MARK SCHELLHAMMER

HOW ARE APPRAISALS AFFECTING LENDERS AND BORROWERS

There is much ado these days being discussed about the values of homes.  Many people complain that they are “underwater” with their home.  I read today an article on Yahoo Finance about the GOOD (yes good) aspects to consider even if you are underwater.  You may still have a decent interest rate, and your monthly payment may still be affordable, within your budget, such that it isn’t that big of a deal.  Robert Kyosaki maintains that a home isn’t an investment, it’s an expense.  When our house dropped over $30,000 in value over the last 2 years, my wife was complaining that we’d lost that money.  I told her we’d only lose it when we sell.  Right now, I pay a valid amount of money every month for a roof over my head.  If I didn’t pay the mortgage, then I’d have to pay rent.  One way or another I have to pay something for a place to live (unless you move in with the parents!  Too old for that!).  So if I’m happy making an affordable monthly payment for a house we enjoy living in, then there shouldn’t be that big of a worry about a slight decrease in the value of the home.

Now where it becomes an issue is if someone has a fairly high interest rate, and wants to refinance.  Or, maybe a job or business is requiring them to sell, and they cannot get the equity out of the house they need to move.  Today I’ll address the refinancer.  In the next day or so, I’ll talk about the seller/buyer, the mover.

The person who wants to refinance will be in somewhat of a pickle if value isn’t met.  If the value is close, but under what’s needed for our LTV (Loan-to-Value) guidelines, then the borrower may have to come to the closing table with a little more money than they’d originally planned.  It may still be a good deal, since the monthly payment will still be lowered, and they’ve paid down the loan balance, which will help them in the long run.  There are problems with those who are far underwater.  Recently I’ve had several refinances that have been killed due to the appraisers value not coming in high enough to be able to refinance the loan, much less roll in the closing costs.  I had a borrower in Brownsville that thought his house was worth $2.5million.  He owed around $1million. The appraisal came in at $870,000!  I had another client in East Dallas tell me she thought her home was worth $285,000.  We did her purchase loan just 2 years earlier and the house appraised at $285,000.  She owed $216,000.  You would think this wouldn’t be a problem.  The appraisal came in at $185,000.  That’s a 35% decline in just 2 years.  What caused this?  I don’t know exactly.  She went to a friend of hers that’s a real estate agent who looked at the appraisal and the sold comps he used, and looked at additional properties that had sold in the area, and delivered the bad news back to my client.  The appraiser was spot on.  When I looked at the house on Zillow I noticed that her house was valued at $265,000 and another house across the street was valued at $300,000.  Hmmm, I thought, maybe the appraiser made a mistake.  Then I looked at all the other houses around hers, in that neighborhood. Aside: I don’t like to use Zillow for valuations. However, it does sometimes give me a ballpark for the area, that I can use with a plus/minus factor).  I noticed that all the other houses were valued in the $100′s.  There wasn’t a single other house in that neighborhood that was over $200,000.  So she had one of the nicest houses in the neighborhood.  That’s a problem.  When you have the nicest house in the hood, then the lower-priced homes will tend to bring down the value of your home.  I get this a lot, where clients tell me how superior their house is over all the other houses in the hood.  I tell them that the $30,000 they spent to develop that special backyard project may get them about $5,000 in value, or maybe nothing at all.  If houses that have sold in the last 3-6 months within 1/2 mile of his palace are regular homes, then the appraiser cannot give him much additional value, since the sold houses don’t provide valid comparisons.  This will always be an issue, no matter how the market is doing.  Also, one must keep an eye out for foreclosures in their neighborhood.  Appraisers used to be able to not include or discount them in an appraisal.  Now, they have to use them and comment about the status of the neighborhood.  So you may have a palace, but if there’s 2-3 foreclosures, bank REO’s, etc, in your area, that have sold at severe discounts, then your value will suffer.  Lastly you might have a decrease in value because you purchased a new home from a builder in their subdivision from 2005 on.  Builders are able to use their own lenders and, back then, appoint the appraiser, and sell the house at an inflated rate.  They were using their other sold houses (at inflated rates) as comps.  Now it’s a few years later, the subdivision is sold out, and the people who bought them with an interest rate that’s higher than today’s, come in to me to refinance.  Unfortunately, those inflated sales prices have now come down to earth, and have also declined as the market has declined.  Houses that were purchased for $150,000, with initial loans of say $145,000, now owe around $140,000.  Their appraisals are coming in at $110,000-$115,000.  They are disappointed and angry, but there’s not much we can do about it.  These people will have to continue to stay where they are and stick this bottom out until values can rise and their note balance can be paid down before they can refinance.  They also realize that they can’t sell their property either.  They are so far underwater that they would have to write a very large check at closing to sell their house.  The one bright spot is using this appraisal to have their property taxes reduced.  My client in East Dallas immediately began her petition to Dallas County to have her taxes reduced.  What better way than to show them a valid, third-party appraisal showing a 35% decrease in value.  She figured that this would save her at least $2,200 in taxes in the upcoming years.  And she’s okay with her current payment, just not happy that she cannot get the best rate going rate now in this era of low rates.  But that’s the hand she’s been dealt, and she would live with it.  Others are having to possibly make some very hard choices with their properties.  Some of those choices aren’t good ones, but they’re choices they have to make.  These are the choices we read and hear about in print and on tv regarding the real estate market.

Next blog, I’ll discuss what’s happening with homeowners that want to sell their home and the difficulties they’re facing and what some of their options are.  See you then.