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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.
Sure, but banks need to know that what they're paying (loaning out) makes sense. Thus a requirement for an appraisal. This is even more important if it's a government-backed loan -- i.e. public money.
Generally not required. I've sold real estate in 3 cities across 2 states. Never had an inspection requested by the buyer. Of course you're an idiot if you don't, but there's no general legal requirement.
I still have more fans than freaks. WTF is wrong with you people?
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.
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.
I really don't know why an appraiser is even told what the contract price is.
I've purchased 7 properties and only one appraisal has failed to meet the price. My agent said that she and the mortgage broker would get it fixed - which made me angry because it meant I would be paying $300 for a useless valuation.
I backed out of that deal. I consider the $300 to be money well spent.
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Homes are already typically appraised ( guesstimates ) every year so the local government knows how to calculate your taxes so I don't quite understand why this is an issue. ( Well, Texas anyway. Is likely a different story in other States where taxes on homes are capped at the purchase price. )
Unless you're paying cash for the home, banks will typically only lend up to X amount of the appraised value of a home. ( Loan type, credit score and whatnot taken into account ) Why would they loan you an asking price of $500k for a home only worth $250k simply because the sellers think they can get it ? If you walked away from it, the bank would now be stuck with a home only worth $250k. Bad for the bank.
In that situation, the bank has no issues loaning you the $250k that the home is appraised at, but it will be on you to come up with the other $250k.
Finally, if you're about to commit to a $500k home, why would you cheap out on a third party* appraiser and / or inspector ?
( Yeah, I'm sure the real estate agent knows who to call, but it would be in your best interests to call someone they DON'T know to ensure a fair inspection )
That's just nuts.
We're not generally talking overall condition of the property. That's easy to work out from just looking at it. The inspection is to cover the buyer's ass to uncover anything that would cost them a ton of money that the property owner hasn't disclosed (knowingly or unknowingly) prior to sale.
The last place I bought the inspector spot checked the voltage at a number of outlets, the furnace & AC, appliances to make sure they worked, sinks and tubs to make sure the water came out and that they drained, did a visible structural inspection which found some rot in the outside deck, looked at the roof to make sure there weren't any obvious issues, opened windows to make sure the cranks worked, checked the foundation for cracks, looked at roof drainage to make sure water wouldn't come in when it rained, looked for asbestos and lead paint, etc.
A lot of those are not super obvious to someone not trained to look closely, and/or who doesn't have the tools to do it. But all could cost thousands or tens of thousands of dollars to repair. Knowing that ahead of time allows the buyer to negotiate with the seller to fix the issues, or provide a discounted purchase price intended to cover the cost of repairs.
That inspection was in a very competitive market, so I waived any counter-bid for anything that would cost in total less than $1000 to fix. That meant as long as they were pretty certain that nothing major was wrong, they were pretty much guaranteed a sale. But if something was majorly wrong, I'd be able to get them to fix it, so I wasn't buying something that would immediately cost me tens of thousands to repair.
At the house I bought before this one they hadn't shoveled during the winter, and an ice dam built up against an exterior door which forced water under the door into the house. Soaking in water like that all winter rotted out the bottom couple of feet of the door frame and the first couple of feet of subflooring. That was a case where we had them fix it before we moved in, because we didn't want to have to rip up the floor, fix the subfloor, rip out the bottom couple of feet of the door frame, and then put it all back together.
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Property inspections are basically in-depth appraisals without the actual appraising of value.
Appraisals are very superficial, they just come and make sure that the property exists, that its description is relatively accurate and there is no visible damage that would reduce the value outright (typically blight and damage that makes the property or portions of it uninhabitable). They also do a check of records to make sure the seller is not scamming anyone and there are no liens against the property.
In the US and in the EU you have various insurances during and after a purchase.
- You have homeowners insurance; that covers damage to the property due to exterior factors (not simply because you didn't maintain it) that needs extensive repair - eg. wind and fire damage
- Mortgage insurance; that covers the property in case the property becomes uninhabitable or is completely destroyed or otherwise devalued (eg. if you find out after purchase the previous owner didn't actually own the complete property or a legal case ends up taking away some of your property). Mortgage insurance typically only covers the bank's share of the property (the principal value of the mortgage). It also covers undiscovered liens so you don't bail on the property and leave the bank with more debt than the value of the property.
- Optional mortgage insurance; that covers "your value" of the property (eg. any money you sunk in upon purchase or already paid back to the bank) for the same reasons as the bank's mortgage insurance. In the EU and certain US-government-backed loans this is often not optional. It also often covers undiscovered liens (again: your share of them).
The appraised value is used in all of the above calculations during losses and often used as well in calculating the property taxes (if any). In many cases homeowner insurances will only pay out up to the value or a rate/multiplier of the appraised value, even if it costs you more to rebuild the property because in the US you can purchase insurance that doesn't cover the full value of the property. Hence why homeowner insurances often tell you to insure for $300k or more even though your house may only cost you $100k.
Appraised values also do not necessarily match real values. The sale value is often decided by market forces and things like conditions of mechanical and other systems, other bidders etc. So you can buy a house for $20k above 'market/appraised value' just because you 'want the house'. Some banks may allow you to lend a certain percentage above the appraised value, others (again, typically only in the EU and for US-government backed loans) may not - that's the risk the bank is willing to take based on your credit.
You do get an engineer inspection as a homeowner but that's fully optional. You do this so you don't get any 'unexpected' costs right after you purchase. They will test the heating system and other things that aren't necessarily structural and give you a report so you can decide what to have the seller repair or renegotiate the purchase cost.
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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.
Have bought 2/2 homes with home inspections. The inspections aren't worth shit. They more or less work for the Realtors, whose sole concern is making sure the house gets sold. We're still fixing stuff that never came up in the second home, you know, little things, like the wall full of mold, and the lack of working power in most outlets in the upper floor.
You are not alone. This is not normal. None of this is normal.
Oh, one other piece of free advice: Don't use a realtor to buy a house.
If you use a realtor, you will get about a 5% higher sales price. But the buyer agent and seller agent commissions are typically about 3% each, or 6% total.
So if you are a seller, using a realtor is a wash. You get a slightly higher price, but lose it all again on the commissions.
But for a buyer, it is just a dead loss. Your realtor has NO interest in negotiating a lower price on your behalf, since her commission is a percentage of the selling price.
Instead, you should ask the selling realtor to do a dual-agency, and make a waiver of the buy-side commission a condition of your offer.
Realtors are parasites. Just one notch above lawyers.
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?
Not only are appraisals a waste of time but they get completed negated when the realtors "pull the comps" which is when they look at the sales of homes in the same area over the last 30-60 days and use those as baseline prices. The appraisal can easily be 15-40k below that, or if the market is under water, above it.
Real estate is such a sleazy market in general I pray I live long and die in my current house just to avoid dealing with that cluster fuck again.
Yep. The article was obviously influenced by an appraiser who anticipates reduced income. People should be allowed to be stupid, and stupidity should be painful. But there are lots of non-government protections already in place - the mortgage writer and the title insurance company will both ensure that they're protected if the buyer simply walks away. It's only an issue if a buyer is paying cash. And if they can afford that, they should be smart enough to check things out beforehand.
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I have friends who worked for lenders, directly responsible for contacting the right appraisers and ensuring the appraisals were done properly and on-time, so as not to hold up loans in progress.
The concept might be good, but in practice? The whole thing seems like a sham to me.
The loan officers do their best to hand-pick the appraisers for given loans, to make sure they go through at the valuations they need to see. The law says, of course, that they're not allowed to do that. But the OWNERS of many of the lending institutions know that things have to work that way, for them to maximize profits and prevent a lot of angry customers who want to buy a property, but get turned down.
So what happens? The lenders opt to use specific software packages that automatically assign appraisers for loans entered into the system. But the software database still needs to be filled with the appraisers it's supposed to assign. Guess who gets to choose who gets put into the database when it's all configured?
Unlike actual inspectors, the appraisers don't even have to really take a close look at much of anything. They have to bring some photos back to the bank and give a guesstimate of the value based on comparable properties. In most cases, they're only required to do a "head and shoulders" look at the attic of a given home, for example. They're not required to climb up into an attic beyond that point.
Often times, the appraisers are even told they can't get hired to do appraisals for given lenders unless they charge below a certain price. If that is below the going rate for an appraisal in that zip code, you can be sure the appraiser is going to do only the bare minimum necessary ....
We sold a house in the UK 5 years ago - put it on the market for X, got an offer for X and then the prospective buyers mortgage provider wanted an appraisal.
The appraiser appraised the property at X-£14,000.
Buyers wanted us to drop the price, we refused and the mortgage provider withdrew.
We put the house back on the market and it sold two weeks later for X+£10,000.
Appraisals are very much in the eye of the appraiser.
The buyer. If you don't want one, the bank may insist on one if they're giving you a loan. The realtor should have nothing to do with the appraisal or choice of appraiser, other than unlocking the door so he can get in. My appraiser and realtor arrived before I did, and I found them talking with each other in front of the house. I wasn't happy about that (it turned out they knew each other from past appraisals). When his work was done, I paid him with a personal check.
The whole point of the appraisal is to provide a third independent sanity check on the value of the home (the first two being the seller's valuation, and your realtor's valuation).
The bigger problem with the housing boom was that your realtor wasn't always acting in your best interests if you were buying. When you hire a professional, like a lawyer, you pay them a fee, and they work in your best interests. When you hire a Realtor, their fee is usually a set percentage of the sale price. That works for the seller, but for the buyer it creates a conflict of interest. Your Realtor is supposed to be trying to get you the best price possible, but they get paid more if they don't help you get the best price possible. The industry really needs to address this problem before it can be taken seriously as a "professional" organization. I used Redfin since their realtors get paid a fixed fee.
Home inspector just wants to get payed. Mine missed the hidden termite damage , now I am replacing two walls, one is an exterior.
Inspectors,appraisers, realtors are really just in for the money , they could care less if the house is about to fall over.
Yup, at least in Canada, inspectors make you sign a waiver that essentially absolves the inspector of any and all responsibility of ANY problems found with the house. In fact, inspectors aren't even allowed (supposed?) to move anything so they can take a closer look. So, if you have a huge crack in the basement foundation, all you need to do is put a wardrobe in front of it and as far as the inspector is concerned, there's no crack.
If you think about it, there's no way an inspector can give you an accurate assessment of a house's structural quality or other problems in 2 hours.
I work for a real estate company. You are wrong on every point.
Florida. And the buyer pays for the inspector, but the inspector is usually picked by the buyer's Realtor because their entire job is supposed to be to represent the buyer. Picking someone independent means you need to know what you're doing to begin with, which most people don't, so in practice virtually all HIs are beholden to Realtors.
You are not alone. This is not normal. None of this is normal.