IMAGINE THIS SCENARIO: Your clients just completed a loan application, and the lender says they can receive the loan without ordering an appraisal.
In fact, the lender says waiving the appraisal will be cheaper and speed up the transaction. Your clients want to save time and money but are unsure if they should accept the appraisal waiver. How do you advise them?
At the 2018 Appraisal Summit at NVAR Fairfax on Nov. 29, presenters helped answer this question by discussing a recently proposed appraisal exemption. First, Dr. Terry Clower, director of George Mason University’s Center for Regional Analysis, opened the event with a breakdown of the national and regional economy.
U.S. Gross Domestic Product (GDP) continued to increase, but according to Clower, the surge of growth in the second and third quarters of 2018 could be a “sugar high” from the new tax law. Job growth held steady, and the unemployment rate was at its lowest in nearly 50 years at 3.7 percent. (See page 8 for Clower’s complete 2018 recap and 2019 outlook.)
“By many measures, if we aren’t at full employment we are getting close to it, but there are some caveats to that,” Clower said.
Clower explained that although unemployment was low, the labor force participation rate – the percentage of people employed or looking for a job – was at a low of 62.9 percent. The participation rate was at 67 percent before the Great Recession and has not recovered since, he said. In addition, even with low unemployment, Clower said wages had not increased as much as expected after the tax cut.
Consumer confidence in the current situation is high, but consumer expectations leveled out after the “Trump Bump,” which Clower defined as a period after the election where consumer expectations spiked.
A growing concern in the national economy is the possibility of an inverted yield curve, which occurs when long-term rates fall below short- term rates. An inverted yield curve has been an indicator of a recession in the past, Clower said.
Despite GDP growth, both existing and new home sales have decreased significantly.
“I would argue to you that we have run a cycle where the people who can afford to be buying a home are in a home, and the people that might otherwise be moving up are not,” Clower said.
Due to Amazon’s announcement of Arlington as one of its HQ2 locations, Clower said appraisers and agents will start to encounter clients with unrealistic expectations of at least a 10 to 15 percent increase in sales price.
Like the new tax law, “the Amazon story has become a little bit like giving the Halloween candy bowl to a 6-year- old,” Clower said. “There’s a lot of sugar high and jumping around.”
Amazon will bring many jobs to the D.C. metro area, but the region has already been growing, Clower said. From October 2017 to 2018, almost 61,000 jobs were added to the D.C. area. All job sectors in the D.C. region increased except for the federal government, which lost 5,400 jobs.
“Overall, the story is about the same: we are growing,” Clower said.
John Russell, director of government relations for the American Society of Appraisers, began his presentation with news that could impact appraisers, agents and consumers.
On Nov. 20, federal bank regulators announced a proposal to raise the appraisal exemption threshold for residential real estate transactions from $250,000 to $400,000. Although less than half of homes in the area transact below the $400,000 threshold, Russell said this proposed rule would still have significant consequences.
“It’s not about the number,” Russell said. “What that number indicates to everyone else in the housing finance world is this: the federal bank regulators are comfortable with relaxing collateral valuation requirements in lending.”
Russell said if bank regulators are comfortable relaxing valuation requirements, then lenders will follow suit and relax their requirements as well, which means an increasing number of lenders will no longer require appraisals. If the lender does not require an appraisal, Russell said Realtors® should advise their clients to order one directly. Hiring an appraiser directly, not through a lender or Appraisal Management Company, allows the client to ask specific questions about the property, including what the future valuation of the property might be.
Agents and their clients expose themselves to risk by accepting the appraisal waiver, Russell said. Without knowing the true valuation of their home, buyers could overpay for their house, and agents could be sued for incorrectly pricing the property.
“You absolutely want the protection of another professional coming in and telling your client – at a minimum – what they think that property is worth today,” Russell said.
Pat Turner, president of the Old Dominion Chapter of National Association of Independent Fee Appraisers (NAIFA) and the Virginia Coalition of Appraisal Professionals, also emphasized the need for appraisals.
“Do they [lenders] get paid if that loan does not close? No. Do you get paid if that sale does not go through? No. Does the seller’s agent get paid if that loan does not go through? No. Does the appraiser get paid if that loan does not go through? Ding ding ding! Appraisers are the only neutral party to the transaction; that’s why the appraisal clause is in your contracts,” Turner said.
In addition to offering more appraisal waivers, Russell said that lenders will start to perform more hybrid appraisals, which are typically done by unlicensed or inexperienced appraisers who never visit the property. According to Russell, Realtors® should encourage their clients to ask if they are receiving a hybrid or full appraisal to ensure an accurate valuation.
Regardless whether a client is hiring an appraiser directly or working with one through a lender, Turner said Realtors® should ask the appraiser five questions before hiring:
- What is your name and phone number?
- Are you a member of our MLS?
- Do you have access to a lockbox key?
- How long have you been an appraiser?
- Where are you from?
If the Realtor® isn’t comfortable with the appraiser, he or she can contact the lender to get the appraisal reassigned.
Agents can also use appraisers for pre-listings and remodels, Turner said. Ordering an appraisal for a pre-listing would save Realtors® time and provide them with the correct square footage, detailed floor plan and set of comparable sales, Turner said.
Turner and Russell encouraged Realtors® to start developing relationships with appraisers and using them as a resource for their business. Start simple with a cup of coffee, they advised.
“We are allies in this; we are not adversaries,” Turner said. “We are in this profession together.”