Anyone who has been actively investing in real estate over the last few years and has been working with a traditional lender knows the kind of difficulty surrounding the appraisal process. It really started in 2009 with the new HVCC laws that went into effect to prevent abuses in the industry between lenders and appraisers. While the intention of the law was good, it definitely created a huge ripple in the housing and mortgage markets that has made the work of a real estate investor much more challenging.
One of the effects of this legislation was the creation of a number of large AMCs (Appraisal Management Companies) which help facilitate the separation of lender and appraiser required by HVCC. For most lenders, the convenience of having a third party appraisal management company to handle appraisers was an easy answer to the compliance requirements of the HVCC legislation. However, those in the business quickly figured out that appraisals through these AMC’s were not only more expensive, but also hit or miss.
As an investor, whether you are buying and selling or buying to hold, it is crucial that appraisals come in where expected. There is nothing worse than spending time and energy to buy a property, renovate it and find a buyer … only to have the deal fall apart (or your profit margins disappear) because an appraiser did a lousy job estimating value.
Interestingly, in the last year or so I have noticed more lenders are popping up with a different business approach to the management of appraisals and HVCC compliance. Many are actually setting up self-managed AMC’s that allow them the flexibility to work off of a much smaller pool of appraisers. In fact, I’ve worked with a few different lenders recently who had as few as 3 to 5 appraisers on their list. While the loan officer doesn’t have the ability to work directly with any of these appraisers (per HVCC), it does make a HUGE difference when you know you have a handful of seasoned and vetted appraisers working on your appraisals. Unlike a large, third party AMC that may have more than 50 appraisers assigned to a geographic area, a smaller self-managed AMC may only pull from a very select group of proven appraisers.
As an investor, having a good relationship with a lender who can provide you with consistent appraisals is absolutely crucial to your business. Whether you are putting permanent financing on a property you plan to keep or selling a retail flip to an end buyer, the appraisal is pivotal to the transaction. One person’s opinion of value can literally change your profit margin by thousands of dollars. Knowing this, investors would be well-served to work with lenders who can deliver consistent and quality appraisals.