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Proposed Regulations Would Allow the Majority of US Homes To Be Bought and Sold Without Being Appraised by a Human (wsj.com)
Federal regulators have proposed loosening real-estate appraisal requirements to enable a majority of U.S. homes to be bought and sold without being evaluated by a licensed human appraiser [the link may be paywalled; alternative source]. That potentially opens the door for cheaper, faster, but largely untested property valuations based on computer algorithms. From a report:
The proposal was made earlier this month by the Office of the Comptroller of the Currency, the Federal Deposit Insurance. and the Federal Reserve. It would increase to $400,000, from $250,000, the value of homes that can be bought and sold without a tape-measure-toting appraiser visiting a property.
More than two-thirds of U.S. homes sell for $400,000 or less, according to U.S. Census data and the National Association of Realtors. If the regulators' proposal had been in force last year, about 214,000 additional home sales, or some $68 billion worth, could have been made without an appraisal, regulators said in their 69-page proposal.
Some worry, though, that dropping appraisal requirements would introduce new risks into the $10.7 trillion market for home loans. "We still would prefer a human being doing the appraisal," said Lima Ekram, a mortgage-backed securities analyst at Moody's Investors Service. One issue: Automated valuations done by computers are largely unregulated. The 2010 Dodd-Frank financial overhaul required regulators to propose quality control standards for so-called automated valuation models, but they have yet to do so.
More than two-thirds of U.S. homes sell for $400,000 or less, according to U.S. Census data and the National Association of Realtors. If the regulators' proposal had been in force last year, about 214,000 additional home sales, or some $68 billion worth, could have been made without an appraisal, regulators said in their 69-page proposal.
Some worry, though, that dropping appraisal requirements would introduce new risks into the $10.7 trillion market for home loans. "We still would prefer a human being doing the appraisal," said Lima Ekram, a mortgage-backed securities analyst at Moody's Investors Service. One issue: Automated valuations done by computers are largely unregulated. The 2010 Dodd-Frank financial overhaul required regulators to propose quality control standards for so-called automated valuation models, but they have yet to do so.
You can buy a house without appraisal, but if you're getting a mortgage loan, the bank wants to know that the deal makes sense (the house it worth what the buyer and seller are saying it is worth).
Inspection is a different issue, but generally also required by banks and/or cities.
Private home sales in the US usually come with lots of inspections of various things:
1) Most buyers demand a physical home inspection by a professional home inspector, looking at physical condition of the property and the mechanical systems. But, no one is an expert at everything, and most home inspection agreements disclaim liability for missing major issues.
2) Most mortgage companies/banks require an appraisal of value before agreeing to the loan. Ironically, most appraisals find the value of the home is just slightly higher than the agreed upon sale price. This is the issue being discussed here.
3) The mortgage company can also demand its own on-site inspections, including such things as radon inspection, pest inspection (termites, carpenter ants, etc), lead paint certification, asbestos certification, etc.
4) The mortgage company will also demand a number of legal investigations: deep historical inspection of title, liens, outstanding permit issues, etc. They'll also demand associated title insurance to protect them if the title search misses something. Most buyers also purchase their own title insurance.
5) Mortgagers also demand that you pay for home insurance for at least the duration of the mortgage.
6) Often, the local municipality requires homes to have a certificate of occupancy, and will demand their own inspection of the home and property at sale for code and safety issues which must be fixed before occupancy by the new owners is permitted.
7) In some jurisdictions, there can be additional legal issues that need to be investigated, such as mineral rights, flood inspections, etc.
There are probably a few others that I'm forgetting.
I think you’re confusing an appraisal with an inspection (English, eh?). In the US, an appraisal is when a licensed professional determines the marketable value of a property. An inspection is when you or someone you hire comes out to see if there are mechanical or physical issues with the property.
In most states, inspections are not required by law. I am a realtor, and I have never heard of a lender requiring an inspection, but I don’t think there is anything preventing them from doing so.
Appraisals are required by lenders, and I think they always will be, regardless of this law change.
Anyone with first-hand experience buying and selling during the previous housing boom knows how "flexible" a lot of appraisers were in bending to the will of agents in getting appraisals that accommodated asking prices.
Calling it flexible is being generous - there was outright and rampant fraud in the system. Appraisers who didn't play ball weren't used in future work, creating a perverse incentive to go along even for those who wouldn't otherwise be predisposed to break the rules.
Appraisals have nothing to do with investments or bubbles. Your lender does not care what you are willing to pay for a house, they care what someone else will pay if you default on the loan. The appraisal process is supposed to help determine that.
A home inspection is generally worth the cost. An appraisal is different, and usually a waste of money.
The appraiser will walk through the house and make sure nothing obvious is wrong (which the inspector already does much more thoroughly), measure the size of the rooms (which is already a matter of public record, and also easy to do yourself), and then calculate a price based on comparable recent sales nearby.
Since the sale prices of the nearby comparables is public information, and available online, why do you need a human to calculate it, rather than a computer program? Answer: You don't.
You're asserting "all rooms in an area of similar size are worth the same" without looking at any of the details that an appraiser would. Ceilings, doors, glass, light, materials, all kinds of things factor in.
They factor in far less than you think. Many sellers spend a small fortune on new countertops and carpets only to find they make little difference to buyers.
The idea that you're going to get a realistic valuation of all of that from a housing inspector or a public county recorder-assessor is just retarded.
Inspectors don't do valuations. That is obviously not their job. But they WILL find major problems, such as structural insect damage, that can influence the valuation.
NOBODY uses tax assessments to do valuations. They use the sale price of comparable properties.
An appraisal generally isn't for you, its for the bank. The bank wants it to make sure you aren't paying more than the place is worth, and they aren't lending you too much. Otherwise I have a 100K condo I could sell you for 1M. You declare bankruptcy, the bank takes the property, I make a 900K profit and split it with you later on. With the appraisal they make sure that they don't lend more then the appraised value, and possibly make you take out PMI or refuse the loan.
Inspections are a good idea, and cheap enough you're stupid not to get one. But they aren't legally required (although a bank may require you to get one as a condition of a loan. I believe VA loans require termite inspections).
I still have more fans than freaks. WTF is wrong with you people?