HVCC Regulations & What’s the Deal with Appraisals?
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.