Mortgage crisis changes are transforming home sales
Photo
Megan Popian stands outside her home on Chatham Street in Janesville. Popian took the home off the market and will rent it out after an appraisal valued the home nearly $20,000 less than the asking price.
JANESVILLE — Megan Popian thought she was one of the lucky ones.
After consulting with three real estate agents, Popian and her husband tried to sell their house on Chatham Street in Janesville for $99,000.
A prospective buyer liked it, offered $97,600, and a sales contract was signed.
Financing was in place; the house passed inspection, and the two sides scheduled a closing date.
“Everyone was happy,” Popian said.
Then a bomb blew the deal to smithereens.
The home’s value, according to a bank-ordered appraisal, was about $77,000, more than 20 percent less than the price agreed upon by the buyer and seller.
That changed the buyer’s financing package significantly.
“Either she would have had to come up with the difference or we would have had to come down in price,” Popian said.
Neither happened. The buyer walked, and Popian and her husband are now trying to rent the house.
Popian’s story illustrates industry changes that stem from the subprime mortgage crisis of the mid-2000s.
It’s not unique to Janesville.
In fact, the National Association of Realtors reported that 16 percent of its members said they had sales contracts canceled in June. That was up from 4 percent in May.
Lawrence Yun, the association’s chief economist, attributed the cancellations to tight credit and low appraisals.
“Appraisers are definitely taking a more conservative approach, deciding to error on the side of conservatism,” said Randy Borman, team leader for the Janesville, Milton and Evansville offices of Century 21 Affiliated.
“We’ve seen some deals blow up, but we’ve had many more that require some renegotiation where either the buyer comes down on their price or the buyer and seller agree to split the difference.”
In this climate, it’s rare for an appraisal to be at or above the agreed-upon sales price, Borman said.
That frustrates sellers, buyers and real estate agents who believe they’ve put together solid deals.
The most significant player in the deal, however, is typically the mortgage lender who must make a loan that makes sense when compared to the home’s value.
“It used to be that the most difficult thing was getting the buyer and seller together,” Borman said. “Now, its equally or more difficult to go from the acceptance of offer to the closing, and appraisals are certainly a part of that.”
Landscape change
The Home Valuation Code of Conduct went into effect in 2009, one of several pieces of legislation created to avert another crisis in the mortgage industry. Part of it stems from the mid 2000s, when real estate agents and lenders across the country pressured appraisers to make the numbers work.
The result was a glut of overvalued homes that secured exorbitant loans that didn’t survive the Great Recession.
Borman, who also has experience as a lender, said there’s plenty of blame to go around.
“Back in the day, people were doing anything and everything to get someone into a house whether they could afford it or not,” he said.
That was typically happening in markets outside of the Midwest, he added.
“We’ve always had a very stable market, and we didn’t have any collusion here,” he said.
Paul Burkart of Modern Appraisal Service in Janesville has been a local appraiser for 26 years. He agrees with Borman’s perspective.
“We have very good lenders here,” he said. “There’s never been any undue pressure to arrive at a certain value to get a deal done.”
The national crisis was significant enough that new rules extend to everyone.
The HVCC sets standards for solicitation, selection, compensation, conflicts of interest and appraiser independence. It covers any mortgage sold to Fannie Mae, Freddie Mac or Ginnie Mae, which covers more than 90 percent of the mortgages made in this country.
Essentially, real estate agents and lenders are prohibited from selecting appraisers, a task that now goes through third-party “appraisal management companies.” In addition, real estate agents and lenders can’t have substantive conversations with appraisers.
“For the most part, it used to be that someone at the bank would call me and say, ‘Paul, I need an appraisal on this property,’” Burkart said. “Now it all goes through the AMC, and we can’t have any contact with the lender, certainly as it pertains to valuations.”
The third-party appraisal companies want to maximize profits, so they often hire low-cost appraisers who might not be familiar with a particular market.
Burkart is aware of appraisers from Milwaukee, Rockford and even Mauston doing work in Janesville.
He doesn’t suggest that those appraisers are doing anything wrong, but he believes local market knowledge is important.
“Ninety-nine percent of what I do is in Rock County,” he said. “I’m a strong believer that you should not do an appraisal outside of your geographical area that you know and understand.
“Some of that is happening, and I think it’s sad that some of the appraisal quality has suffered.”
Difficult conditions
An appraisal that comes in below a sales price doesn’t always reflect insufficient market knowledge, he said.
Typically, appraisals are based on comparable neighborhood sales that are true arms-length transactions that don’t involve pressure or duress. Typically, they don’t include foreclosures or other troubled sales.
But, Burkart said, troubled sales make up the majority of transactions.
“You get in some neighborhoods, and 50 percent or more of the sales are foreclosures,” he said. “We have to use houses that have sold, but there just aren’t a lot of comparables.”
Burkart is aware that deals have fallen through because of low appraisals, but he said that’s simply a reflection of market conditions.
“Just because one buyer is willing to buy for a certain price does not make a market; it’s not necessarily a true valuation,” he said, noting that appraisers are aware of a negotiated price before they do an appraisal.
“The offer to purchase is in itself a good comparable, but we have to support it with others,” he said.
Sometimes, he said, people fall in love with a home and are willing to pay slightly more than the asking price and significantly more than the market value.
“But if there’s a mortgage involved, the appraiser has to find supporting data,” Burkart said.
Popian suggests that home sellers get appraisals before they put their properties on the market. In her case, an early appraisal would have saved time and consternation for both sides.
Burkart said that’s a decent suggestion, and it offers sellers another tool.
But Borman said appraisers know their clients: Sellers are looking for maximum value; buyers are looking for minimum, and the lenders want a number that justifies the mortgage.
“Appraisals are like opinions. Everyone has one,” Borman said, adding that it’s virtually impossible for appraisers to discount troubled sales because they account for such a large percentage of the local market.
Burkart doesn’t disagree.
It’s not an exact science, he said.
“An appraisal is an estimated opinion of market value, and the key word is opinion,” he said. “An appraisal is only as good as the comparables, and right now the lack of true arms-length sales makes it harder for us to do our jobs.
“When a sale or refinance falls apart, people look at us as the bad guys.”
Sep 1, 2011 at 12:06 p.m.
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Or get a lawyer. I think a broker will help for a smaller fee than listing the home all together. There is too much paper work and things to do to do FSBO. You are just asking for trouble. Do you think they go to school and classes for fun. It is for their career and most have the knowledge you are paying for tog et the job done right. Just be sure you dont get somebody that doesn't know what they are doing!
Aug 31, 2011 at 1:11 a.m.
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Not using professional help is being penny wise and pound foolish if in fact that is what they did. If they didn't want to hire a Broker, they should have paid $400 for an appraisal. I don't really feel too bad for them - ya try to cheap out and that's whatcha get.
Aug 30, 2011 at 1:41 p.m.
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jp53545 The sellers did not use a broker. This was a FSBO sale. The article stated that they consulted with three agents, but it never said what the agents recommended as price. An experienced agent that knows that area would have told them that their home is not worth that price in this market. Through no fault of their own, like many homeowners, they paid more than the property is worth in today's market. Maybe that's why they chose to list it on their own without professional help.
Aug 29, 2011 at 11:43 p.m.
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How was their Broker so incompetent as not to know that the house would not appraise at value.........
Aug 29, 2011 at 6:41 p.m.
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I would LOVE to sell my house for the assessed value...
Aug 29, 2011 at 6:30 p.m.
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my house assessed at $8,000 more than my appraisal! leaves me wondering how that can be!
Aug 29, 2011 at 5:32 p.m.
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pubsrus- I agree- it should have been set before closing. This is why CLOSING is scheduled. My closing once was put off a couple times because of financing problems with the buyer. All was set but they were late to closing trying to scrap up $1000 or so the bank wouldn't approve.
Aug 29, 2011 at 4:36 p.m.
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Troublemaker.. let me guess. you have a credit rating of under 450, don't you?
Do you think that if a bank loans someone 10K and are irresponsible to the payments, that the bank should just forget about it? How about this, if you can't pay back 10K, you not borrow 10K?
Since this concept escapes you... let me explain. The bank does not want the car. The bank wants the money. They will get their money back by either the person paying back the loan, or by selling the collateral and sueing for the balance.
It is not a "racket" because the person borrowing the money AGREED TO THIS. Do you not understand? Anyone who borrows money AGREES to this. That is, they sit down with a piece of paper, the whole thing is explained to them, to the point that the title has LIEN on it. A "racket" is when money is extorted.
Where do you think the rest of the money should come from if the person that took the bank's money doesn't pay?? If the person doesn't care enough to sell a car that THEY bought, that they picked out, for the amount they owe, why should that be the bank's responsibilty? Are you saying that banks should be in the business of picking out cars for people that they know they can sell for the full sale price? How are they going to do that?
Aug 29, 2011 at 4:24 p.m.
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The article mentions that they consulted with three agents. This sale was a FSBO. It makes me wonder what the agents suggested as price that the sellers didn't choose to list with any of them. People that list their homes on their own, lack the guidence of a professional as the market progresses while their home is for sale. Inventory & competition changes daily for home sellers. Having a professional giving them guidence while the property was listed would have been helpful to these sellers, as well as their buyers. They paid $97,800. for the home in 2007. The newest 2011 assessment is $75,000. Most people cannot get what they paid for their homes in recent years, especially those that purchased close to the times of the market highs, as this seller did. A two bedroom, one bath home, with 952 sq. ft., and a one car garage in that neighborhood does not sell for $97,600. in this market. Comparative sales prove the appraiser and the city are correct on their values.
Aug 29, 2011 at 3:58 p.m.
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Let's remember that sometimes we, as homeowners, have to take some initiative and go to what is called "open book" to have our assessments reviewed. The city government isn't going to come knocking on our door to ask us if they can PLEASE lower our assessment. They're losing revenue. I know of at least 3 close friends who did such and had their values re-aligned with the current market.
Aug 29, 2011 at 3:55 p.m.
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12345678: Assuming the information you provided is correct, it's pretty much as I thought -- the new numbers from the latest Government assessment/appraisal/fair market value exercise are pretty accurate. So, people should not feel compelled to sell for less than the most recent City tax valuations.
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More importantly, we need new legislation so that when a bank forecloses on a propery, they give the homeowner credit for that "Government certified" value. It's not right for the bank to buy a property at the Sheriff sale for half price and then continue to chase the foreclosee for the balance due when they really might not have been "underwater."
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It's like when the bank repossesses a car worth $10,000 because the buyer misses a few payments, sells it at auction for $3,000, then files suit against the owner for the remaining $7,000. It's a racket that should not be allowed to continue!
Aug 29, 2011 at 3:16 p.m.
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Don't forget most first time buyers also got $8000.00 back on the purchase price.
Aug 29, 2011 at 2 p.m.
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Someone was just saved from being 20K underwater immediately.
Aug 29, 2011 at 9:35 a.m.
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The property discussed in this article was assessed by the city in 2010 at $77,600............
Aug 29, 2011 at 9:24 a.m.
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Online 2010 sales information shows:
430 N. Chatham St sold for $75000 on 5/7/10
545 N. Chatham St sold for $70000 on 4/30/10
Both are 2 bedroom houses.
A 2 bed 1 bath house sold on S. Chatham for $110000.
Was this a flip that just didn't work out?
Aug 29, 2011 at 9:11 a.m.
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My question would be, why would you schedule a closing without knowing the financing was approved. One would think the appraisal would have been completed early in the financing process. Sounds like someone got the cart in front of the horse.
Aug 29, 2011 at 9:04 a.m.
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The real estate club mess is an embarrassment to every American.
Aug 29, 2011 at 8:19 a.m.
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Megan, we would all like to know what the new valuation from the City was for this property. Would you mind sharing that with us? Jim, why didn't you put that information in the article? It would have been an even more interesting piece if your reporting had been a little more complete.
Aug 29, 2011 at 7:54 a.m.
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HVCC regulations are the reason the housing industry cannot recover. The appraisal management companies hire the cheapest appraisers who come in and use the 3 lowest comps in the area and are gone. They are paid less than local knowledgeble companies in most cases. Until this problem is remedied housing and new construction will remain at a halt.
As with Dodd/Frank and other current administration rules the government IS the problem.
Aug 28, 2011 at 11:24 p.m.
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Point of curiosity: What's the assessed valuation of the Chatham St. property? Is it close to what an appraiser says the property is worth? Or is it close to what a "willing and informed buyer" offered?
Aug 28, 2011 at 10:02 p.m.
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I'll bet the city's appraisers didn't take any of this into account either when they did their re-appraisal. They ignore "forced" sales and they ignore "can't sells". And the result is that our "loyal, hardworking" public servant unions are convinced we're better off than we are, screaming "tax to the max" and "no re-negotiations"!
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