The bad surpriseHome sellers and buyers sometimes get a bad surprise in the middle of an escrow. Increasingly home appraisals are lower than the sale price.
What happens next? If the buyer is buying the home with financing, the lender will loan based on the lower appraised value, not the purchase price. Three things can happen:
- The seller reduces the price to the appraised amount or
- The buyer must make up the difference with cash or
- The sale is canceled.
The whyWhy this trend in lower appraisals? Home Valuation Code of Conduct (HVCC), went into effect on May 1, 2009. Its primary goal is to ensure that real estate appraisers are not coerced in any way into establishing a pre-determined or desired valuation on a property.
While HVCC is not a federal law, it does apply to every mortgage on one- to four- family homes from any lender in the country who intends to sell the loan on the secondary market to Fannie Mae or Freddie Mac.
In the past, it could be argued that the best determination of market value is the price established by a willing buyer and a willing seller. Now, market value as determined by an appraiser is more influenced by recent sales (including distressed sales) and market trends. The result is that appraisals tend to be more conservative than in the past — potentially lower than the price agreed to by the buyer and seller.
Avoid the mistake nowA canceled escrow is very stressful. Once a home is in escrow, a seller and buyer are usually invested in the close of the sale. The buyer has made plans to sell their home, already decided how to decorate “their” new home, made moving plans. Similarly, the seller has planned what to do with the money, may have put an offer on another property, and is looking forward to the next stage of their life.
Sellers and buyers can avoid this problem by working with agents who know the market values. La Jolla values are idiosyncratic and often very confusing. It takes an agent who really knows La Jolla in order to establish a realistic listing price for the seller and an offer price for the buyer. When choosing an agent, find out their experience in La Jolla. One good sign that an agent is knowledgeable about La Jolla real estate is membership in REBA (La Jolla Real Estate Brokers’ Association).
Contributed by the La Jolla Real Estate Broker’s Association, REBA,
Be sure to ask your agents if they are REBA members.
More details about HVCCHVCC is intended to set standards on solicitation, selection, compensation, conflicts of interest, and appraiser independence Under HVCC, only a lender or any third-party specifically authorized by the lender may select, retain and compensate an appraiser. Lenders are prohibited from the following:
• Using any appraisal report that was prepared by an employee.
• Accepting any appraisal report that was completed by an appraiser who was selected, retained, or compensated in any manner by any other third party, including mortgage brokers and real estate agents.
• Using any appraisals report that came from an AMC (appraisal management company) that is owned by the lender or its affiliates unless the lender owns less than 20 percent of the AMC and has no role in its day -to-day operations.
• Using any appraisal report that came from an entity that is owned in whole or in part by the lender, such as title companies or settlement services companies.
• Ordering a second appraisal if it is done in an attempt to influence the outcome of the first appraisal.