Bay Area: 6 Things Every Homebuyer Should Know

I know—there are more than 6, but it’s a beautiful day. Hard to imagine who’s in the mood to sit and read long blog posts at the computer. Plus, I found an interesting article in the Washington Post that actually reduces homebuyer essential knowledge to 5 categories, to which I would like to add one.

From The Post:

1. Mortgage interest rates can change quickly, pushing a home out of your budget in a matter of days. Check in with lenders before making a bid to get an up-to-date estimate of monthly payments based on current rates.

2. Include in your offer a requirement that the sales price be equal to or less than the appraised value as determined by the mortgage lender. Without such a contingency, a lender can require the buyer to make up the difference between the appraised value and the sales price.

3. Do your research. Compare the price of the home you are interested in with the prices of similar homes on the market or recently sold. In areas where home prices have been falling quickly, some real estate agents recommend narrowing the data to the last three or four months instead of year-old sales, which can be outdated.

4. If you decide to bid significantly below the asking price, be prepared for rejection. A lowball offer could be flatly rejected by an annoyed seller or viewed as the starting volley in negotiations.

5. Don’t assume that because the price of a home has been reduced, there isn’t more room for negotiation. Research prices in the area, and compare the lowered price with recent sales.

As an extension of #2, however, comes my number 6. In the wake of our current mortgage sunami, appraisal is becoming a complicated issue. An SF Gate article warns that “A major legal brawl is breaking out over how homes are appraised, at what cost and by whom. The outcome could directly affect the price you pay for your next piece of real estate and the amount of mortgage money you can obtain.”

Under then tenants of the out-of-court settlement, the result of New York Attorner General Cuomo’s investigation of “the mortgage finance giants’ appraisal practices,” these giants must adopt a particular “home valuation code of conduct.”

The code, which is scheduled to take effect on Jan. 1, would shake up the entire appraisal system:

—Mortgage brokers, who originate roughly 60 percent of all new loans, no longer would be allowed to select or pay appraisers. That could force some mortgage shoppers to pay for multiple appraisals rather than just one.

—In-house appraisers at banks and mortgage firms no longer would be permitted to do appraisals for loans to be funded by their organizations.

—Lenders would not be able to use appraisals generated by management companies – firms that contract with networks of appraisers nationwide – if they have a significant financial stake in the management company.

To some eyes, forcing Fannie Mae and Freddie Mac to reform appraisal is a great idea: “Inflated appraisals—often involving either pressure by loan officers or fraudulent collusion by appraisers themselves—played a role in at least some of the mess we’re seeing in many housing markets.”

Opponents meanwhile, such as financial and banking trade groups, claim the settlement is “bad policy.” Aside from the potential dismissal of qualified and ethical professional appraisers who work for banks, brokers “should not be prohibited from hiring independent appraisers because the current system—if strengthened by greater use of review appraisals to double-check accuracy—works efficiently for consumers and the mortgage industry as well.”

Plus, under this new agreement, “consumers would be financially tied to the first lender they, or their mortgage or real estate professional, submits their application.”

The upshot of this debate is that 6th thing homebuyers should know: Appraisal is a complicated process, with multiple (and often conflicting interests) at stake. Until we achieve an improved system with “much-tougher penalties for lenders who pressure appraisers, much-tougher penalties for appraisers who give in, and more accurate appraisals for the consumers who pay for them,” proceed with caution.