Good News – Fannie Mae Announcement Regarding Revised Sales Contracts

JANUARY 9, 2017By RICHARD HEYN, SRA 

As we develop new products for appraisers, compliance with industry standards is always front and center. Our objective is to help improve appraisal quality and provide efficiencies to the process. Everybody wins by connecting industry needs with appraisal reporting techniques through technology, industry guidance, and practical advice. This is ACI’s contribution to the industry – and we hope you find it informative and helpful. Enjoy.

 

You’ve likely been there. The sales contract is changed after the effective date of the assignment and the client then asks you to reflect the revised information in your (new) report. You must then review the new contract and summarize your (new) analysis. I’ve blogged on this scenario in the past regarding whether this constitutes a new assignment or just a new report. Perhaps now this nuisance issue will largely become a thing of the past.

On December 6th Fannie Mae published announcement SEL-2016-09 which should make life a little easier for appraisers. Essentially, if the sales contract is changed regarding the sales price or seller concessions, the lender is no longer required to forward that information to the appraiser. Fannie Mae is apparently recognizing that changes to seller concessions or sales price don’t affect the opinion of value. If, however, the contract “is amended in a way that affects the description of the real property used by the appraiser, then the lender must provide the updated contract to the appraiser and the appraisal should be updated.” Note that “updated” in this context would amount to a new assignment, not just a new report. Here’s an excerpt from the announcement.

Currently, we require the lender to provide the appraiser with all amendments made to a sales contract, including amendments that are made after completion of the appraisal. With this update, we have clarified when the appraiser must be provided with updates to the sales contract and circumstances that warrant updates to the appraisal. For example, if the contract is amended in a way that affects the description of the real property used by the appraiser, then the lender must provide the updated contract to the appraiser and the appraisal should be updated. However, minor updates to the contract, such as changes to seller paid closing costs or changes to the contract price, do not require an updated appraisal. In addition, we have updated the policy to require disclosure of changes to financing information (such as loan fees and charges, and subordinate financing provided by interested parties) to the appraiser only for purchase transactions.

So, does this mean you will never again get a request to review an amended contract and issue a new report when the sales price is renegotiated? Probably not, as lenders and their agents often take time to become aware of announcements like this. But it means you will have an opportunity to educate those individuals who ask you to unnecessarily issue a new report. Simply refer them to Selling Guide Announcement SEL-2016-09 issued December 6, 2016. Reference item number 4, “Disclosure of Information to Appraisers.” We suggest you download a PDF copy now, for future use. Here’s the link: https://www.fanniemae.com/content/announcement/sel1609.pdf

Six Things to Remember When Valuing a Newer Home in an Older Neighborhood

How do you value a new home in an old neighborhood? Here are six things I keep at the forefront of my mind when approaching this situation and choosing comps. What else would you add? I’d love to hear your take in the comments.

  1. Premium: There is usually a premium for new construction. Just as buyers pay more for that new car smell, buyers will typically pay more for a home that has never been lived in.
  2. Fading Premium: However, the premium for new construction fades VERY quickly. This is important to keep in mind because any premium paid when the house was built a few years ago may not exist in today’s resale market.
  3. Infill Location: If the newer home is part of an infill project, it might have a bad location since the best locations were probably already built out. Moreover, infill projects tend to have tiny lots compared to larger ones found with older properties.
  4. Quality: Sometimes newer homes may not have the same quality as older homes, which reminds us new is not always more valuable. Other times though new homes are far superior to the surrounding area.
  5. Conformity: Does the property fit in with the neighborhood in terms of design and size? Or does it stand out in a bad way? The principle of conformity is a very relevant dynamic in real estate, and whether a property fits in the neighborhood or not can impact its value.
  6. Neighborhood Acceptance: Sometimes neighborhoods go through a period of change where it becomes more acceptable for older homes to be torn down and newer bigger ones rebuilt (East Sacramento). Other times it is not common or acceptable, so a new home might look like a sore thumb.

When valuing a newer home next to older ones, it’s easy to automatically assume it’s worth more. Yet we have to ask, how does the market see this new property? Is the market willing to pay more for this or not? What are buyers looking for in the neighborhood? The proof is in the data, so often times we need to dig deep for comparable sales. It might even be helpful to search through the past several years of sales to find something else that was new. What was comparable to the new property at the time of its sale? Did it sell with any premium? Or did it sell right on par with other older homes? Be careful of course when interpreting new construction comps since sometimes newly constructed homes are loaded with concessions and credits, which can inflate the price.

Differentiating Marketing Time and Exposure Time

 The lenders that we work with have made us aware of a concern that they have with the manner in which Exposure and Marketing time are being reported.  While the length of time for each may be similar in some instances, it is important to note that these terms have distinctly different meanings.  As such, they cannot be used interchangeably and need to be independently disclosed.

The additional guidance provided within the ASB, USPAP Frequently Asked Questions section provides a good explanation of these differences.  It states:

  • ·         Although the two may be the same length of time, the meanings are different. The exposure time opinion required by USPAP is specific to the subject property and represents the length of time the subject would likely have been listed for sale prior to a hypothetical sale of the subject property on the effective date of the appraisal. Marketing time, in this context, is the typical length of time the properties in that neighborhood would be expected to be on the market prior to a sales agreement.

 The 2014-2015 edition of USPAP further defines these terms as follows:

  • ·         Exposure Time: Estimated length of time that the property interest being appraised would have been offered on the market prior to the hypothetical consummation of a sale at market value on the effective date of the appraisal. Comment: Exposure time is a retrospective opinion based on an analysis of past events assuming a competitive and open market.

 

  • ·         Marketing Time: An opinion of the amount of time it might take to sell a real or personal property interest at the concluded market value level during the period immediately after the effective date of an appraisal.

Exposure time occurs prior to the effective date on the report and Marketing time occurs after the effective date on the report.  While these time frames can be similar when a market is stable, it is important to note that they can also be vastly different when changing market conditions are present. 

 The following examples are statements that have been included in appraisal reports and deemed unacceptable by our clie

How do appraisers account for a difference in age between comps?

 Ryan originally posted this on his blog  to help real estate agents understand the thought process appraisers go through when choosing comps in the hopes that it would help them when pricing homes.

There are so many factors to consider when valuing a property. Anyone who works in real estate knows this. So how do we account for a difference in age between comps? Does age matter? Should we make any value adjustments? Someone asked me this recently, so I figured it was worth kicking around the issue together. I’d love to hear your take in the comments below.

Question: How do appraisers account for a difference in year built? Do appraisers give an adjustment when to comps there is an age difference?

Answer: Here’s my take. Most of the time buyers tend to buy based on condition instead of age. Thus if there is a difference of a few years or so within a subdivision, it might not have any impact on value as long as the condition is similar. For instance, in some tracts we see an age range of 1977 to 1983. If one house was built in 1977 and another in 1983, and they are in the same condition, it’s unlikely to see the 1983 home command a value premium unless for some reason it has a higher quality or if it is located on a stronger street. Sometimes buyers are actually not even aware of the age of the home. They’re really just looking at the neighborhood and buying what is there. Do you agree?

My $500 Adjustment: I’ll admit when I first began appraising I used to adjust $500 per year on all comps in every appraisal because that’s what I was taught to do. In very technical terms, this valuation methodology is…. bogus. After all, a $500 adjustment per year certainly doesn’t apply to every neighborhood, every market, or every property type. These days though I rarely make any adjustment for year built since most of the time I’m looking at condition instead. However, if the age gap is too large, there may be a difference in value, and we we have to begin asking if we should even be comparing the homes in the first place. For instance, is 1977 vs. 1990 a good comparison? What about 1990 vs. 2003? Maybe not because we might be dealing with a different quality of construction, different tracts, or different markets. But at the same time, we might see homes in one area were built in 1955 and another nearby area has homes built in 1972. If there is no price difference observed between both areas, then the homes may easily be competitive despite their age gap. The thing we need to do though when valuing a 1955 home is to be sure to find 1955 sales instead of just 1972 sales (this helps prove the market really does pay the same amount for both ages).

Subjective Mush: I know this begins to sound very subjective, but there is no rule out there when an adjustment is needed other than when buyers at large have clearly paid more or less because of a feature. In reality it can be tempting to make value adjustments for every single distinction, but sometimes it’s best to not force adjustments by remembering the market isn’t so sensitive as to warrant a price reaction for every single difference. However, a good rule of thumb when searching for comps is to take an “apples to apples” approach. This means we start by searching for similar-sized homes with a similar age rather than choosing newer or older sales that really might not be competitive. I know this sounds basic, but when we keep the fundamentals in mind, it keeps us sharp (right?).

Brand New Homes: As I mentioned recently, we do need to be careful about comparing brand new homes with ones that are even a year or two old because brand new homes tend to sell at a price premium. This means despite only 1-2 years difference in age, we might see a pretty big difference in value.

What is an Arm’s Length Transaction?

 What is an arm’s length transaction? The question seems simple enough, right? Just mentioning it on an appraiser blog creates a flurry of debate over what exactly is an arm’s length transaction. While doing research for this article, it evoked a lot of emotion from my peers. Everyone has an opinion and many believe their opinion is the correct one.

The Appraisal of Real Estate, 13th Edition, published by the Appraisal Institute, states that an arm’s length transaction is “a transaction between unrelated parties under no duress”. The common definitions of market value usually set out the criteria for an arm’s length sale in detail (1).” On the page prior to this definition in this text, it reads, “Sales that are not arm’s length market transactions (in accordance with the definition of market value used in the appraisal) should be identified and rarely, if ever, used (1).”

In the new FHA/HUD Handbook the definition of arm’s length transaction is, “An Arm’s Length Transaction refers to a transaction between unrelated parties and meets the requirements of Market Value.” This is where the lines get blurred. Grandma can sell me her home at market value, under no duress, and it is not arms length but can be at market value. A property that sells for less than market value may occur because it is under duress, such as REO, but it is not between related parties. They can be mutually exclusive. They are not interchangeable terms.

Simple examples of a non-arm’s length transaction are buying a home from someone you have a relationship with (like a family member or a friend). More complex transactions typically involve builders, developers, “flip” transactions, properties being held in trusts or corporations and being sold to the trust or corporation owner. Other examples include real estate agents selling properties to themselves, etc. It is important to examine the relationship of the buyers and sellers to determine whether or not the transaction is arm’s length.

A good illustration of this involved a vacant land sale in Sedona, AZ that I discovered while researching sales for a vacant land appraisal. The sales price was $800,000 in a market of typically $200,000 properties. To add to the complexity of that sales price, the property backed to a highway and medical center, which would typically adversely impact market value, not add to it. Turns out the developer sold the lot to himself to create comparable sales.

To complicate matterssome State assessor’s offices list REO transactions as “non arms length” when they simply should be listed as REO. There are other influences on value aside from being between related parties.

This article is relatively short on a topic that can be written about at length (no pun intended). There is a lot more that can be said about arm’s length transactions but hopefully this has cleared up some of the ambiguity. I invite any constructive comments and feedback. As appraisal professionals, we all need to continue to evolve, grow and learn from one another in a positive arena.

Depreciated Cost, a Test of Reasonableness

With all of the clamor and excitement that Fannie Mae’s Collateral Underwriter (CU) is creating, we started working on a new article that addresses some possible solutions. In this one, we are expanding a bit on using the cost approach as a means to develop and support some adjustments. Each of the three traditional approaches to value can be used to develop a basis of analysis in any of the approaches. As such, the cost approach can be a reliable means to develop a gross living area adjustment, or lend additional support for it. While it does not work each time, has proven successful for us many times, and as such, we do urge studying it and putting it into your toolbox of solutions for supporting adjustments.

For more great articles by Rachel Massey, Woody Fincham, and Tim Anderson visit their site 3approaches.wordpress.com

 

Quantitative adjustments require some type of support. CU is not changing anything regarding this premise. Appraisers are supposed to have support within the workfile for adjustments made, and then support the adjustments with commentary within the report. This is in harmony with USPAP. Many appraisers do not address specifics on the adjustments made, let alone explain how they were developed and applied. So here is one method that can be relied on as a means to support a gross living area (GLA) adjustment. Sometimes it can be used for other items.

One aspect of Collateral Underwriter (CU) that many have been discussing concerns price/SF. In the example from the CU webinar, it is stated that if an appraiser is using $15/SF for adjustments regarding gross living area (GLA) adjustments and the comparables sales indicate $200-$300/SF, then it will be probably be flagged as a higher-risk item. So part of the advantage of using this technique will help you address this with analysis. Let us look at some improved sales now that we have an idea of what site values are for the market (Read More)

COMPLEX APPRAISAL ASSIGNMENTS

What constitutes as a complex appraisal assignment? Basically a complex property can be anything that is “atypical”; meaning that specific characteristics of the property being appraised differ from what is the norm in the neighborhood or market area of which the property is located.

Examples of what most federal financial institutions consider “atypical” factors which could make an appraisal “complex” include but are not limited to the following:

  • Use of the property when contrasted with other land uses in the neighborhood
  • Location, single family in predominantly commercial or industrial developed area, ocean or lake front, mountain, island, a condominium unit or multi-family in a rural area, etc.
  • Property rights, environmental and zoning issues, etc.
  • Architectural style, unique, dome, earth berm, special use properties, etc.
  • Size of improvements, luxury dwellings, certified Green, under improved cabins, etc.
  • Dwelling historic in age or possibly a new construction home in an area of older construction

When completing complex assignments, it is critical that one expands on each step of the appraisal process in order to complete the assignment correctly. For complex assignments it is important that well written commentary with additional addenda validates the appraiser’s conclusions and helps the reader of the report understand the subject’s complexities.

Before taking on a complex assignment, you must be aware of and understand the methods and techniques that are necessary to produce credible assignment results. Remember to always determine the scope of work necessary and develop an appraisal that is credible given its intended use.

Real Estate Tool

Use these online real estate tools to learn more about building cost, cost vs. value report, neighborhoods & communities, cities, risk hazards, cost of living, crime, schools, buying and selling a home and more. Please note that the home value estimator tools are not reliable. A property value estimate is not an appraisal and you will not be able to use it in place of an appraisal.

RULES, REGULATIONS & GUIDELINES
 

 In order to assist you to keep up with changing laws, regulations and guidelines, we have provided this page of links directly to documents related to appraisal regulations and guidelines. 

We have also added links to agency home pages in order to assist in research for other topics.

Appraisers Black Lists

     

 

 

Fannie Mae Creates appraiser Blacklist; Do AMCs Make Sense? Bank M&A Rolls On - Are Mortgage Banks Doing the Same?
 
Nov, 28 2016, 

If you don't think the nation is changing, think again. California's Latino population is going to overtake the white population in only two months, according to this year's state budget report. And the Golden State is also getting older, with the population of over 65s predicted to hit a boom over the coming months (1,000 people out there turn 65 every day). The state has been getting more diverse for a while, but now the Latino population will be 'the single largest race or ethnic group', and it's thought to be because most Latino groups are in their prime childbearing years. According to the 2013-2014 report, by March Latinos will make up 39 per cent of California's population of 38.2 million and outstrip the white population by 76,000; non-Hispanic whites will make up 38.8 per cent.

Speaking of California, San Francisco's Parkside Lending continues its growth. Parkside's recently broke news about the formation of its REIT, release of its new non-QM product and expansion into new states. One can add to the list new growth and job openings on its San Francisco operations team for a QC Manager, In-house Council, as well as a Closing Manager. Confidential inquiries can be submitted to Rick Nelson at Rick@parksidelending .com or visit "careers".

And First National Bank is expanding its operations in Cleveland, Pittsburgh, and Baltimore and is searching for experienced Mortgage Loan Originators. First National Bank is an affiliate of F.N.B. Corporation, a diversified financial services company with over $12 billion in assets and services including banking, trust, consumer finance, and insurance. "F.N.B. Corporation (http://www.fnbcorporation.com/) has community banking offices are located in several states including Pennsylvania, Maryland, Ohio, and West Virginia. The Mortgage Originator is responsible for the generating residential mortgages, which includes working with existing customers with residential mortgage needs and developing new business from external sources. This position will also need to provide the highest quality of customer service to both internal and external customers. "We offer a competitive commission structure, 401K, medical, dental, vision, stock purchase program, and much more!" Please visit FNB's careers website to complete an online application.

Just when we think everything is quiet on the appraisal front, Kate Berry with American Banker writes that Fannie Mae has created a blacklist for appraisers. "In its ongoing effort to flag defective loans long before they default, Fannie Mae is taking aim at the home appraisal industry. The government-sponsored enterprise is keeping a virtual blacklist of appraisers that it views as shady and is warning banks and mortgage lenders to be careful about doing business with them. All loans with work done by appraisers on the list will be subject to extra scrutiny before Fannie buys them from lenders and could be rejected outright, Fannie says. The list is a small one, with just four names on it for now, but it is likely to grow as Fannie scours its appraisal database to identify appraisers who repeatedly submit shoddy work. Unacceptable appraisal practices include inflating the appraised value of a home, misstating the characteristics of a house, and failing to use the best comparable sales of physically similar properties...Fannie has moved toward a model in which appraisals are scrutinized early in the mortgage process before it even buys a loan from a lender. Instead of forcing costly buy backs for defective loans years after the fact, Fannie now will reject loans for egregious inconsistences made by appraisers."

Ms. Berry's well-written article continued: "Fannie's aim is to not just make sure that the loans it buys and bundles into mortgage-backed securities meet its standards, but also to collect consistent data on appraisals to ensure that property values are accurate and that borrowers have the ability to repay their loans over the long haul without defaulting. Fannie has not made its blacklist public. The list, to be published monthly, is accessible only by lenders and will not be broadly distributed. Observers say that the mere existence of a blacklist will likely deter banks and mortgage lenders from doing business with appraisers whose names appear on the list."