Monday, July 27, 2009

HVCC Strikes Elk Grove...and one of my transactions...

I hesitated to blog about my recent experience with HVCC appraisals until this particular transaction closed...but thankfully my buyer clients closed on their Elk Grove home on Friday, so now I will share this awful experience with the world.

For those of you not familiar with the Home Valuation Code of Conduct (HVCC), it is legislation that went into affect on May 1, 2009 that regulates how conventional lending appraisals are conducted. I have blogged about the HVCC a couple times, and you can read up on HVCC here.

At the end of May, some first time buyer clients and I wrote an offer on a great Elk Grove home. There were offers from multiple buyers on this property, and we ended up with a contract price slightly above the original list price. My clients were extremely excited, because this was a great house that was not bank-owned and not a short sale, and also because the market for Elk Grove homes in their price range is quite brisk with lots of competition from other buyers.

Their loan officer ordered their appraisal a few days into the transaction. Due to HVCC guidelines, an appraisal management company randomly assigned an appraiser to do the appraisal. The appraiser did not contact the listing agent to get access to the house until 5 business days later. The appraisal report itself was not delivered to the loan offer until 4 business days after that...if you are paying attention, you will realize this is more than 2 weeks into the transaction. Ridiculous.

Well, it turns out this appraisal management company sent an rookie appraiser from Pleasanton who was not familiar with Elk Grove to do the job. He valued the property $50k below our contract price. The appraiser neglected to use the most relevant recent comparable sales from the same neighborhood. He also refused to use a comparable sale in his analysis that was sold 'by owner' (and was not in MLS).

The seller was completely insulted. The buyer was heartbroken. This was an obvious speed bump in our transaction...the lender would only lend a certain "loan-to-value" based on the appraised value. Given this set of circumstances, my clients would be unable to obtain financing...even though they were willing to pay the higher contract price for the house, they could not.

We immediately filed an appeal with the appraisal management company. It took 5 business days to get the results of the appeal. The value was left unchanged by the appraisal management company. ARRGGHH!!!

What to do...? After a couple days of going back and forth with the listing agent, I was able to convince the seller to pay for a new appraisal for my buyer client. A new appraisal from a new appraisal management company was ordered. This appraiser contacted the listing agent the same day for access to the property. The inspection was completed within 2 business days, and the appraisal report was received by the lender within 2 more business days. This appraiser was also not from the Sacramento area. While the value of this appraisal was substantially higher than the first appraisal, the value was still much lower than the contract price.

Thankfully, after lots of back-and-forth with the listing agent over a few days, I was able to re-negotiate the entire contract for my buyer. The seller agreed to lower the price to the appraised price, however some of the seller concessions (credits for closing costs) they had originally agreed to were reduced.

So in the end, our 30-day escrow took 55 days to close. My buyer clients were extremely lucky that the loan program (a special CalSTRS mortgage program for teachers) they were using offered a 60-day interest rate lock, otherwise they might have lost their low interest rate. They were also fortunate that the seller was willing to pay for a second appraisal, which cost about $400...and finally, they were fortunate to be able to purchase an outstanding property for several thousand dollars less than what they had originally intended to spend, but they had to come out of pocket several thousand dollars more due to the reduction of the seller concessions.

The sellers on the other hand - they were pretty unhappy, and rightfully so. They had already purchased another home, and really needed to sell this one. The escrow took almost twice as long as it was originally supposed to, and they were responsible to make another monthly mortgage payment. They ended up paying that $400 for a second appraisal. They were going to have to disclose the presence of these other low value appraisals to any subsequent buyer, and may have had the same issue had they with my buyer if tried to re-market the property to a different buyer - so they sold the house for less than the originally agreed upon price.

I know the HVCC was originally intended to protect the consumer, but does this situation really seem fair?

1 comment:

Cj said...

I have two comments on this. One, It isn't HVCC that makes AMCs do crappy work. That's all on them. You can see the difference between the two companies in this transaction by itself. I settled on a good AMC a while back and haven't had any customer-service problems.

Two, market appraisals are very hard to get on real-estate transactions right now. By "market", I mean appraisals that reflect what the obvious market for the property is - the price at which the buyer and seller are willing to exchange. Unfortunately, banks are being extremely cautious about values, and appraisals are coming in lower across the board than people would like to see. My advice to most sellers is to get an appraisal done themselves, on their own dime, before they decide where to sell the house. It's an expense nobody wants, but it's a far sight better than expecting to get $20,000 more than is going to be available.

Good article, and thanks for sharing this info. There is a lot of this going on out there.