buyers to qualify for and make payments at a very low, negative amortizing rate has insidious features that most probably don’t understand yet. Namely they don’t have rate caps. Most traditional ARM’s have a periodic and life cap on the interest rates. Option ARM’s generally don’t. That means there’s no limit to the rate increases that a buyer can experience, and they can change monthly! Since many buyers were pretty well tapped out financially at the lowest payment option, the rate increases that we are seeing is going to push them under. I am expecting a wave of foreclosures to really begin in 6 months or so when people finally have to give up, stop paying the mortgage in order to put food on the table and let the foreclosure process take over. I expect there is going to be a lot of finger pointing going on industry wide as loan officers, underwriters, real estate agents, consumer advocates, lawmakers and others formulate positions that explain the high foreclosure rate while exonerating themselves.
My point is lending guidelines are going to tighten a little bit. First time buyers aren’t going to be able to readily buy over their heads and will have to accept less than a brand new top of the line home. In the end it is good for their expectations to come back to reality for a while. Many lives are going to be stressed out due to the “irrational exuberance” of a lending environment that allowed almost everyone to get whatever they wanted.
Looking forward the questions is, will the lending guidelines swing too far back towards tightening to the point where well qualified buyers cannot get approvals for mortgages they can afford? Are all appraisals going to come under scrutiny? I have already seen lenders reacting irrationally by closing programs and shutting down operations without notice leaving many caught in a crunch. The Seattle market is blessed with good fundamentals and any price roll backs will likely be max out at 3-5% of value if there is any at all. Working with low appraisals is going to be a part of the average transaction like it used to be 15 years ago. It has been a long time since we had to consider the appraisers opinion of value when closing real estate purchases.

8. Comment from Rhonda Porter
Time July 3, 2007 at 7:00 am

I have to agree with Ken. For example, Fannie Mae has not stopped the My Community Program, however, they increased the pricing by 1% across the board to all lenders making it not a competitive option.

It’s not just the lending over the past few years, although loose lending was the cause and we wouldn’t have had this without it…agents have been writing offers for buyers that were over their head. I’ve had circumstances where I would say to an agent, “Joe and Sally would like to buy a house for $X” and the agent would say “Can’t they qualify for more?”

Over the past few years, there was probably a mortgage for almost anyone and yes, they could qualify for more. I was told by one agent that it was our jobs were to help buyers get what ever home they wanted, not consider their ability to pay. (Wrong!)

And I still have consumers contacting me with no money in the bank, recent lates on their credit wanting to buy now…panicked that they may be priced out instead of being panicked over their personal financial situation.

Oops. Guess I got off on a tangent!

Ken, it’s nice to see you at RCG! (I’m Rhonda Witt…became a Porter on April Fools a year ago)

9. Comment from Ken Crotts
Time July 3, 2007 at 7:46 am

Nice to see you too. Ultimately it is the buyers responsability to know what they can afford. While we all like to think we are looking out for their best interest and, in good faith, attempt to do so the buyer is ultimatly responsible for making decissions regarding their futures. Every person involved in the process from the Realtor to the closer “could have” done something to help the buyer avoid getting over their heads. On the other hand, who are we to suppose we know better for them than they do for themselves? What of the majority of buyers who get the use and enjoyment of their new homes which will springboard them the the next home? Would we deny them their dreams of homeownership by stopping them before they make a “mistake”. After this market cycle is over and we are on to the next one we will be left with many buyers who are a lot more savy than they are today, probably some new well intentioned legislation, and fewer real estate agents and loan officers. The cycle goes on.

10. Comment from ARDELL
Time July 3, 2007 at 7:55 am

“It has been a long time since we had to consider the appraisers opinion of value when closing real estate purchases.”

Interesting. In a market where “the comps” are in play, the buyers will need to make up the difference between appraised value and sale price with cash (like they used to). That will in turn limit appreciation to that which can be support by cash outlay, and someone’s willingness to pay more than the appraised value.

From the seller’s side of the fence, it could be time to take out any “must appraise” standards. Sellers may need to know in advance that the buyer is willing to make up any shortfall between appraised value and sale price in cash. All agents may have to know how to value property, so they can know in advance where it will likely appraise vs sale price. A welcome change.

A change like this may not only elevate the expertise needed by LOs, but agents as well. All in all, likely a good thing. But boy is it going to be a mess in between.

I think it’s time to start tracking the % of sales that never make it to closing. You will see many hit a brick wall before these changes are fully implement, and that fallout will show in properties that make it TO escrow, but not out the other side.

Oh the poor escrow companies. They better find a way to get paid whether the sale closes or not. There will be no sympathy for LOs and agents who start the ball rolling toward a purchase that can not culminate into a closed transaction. But the escrow companies could take a huge hit. They may have to find a way to get paid for those that don’t close, or we may see the cost of escrow services increasing to compensate.

11. Comment from ARDELL
Time July 3, 2007 at 9:38 am

Ken,

Of course sellers will also be getting better educated. A letter from a lender will not be sufficient, in a market that falls down on appraisal, regardless of how well qualified a buyer is.

Going back in time in order to predict, I am remembering when appraisals weren’t adjusting sufficiently for sale price increases. This is what I remember happening, and will show it here so our readers can see how this plays out in the marketplace.

A buyer will make an offer with 20% down of $600,000 or $120,000. When it appraises at $570,000, the buyer will “have to” pay the $30,000 difference between sale price and appraised value. Though some buyers will say “won’t the seller have to reduce their price to $570,000″. Good question. Let’s assume for now that he won’t.

This leaves only $90,000 for downpayment. The mortgage will then be processed at 16% down against the lender’s value, even though the buyer still put the same $120,000 against the sale price. That same $120,000 now represents a downpayment of only 16% against the lender’s value vs 20% against the sale price.

Now the 20% down buyer has to face the conseqences of being 16% down with the same dollars. Those consequences being PMI and possibly a higher interest rate. The monthly payment they anticipated when they made the offer will be increased. Could be a reason for the introduction of PMI being tax deductible. Perhaps the powers that be are seeing this foregone conclusion as well.

This will raise the question, will the buyer be forced to close if they CAN, even though the entire basis has changed on them? Will the seller not accept “must appraise” clauses, forcing the buyer to be the one that bears the consequences if the property does not appraise? That’s what usually happens. Must appraise clauses are not a right, and if the appraisals are falling down on review at the end, the finance contingency will likely have expired by that time.

A glimpse of what might be coming down the pike could help us to be proactve rather than reactive. It may be time to revise the Finance Congingency to clarify these matters for consumers, before they hit the marketplace.

Lots of fallout in the future. But Ken, while I agree that being “savvy” will help in the long run, something tells me that being in the business long enough to remember how we used to handle these situations will be the first step to enlightenment of the many

12. Comment from David Young, LO
Time July 3, 2007 at 6:46 pm

Don’t know if this will be necessarily helpful or not, but, for what’s it’s worth, if the buyer is putting down 20%+, and the difference between the appraised value and the purchase price plus downpayment still gives your buyer an 80% Loan to Value purchase, then their loan will still be the most competitive loan (no MI, no need for a 2nd, and such). This may ‘get it done’, but there still would likely be other questions/concerns to be addressed.

Kindly.

13. Comment from ARDELL
Time July 3, 2007 at 6:53 pm

Thanks David. All conversation is helpful

If the buyer has additional funds to make up the difference PLUS 20% down, you are indeed correct. Things move forward as planned.

In my experience the buyer uses the same amount of money that would have been 20% down if it had appraised. After you subtract the difference between sale price and appraised value, their remaining funds no longer equal 20% down.

14. Comment from Ken Crotts
Time July 4, 2007 at 5:46 am

The practical reality is that the house is much more likely to appraise if the buyer is putting down 20%. Appraisals don’t happen in a vacuum even though appraisal theory suggests it does. Appraisers have to balance their appraisals between giving the lender, who orders their appraisals, what they want and the potential for default of the loan. If you come in low too often the loan officer is going to order appraisals through someone else. If the transaction for which you provide appraisals for have a high default rate your appraisals come under scrutiny and you risk being kicked off the approved appraiser list for that lender. Lending and appraisal standards for buyers that have skin in the game are not as tight in practice as those for 95% LTV loans and higher.

15. Comment from ARDELL
Time July 4, 2007 at 6:25 am

I have always believed that to be true, Ken. I used to recommend that buyers apply for their loan with minimum down to get a more heavily scrutinized appraisal. Then, after appraisal and before loan docs, advise the lender of the higher downpayment.

If someone wants to truly rely on the appraisal as a checks and balances system of confirming value, this is a better method. I have written with this advice before and some complained that the downpayment didn’t matter. Real experience suggests otherwise and I wholeheartedly agree with you.

16. Comment from Stuart Fearer SRA
Time July 4, 2007 at 1:00 pm

As an appraiser reading this string of posts, I have to comment that a reputable appraiser will come to a value estimate without regard to the LTV represented on the contract and appraisal order. Most veteran appraisers who are around long enough to make it to being on the majority of the lenders’ “approved list’ are not hung up on hitting that afore-mentioned balance betweeen pleasing the LO on high LTV deals and coming in more conservatively on 80% or less LTV deals.

Most of the reputable people in my profession recognize that the market has declined or is declining still and we try to come in at a well supported estimate regardless of the contract price. Unfortunately there are many hungry scruple-challenged young appraisers that have gotten into this industry by hook or by crook and are motivated by how many assignments they can rack up per week instead of quality. Many of them were mentored by appraisers who themselves were not well educated. We call them “Skippy’”appraisers and we all hope for their early retirement as the states pass more restrictive laws on the LO s influencing us on value by non-payment of fees or with-holding of business.

Those of you that really care about the transactions moving forward at the true market value should influence your mortgage brokers and LOs to use experienced appraisers, preferably with designations that have been earned with heavy education, experience and practical application of appraissal principles.

I will step off my soap box now!

17. Comment from Tim
Time July 5, 2007 at 8:23 am

“They better find a way to get paid whether the sale closes or not.” - Ardell

Ardell, you’re freaking me out! LOL. But yep, the small escrow co’s with no AfBA’s are going to take it in the chops because to a large extent, we cannot control the business pipelines of people who utilize our service.

18. Comment from ARDELL
Time July 5, 2007 at 8:43 am

Tim,

AfBA’s???

19. Comment from Tim
Time July 5, 2007 at 9:10 am

“Every person involved in the process from the Realtor to the closer “could have” done something to help the buyer avoid getting over their heads” - Ken

Closer? I don’t believe so. Ken, don’t know if you will read this thread, but closers can do nothing in the realm of advice for consumers prior to during or after escrow.

I can just see this scenario playing out: An agent’s customer is with me and I look over the loan docs and I say, “Mr & Mrs. Newhomebuyer, based upon your sub 600 Fico’s scores and virtually no savings, this 100% financed interest only ARM (based upon a LIBOR Index 6 mos. adjustable program with an initial interest rate at 7.375% on the first and 10.875 on the 2nd loan), is going to crush you. Oh, and there is a three year pre-payment penalty, even though your program will reset and adjust at year two. If you refinance before 36 mos., this will cost you, pardon me let me calculate this…um…..oh, here it is, about $12,000. Yep, $12,000 and that does not include closing costs for refinancing. Bottom line, I hope your income is going to increase by about 50%. If not, I highly suggest you do not sign these documents. May I answer any other questions for you?”

Escrow folks do not have these conversations with clients. By the time they are at escrow they should know what loan program they have*, the terms* and whether or not they can truly afford the home. (* hopefully)

20. Comment from Tim
Time July 5, 2007 at 9:15 am

Ardell-

AfBA’s = affiliated business arrangements.

If a mortage co/broker or real estate broker owned an escrow office and sent all it’s business there. Or if a real estate brokerage has ownership in a title company etc..

21. Comment from ARDELL
Time July 5, 2007 at 9:27 am

What you are basically saying is that the “free” policy is based on % of business. If someone sends you 50 transactions and 2 don’t make it, then waiving fees on those is good business. If someone sends you 10 and half don’t make it…well that’s another story. I don’t think AfBA’s are really the issue, though they likely have the advantage of the 50/2 vs. 10/5.

Kim and I were talking about a Broker’s monitoring of agents who have an unusually high percentage of rescissions. On the one hand I would never want to penalize an agent for valid rescissions, when rescission is in the best interest of the client. I’d rather see a rescission based on Resale Certificate or Inspection issues, than see an agent twisting someone’s arm based on these issues. But if an agent is constantly rescinding based on things they should have been able to foresee…that’s another story.

I think that for a small escrow company, building relationships with agents who have low rescission rates could maybe be the compensating factor for AfBA issues.

Personally I strongly support AfBA relationships, even though we do not foster them at present. Having been a Coldwell Banker agent for many years, I see many huge advantages to such relationships for consumers, when done well.

22. Comment from Ken Crotts
Time July 5, 2007 at 10:14 am

Tim,
I think you are taking my comment too out of context..
“Every person involved in the process from the Realtor to the closer “could have” done something to help the buyer avoid getting over their heads”
Yes, we “could” have those conversations in theory. However each person involved the transaction will have a position just as valid as yours. The Realtor isn’t even aware of the buyers’ actual credit scores and qualifications. The loan officer is trusting in the guidelines that say the buyer IS qualified. The underwriter followed established guidelines and the closer prepared the documents, explained them and closed the deal. My point is not to point fingers but to address the issue of culpability. I don’t believe anyone involved in the transaction, who has performed their duties with integrity and professionalism, bears responsibility for the failure of a home buyer to fulfill their mortgage obligations. If the buyer was misled, lied to, uniformed or not given a proper disclosure then that is another matter.
Foreclosures are already a hot topic in the media and in political circles. There is going to be some finger pointing going on by those outside of the industry because they need a bad guy. When the rhetoric starts and they ask why did you …(fill in the blank), or you could have …(fill in the blank). The “could have” in my comment is reference to the inevitable finger pointing by those on the soap boxes.

23. Comment from Tim
Time July 5, 2007 at 10:33 am

I understand what you are saying Ken.

24. Comment from Tim
Time July 5, 2007 at 10:53 am

Ardell, I know of very few instances where AfBA’s have directly benefited consumers both financially and in a fiduciary capacity. Sorry this is off topic from appraisers. For example, I have countless times given disclosures to a client indicating afflilated business relationships within the loan package that the lender, title company or real estate brokerage has: stating that the borrower has the ability to shop.

What is wrong with this picture? It’s done at closing. Rediculous.

PS. What do you think the response will be if I ask agents “what is your rescission rate?” Just teasing.

25. Comment from ARDELL
Time July 5, 2007 at 11:46 am

Tim,

Reality is that your pricing has to factor in rescission factors, since you are in a business where your competition is free for rescission. Kind of like a landlord with a high vacancy rate can’t charge more rent to compensate and still compete for tenants.

Shopping is just so NOT in my opinion with regard to escrow services or inspectors. These are not two areas where price should be the primary consideration. I would gladly pay the difference for a buyer to choose the best inspector if they are price shopping. Same with escrow fees. The difference in cost isn’t worth choosing by cost.

As to the end run signature regarding ability to shop, it would seem to me that is likely a confirmation of something they signed at time of contract. Not a “new issue”, same as the buyer signing the loan application at the end. Just because they sign the loan application at the closing table, doesn’t mean they’ve never seen it before. Same issue I think with affiliated business disclosure. I’ve never seen a company that uses AfBA’s not have an AfBA addendum in the contract at time of offer and before they choose their services.

26. Comment from Rhonda Porter
Time July 5, 2007 at 11:47 am

I have to agree with Tim re: AfBA’s. Especially when the broker restricts outside reps (escrow, mortgage, title, etc.) from presenting information/products to their agents. It restricts healthy competition which does not benefit the consumer.

27. Comment from ARDELL
Time July 5, 2007 at 12:02 pm

Not sure why I’m defending AfBA arrangements, since it has been many years since I’ve used them. But when I did, the consumer absolutely preferred the “one stop shopping” method and convenience. Also the agents had a lot of pull if the consumer ended up with a problem during escrow or loan process. People jump through all kinds of hoops within AfBA relationships that clearly benefit the consumer.

Just saying the pros outway the cons from my experience, and many consumers like the convenience. Those prone to “shopping” will anyway, don’t you think? Most times they will simply try to negotiate with the AfBA rather than use someone else. This is more true of services outside of lender. Choosing a lender is probably the hardest part of buying property. Sometimes, even often, harder than choosing a property

Now that I’m thinking about it, choosing the right agent, lender and home inspector IS harder than finding the right house. That’s sad. So there’s another reason AfBAs done well can save the consumer from a lot of headaches.

28. Comment from sandy
Time July 5, 2007 at 1:11 pm

Hi Ardell: I am pasting the link of the front page seattle times article:

http://seattletimes.nwsource.com/html/businesstechnology/2003775906_webhomesales05.html

How much of this do you see in your experience?Can I request you to post stats for May and June as you did before for earlier months pls?

29. Comment from Jillayne Schlicke
Time July 5, 2007 at 1:44 pm

Affiliated business arrangments, when operated the way HUD intended, work fine. However, doing so requires care and attention to HUDs rules. In the real world (not HUD’s world), care and attention often go out the window in favor of the quickest route to profits combined with lax regulatory oversight. Some AfBAs are well-run, some are not.

I owe Rhonda, Tim, and Diane Cipa a post on AfBA/CBAs.

30. Comment from ARDELL
Time July 5, 2007 at 8:34 pm

My stats have always agreed with this statement in the article.

“The majority of King County’s single-family homes sold for $200,000 to $600,000, with sales strongest in the $400,000 to $600,000 range.” Though for Eastside that includes townhomes and condos as well as single family.

I’m not feeling like doing stats…but since you asked. As usual I will post one graph here and the rest over on my blog as they take a lot of space. I’ll try to do them tomorrow.