It was a federal agency reversal that was startling in its effect: a change in guidance that actually clarified more than muddled!
The change will directly affect St. Cloud buyers and sellers because the issue will impact the cost of St. Cloud residential real estate transactions—specifically, in the area of home appraisals.
As the first order of business—for those who have never bought a house or condo (or who have let the details fade from memory)—an appraisal is different from an inspection. An inspection is commissioned on behalf of a buyer to determine the state of repair of a property that is being purchased. It gives the buyer an idea of how much (or little) expense and effort is likely to be required in future years. As such, it can affect the terms of the purchase—or even whether a purchase is still in prospect.
An appraisal, on the other hand, can be key for potential lenders in determining what is the collateral value of a property. Even if a buyer is willing to pay $400,000 for a home in St. Cloud, if the appraiser estimates the value at $320,000, it’s going to be all but impossible to find financing for the sale at the higher price.
That’s not the only reason appraisals are financially vital. The appraiser gathers information about the property itself, looks at the recent transactions in St. Cloud to determine market conditions, and comes up with a likely market value—the amount buyers would probably be willing to pay. It’s a guess, but a highly informed one. In the previous decade, the world saw how important accurate appraisals (and the decisions based upon them) could be. When a combination of circumstances led to appraisals that gradually became more and more over-optimistic, banks offered mortgage loans that were too disconnected from the value of the property and the ability of borrowers to repay. When it became clear that an avalanche of foreclosures was inevitable, we saw what happened: global financial meltdown.
As you might imagine, the regulators in the FHA were not pleased with having been apportioned a part of the blame for the housing crisis. As part of their response, earlier this year they tightened requirements about the work appraisers are required to perform. They were ordered to operate and physically observe appliances on a property. That’s right: turn on the washer, the dryer, the dishwasher, the trash compactor…
This specific requirement is far outside the scope of what appraisers have, historically, been called to concern themselves with. At a minimum, it meant spending more time per appraisal—an added expense which would come due as part of the closing cost. And the difference in the ultimate work product—the appraisal value—would usually be insignificant.
So when, at the end of last month, the FHA came out with a reversal of that appliance-checking requirement, it marked an unusual turn of events: a regulation that disappeared—pretty much on its own.
Part of my job is to keep up with any and all changes that affect my clients, who can be assured that the paperwork and technical requirements are always handled properly. Call me!