Thursday, July 16, 2009

Appraisals the new hurdle in home sales

As if sellers weren't having a hard enough time in this market... over the past few months, more sales contracts are falling apart - and more are happening due to low appraisals.

In "normal" housing markets, it's less common that problems arise once a contract is signed, but here's a quick look at issues that are happening with some frequency now:
  • Home Inspections - always good practice, but when the market was slanted towards sellers many buyers were waiving the inspection process. Now, buyers are often expecting the sellers to fix even minor issues or canceling a contract.
  • Financing - as most everyone is aware, lenders are giving far more scrutiny to the buyer and financing can fall through even after someone has been pre-approved. Sometimes a new lender can be found, many times not.
  • Appraisals - the concern is now that appraisers are being overly conservative in the valuation of a property. If the house does not appraise, then the buyer is faced with paying the difference, or the seller is asked to reduce the sales price (or somewhere in between). After sometimes difficult negotiations up to that point, you often have a situation where neither party feels they should budge.
A lot of press has been given to the recently implemented HVCC or Home Valuation Code of Conduct. The guidelines stem from an agreement between Fannie Mae, Freddie Mac, and New York's State Attorney General to eliminate conflicts of interest. Without going into a lot of detail, essentially it seeks to ensure the independence of home appraisers.

As things of this nature often do, a fair amount of confusion exists over what's OK and what's not. And as one would expect, the (over)reaction is to err on the side of caution. With a number of sales being canceled due to low valuations, many are pointing the finger at the use of inexperienced and out-of-area appraisers (i.e., they don't know the local market). While the intent of the HVCC may have been positive, the law of unintended consequences is having a significant impact.

The complexities and issues in today's housing market will take time to sort out and may require an abundance of calm and patience whether buying or selling, but it's still important to note that many home sales can and do get done without problems.

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