Our friend Jay Vorhees at JVM Lending has posted another great blog recently about appraisers. I have taken some liberty with his original blog and modified it to some of my personal experiences. Check it out below!
Lenders are not ever allowed to communicate directly with appraisers. They are only allowed to order appraisals through an Appraisal Management Company, which in turn contacts the appraiser. This arose out of the mortgage meltdown in the efforts to prevent fraud. Overall, I think it hurt the buyer because the cost of appraisals rose.
Realtors, however, can communicate directly with appraisers and I highly recommend that they do so. I meet the appraiser at the home, provide them with the comps I used to come up with the list price and let them know how many offers I had and the offer price of them. It is important to be nice, and not tell them ‘how’ to do their job, but provide them with data that they may not have.
Below is the criteria appraisers use for Comparable Sales Data guidelines.
1. Size: Comps need to be within 20% of the size of the subject property. For example, they usually cannot use a 1,300 square foot comp for a 1,000 square foot subject property. Likewise, they cannot use a 700 square foot comp for a 1,000 square foot property.
2. Distance: Comps need to be within one mile of the subject property, and not over any major barriers like a freeway or a river.
3. Same Town/City: Comps need to be in the same city as the subject property in most cases, even if the comp is less than a block from the subject property.
4. Closed: Comps need to have closed in the last 90 days. Pending sales and listings are not acceptable.
5. Lot Size: Lot sizes must be accounted for too. If the subject property is on a small lot of 6,000 square feet, for example, a comp and a 12,000 square foot lot will have to be downwardly adjusted significantly in most cases.
6. Adverse Influences: If the subject is on a busy street or abuts a school, a freeway or an industrial area, valid comps will need to have similar adverse influences or they will make adjustments to equalize the value.
7. Bracketing Comps: Valid comps need to “bracket” the appraised value. Hence, at least one comp needs to be priced higher than the appraised value, and one should be priced lower.
At the end of the day. Appraisals are still subjective based on the appraiser’s interpretation and experience. Most of the time they are trying to do their best, and as markets shift, they have to adjust. They do not always have some inside information about a neighboring sale or a credit and if you can make their job a bit easier, I find everybody’s job becomes a bit easier.
I should also note that Mortgage Bankers have AMC – Appraisal Management Companies, where they can cherry pick the appraisers that are in the pool, even though they can’t talk to them about value. These are usually much better than the big banks and that is a whole other story that only frustrates me….
Our friend Jay Vorhees at JVM Lending came up with another relatable blog recently: Tax Transcripts and 4506-T forms. It generally explains how those forms work, and reminded me of an experience of my own. First, a summary of Jay’s blog:
Every time a lender gets a loan from a borrower, they also have to get the last two years of tax returns. This is why borrowers sign IRS Form 4506-T as part of their disclosures. It formally authorizes lenders to request tax transcripts, which then show the filer’s status and income information.
Lenders are required to request transcripts from the IRS before a borrower can (borrowers can only request them directly if the IRS reject’s a lender’s request). If there is a minor error between the 4506-T and the tax return, this rejection may occur, so it happens pretty often.
That covers the basics of how the 4506-T form works and the role it plays in a real estate transaction. It’s a more subtle part of the process, but can cause huge headaches when done incorrectly. Take, for example, my experience with a property at Madeira in Pleasant Hill last year.
I represented the seller, and the buyer had their lender in Oakland, with a Bank out of L.A. Unbeknownst to us, the bank was being bought out and the new bank was called Bank of Hope – yes, really. But it turned out to be the Bank of Hopelessness.
Processes changed, the lender in Oakland was let go and nobody knew what they were doing. Communication was terrible. One of the balls that got dropped was getting the tax returns. We closed almost two weeks late and the only way this ended up closing at all is by the processor who I had been speaking with regarding other issues. They actually went down to the IRS office and got the tax returns. She went beyond what is required (and probably got tired of our phone calls), but my seller is an attorney and also made multiple phone calls as they had already purchased a new home that was about to close.
This is one of the best reasons to get fully underwritten before you start to write offers. If all the documentation is in upfront, there won’t be any surprises or delays once you get into contract. Selecting the right lender can be the difference between smooth sailing and dark nightmares.
Our friend Jay Vorhees at JVM Lending wrote a blog recently about Apprisal Management Companies (AMC’s) that I found really interesting. Jay wrote about the mess that usually comes out of a broker-lender relationship due to appraisal issues.
After the mortgage melt down the laws changed that required lenders to use AMCs instead of cherry picking their appraisers directly. This past practice created an opportunity for dishonest practices. However, creation of AMC’s created a separate list of issues and caused the cost of appraisals to increase. The AMC’s usually paid the appraisers too little and decreased motivation by appraisers to do a good job or they hired inexperienced appraisers because the seasoned appraisers got out of the business as their salary decreased. Initially there was no parameters in place for the appraiser you got. Many times, I got an appraiser from Sacramento appraising a property in the Walnut Creek School District and would get a low value because the comps they pulled were parts of Walnut Creek not in the school district. As you can imagine, this led to some huge problems
As time passed, mortgage brokers such as JVM have moved to a “mortgage banking channel” to avoid using AMC’s and now utilize their own internal AMC that is still compliant but staffed by competent, local, highly-skilled appraisers of JVM’s choosing. The lender still can’t talk to the appraiser, but at least they have control of the quality of appraisers and know the area they are appraising.
When discussing renting versus buying, it’s helpful to have tools to calculate the differences. Luckily, our friends at JVM Lending have hooked us up. Here is our edited version of their information:
Imagine having a borrower who is paying $1,800 in rent who is very nervous about his or her potential payment increase after purchasing a home. These calculators can show how their “effective payment” will go down when tax savings and appreciation are accounted for.
Now, Trulia and Freddie Mac both offer great “rent vs. buy” calculators that will help with this. Even with modest appreciation (like 3%) and tax rate (28-34%) assumptions, these calculators can clearly show how much better off people are when they buy.
For example, according to our imaginary borrower, the Trulia calculator tells us her net housing costs will actually be 3% lower after she buys a $500,000 home with 20% down. These tools can help potential buyers get off the fence by showing why it’s a better investment to buy a home and accurately differentiate between buying and renting. I like to look at as you are paying yourself, not a landlord.
Have you recently purchased a home and been thrown off by getting bills about “supplemental property taxes?” Our friend Jay Vorhees at JVM Lending breaks it down for you:
Supplemental property taxes often create significant confusion for new homebuyers. When someone purchases a property in California, the County Assessor is required to immediately re-asses the property for property tax purposes. This re-assessment usually correlates to the purchase price and can take up to six months to complete.
When a home is purchased, property taxes are usually based on the property tax bill of the current owner or seller. But usually, their property tax bill correlates to the price the seller paid for the property – often much less than the buyer is paying. Then, buyers mistakenly believe the property tax payment estimate when they purchase is an accurate reflection of their actual property tax. Usually, that’s false.
Anywhere from three months and beyond, buyers should expect a “supplemental tax bill” from the County Assessor. Even if a buyer has an escrow or impound account, they have to pay for the supplemental taxes, which can be sizable. As soon as a supplemental bill is received, a buyer should contact their loan servicer.
Also, when new buyers refinance into a new loan less than a year after a purchase, supplemental tax bills can cause confusion. Even if a borrower is refinancing into a lower rate, the housing payment can appear to increase. This is because lenders are basing the new housing payment on the new property tax liability, while borrowers are still basing their housing payment on the seller’s property tax liability, which is too low.
Did you know interest rates climbed about 1/4 of a percent in the aftermath of Donald Trump’s election? This was the biggest single-day rate increase in three years.
Despite being told over and over again that a Trump victory would result in lower rates, the opposite has happened. In a recent Forbes column (Dec. 6 issue) Gary Shilling said he thinks the markets have massively overreacted to Trump’s election. He points out that the root causes of weak economic growth (that have kept rates low) will remain. He also says that Trump’s proposed tax cuts and stimulus programs will be watered down by Congress; the expectations of an economic boom are overblown. If he is correct, this means rates may fall again.
This now begs the point: nobody can predict anything in this market. So, if you have been thinking about buying or selling, is it time to get off the fence? Rates are still historically low, but for every 1/2 percent increase in rate on a $500,000 loan, the payment increases about $140 to $150 (and even less after “tax benefits”). Should buyers and borrowers wait to see if rates fall before moving forward with transactions? Absolutely not. Borrowers can easily take advantage of no-cost refi’s if rates fall.
If you do decide to buy or sell, give me a call, I would love to help you navigate the process!
I thought this might be interesting to share. Traditionally, there is very little on the market as we enter the holiday season. The last couple years, sellers listing in December and the beginning of January tended to have multiple offers because there isn’t much inventory (meaning, people don’t like to have Open Houses or showings during the holiday season as they are usually entertaining family or friends).
With the Presidential election around the corner, many agents are getting the feel the market has softened. It will be interesting to see how this year’s election will affect our market. Here are some insights from my friend Jay Vorhees at JVM Lending:
Trump = Lower Rates; Clinton = Same or Higher Rates
We have blogged several times about how rates are not held artificially low prior to major elections. It is a myth that they are. Presidents, in fact, like to see proof that the economy is getting stronger, and these signs usually push rates higher. Presidents hope for positive signs like GDP growth, job growth, lower unemployment, etc. These signs usually push investors into stocks and out of bonds, causing rates to go up.
(Quick reminder: When investors demand more stocks, rates go up; when investors demand more bonds, rates go down.)
With respect to Donald Trump and Hillary Clinton, it is all about “stability.” Stock market investors like “stability” as much as they like growth. Worries about instability or shakeups send investors away from stocks and into the safety of bonds (pushing rates down).
Investors believe that Clinton will follow President Obama’s course, and this is perceived as “stability.” So, signs that Clinton might win will probably keep investors in stocks, which will ultimately keep rates largely the same.
Investors are not sure what Trump might do, so signs that Trump might win will probably push investors to the safety of bonds, pushing rates lower.
This is very similar to the uncertainty the Brexit vote created and its influence in pushing rates lower.