Mortgages & Creative Financing

HVCC Regulations & What’s the Deal with Appraisals?

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Google the phrase “HVCC Nightmare” and you’ll return over a hundred web pages discussing the horrible legislation  passed in April 2009 governing  how appraisals are to be conducted in the mortgage business.  For those who aren’t familiar with this legislation and how it impacts the lending process, here’s a quick overview:

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  • Appraisers can no longer communicate with or have any contact with other parties involved with the transaction (i.e. loan officers, agents, mortgage brokers, etc).
  • Appraisals must be ordered through either third  party appraisal companies (AMCs) or through some other mechanism within an organization that randomly selects an appraiser.
  • Lenders can’t own their own appraisal companies.

At initial glance, these points seem fairly reasonable.  I can appreciate the intent of this legislation and the need to rein in mortgage industry abuses. However, having been personally involved in numerous transactions since the new rules were enacted, it does feel like the pendulum now has swung too far in the other direction.

This topic is fresh in my mind because I’m  working at the moment with a new investor who just received the appraisal back on his first investment property. He is buying the house for approximately  $81,000 and the appraisal just came back at $81,000. With other properties in the area selling in the $100,000 range, he was disappointed and wondering why the appraisal wasn’t  higher.  Unfortunately, under the current system, the appraiser usually has a copy of the sales contract and is simply determining if the sale price is justified – not necessarily determining true market value for the property. In this example, it’s a good bet if the sales price had been set at $95,000 the appraisal would have mysteriously come in at $95,000!

In light of the continuing high rate of foreclosures, and the mandated HVCC compliance, I’m usually satisfied when the third party appraiser doesn’t completely botch an appraisal! Talk to any real estate investor who has been buying and selling property over the last two years and chances are he’ll  have a story or two about how a horrible appraisal killed a deal.

Truth is, with real estate values all over the place and appraisers disincentivized to work hard for an honest  appraisal, most appraisals aren’t worth the paper they’re written on.  In fact, I’ve seen appraisals vary as much as 50% on the same property! One appraiser may choose to use good retail comparable sales while another appraiser chooses to use only foreclosure comparables to value a property. Who can say who’s right? This industry has become so subjective that it’s really evolved into one person’s opinion versus  another’s.

At the end of the day, investors need to do their own homework to determine whether or not an investment property makes sense.  I personally don’t care what an appraisal says; the appraisal in most cases is just a means to an end.  I’m going to conduct  my own due diligence to determine what I believe a property is worth (or will be worth at some point in the future). If the cash flow from the property fits into my investing strategy and there is good potential for long term equity gain, I’ll likely move ahead with the purchase regardless of one appraiser’s opinion of value.

Ken Corsini G+ is the host of the Deal Farm Podcast (on iTunes) and has 10 years of full-time real estate investing experience. His company, Georgia Residential Partners buys and sells an average of 100 deals per year and has helped hundreds of investors around the country make great investments in the Atlanta market. Ken has a business degree from the University of Georgia and a Master Degree in Building Construction from Georgia Tech. He currently resides in Woodstock, Georgia with his wife and 3 children.

    Replied over 8 years ago
    “At the end of the day, investors need to do their own homework to determine whether or not an investment property makes sense.” You summed this up perfectly. Too many investors today are rushing into contracts with little knowledge about the value of the site.
    Replied over 8 years ago
    I think lazy realtors and appraisers are keeping housing prices artificially low. Realtors dont want to work for the sale and are encouraging low priced listings for a quick sale. And then when you do get an offer, the appraisal comes in lower than the offer and you lose again. In my opinion a house is worth what someone is prepared to pay for it- the negotiated price!! You shouldnt need an appraisal on a sale – where are the anti-appraiser lobbyists when you need them!
    Replied about 7 years ago
    I am a commercial and residential real estate appraiser. While I would concur that there are poor appraisers in the industry that have contributed to the financial crisis, it is ridiculous to say that appraisers are responsible for ‘artificially keeping housing prices low’. Appraisers are supposed to appraise the property by what the market supports. In other words, whatever the sales and trends are indicating, that is what the value is. Realtors also have an obligation and financial incentive to sell the property for as much as they can. So why would they want to sell it for a low price!? Also, if you don’t want to get an appraisal, then don’t get a loan….it’s that simple. I have saved some investors and clients millions of dollars because they didn’t see the whole picture of what they were buying. When you see the 100-300 page reports that ‘good’ commercial appraisers produce, you can appreciate the importance of our work.