Due to a new City ordinance, on January 1st, 2018 most homes listed for sale in the City of Portland are required to first obtain a Home Energy Score. Our sister company, A Quality Measurement now offers this service. Portland’s policy is unique in that sellers are required to obtain the energy score prior to listing the home for sale. This can be a burden to sellers, but it is a benefit to buyers who want to purchase a home that uses less energy. The question that always comes up is, “If I get a low score, will my home sell for less?” I have two thoughts on this.
1. The Home Energy Score is like the miles per gallon (MPG) rating of a car. We all know that a car with a lower MPG rating is not necessarily less valuable than one with a high rating. For example, a luxury SUV may have a very low MPG in relation to a compact car. However, it is also likely that the luxury SUV will sell for more money. A low score does not necessarily equate to a low value. 2. On the other hand, a home with a lower energy score might sell for less. If two homes are equal except that one uses less energy, we can expect that a well-informed buyer will pay more for the more energy-efficient home. A long history of scientific (and unscientific) studies link a buyer’s willingness to pay more for a home that uses less energy. However, most such studies involve new homes where buyers are more likely to have information about estimated energy consumption. Now buyers of used homes in Portland will have the information and scientists, appraisers, and real estate agents will be watching to see what happens. Here is a link to a blog post where I go into more detail about existing studies.
1. The Home Energy Score is like the miles per gallon (MPG) rating of a car. We all know that a car with a lower MPG rating is not necessarily less valuable than one with a high rating. For example, a luxury SUV may have a very low MPG in relation to a compact car. However, it is also likely that the luxury SUV will sell for more money. A low score does not necessarily equate to a low value.
2. On the other hand, a home with a lower energy score might sell for less. If two homes are equal except that one uses less energy, we can expect that a well-informed buyer will pay more for the more energy-efficient home. A long history of scientific (and unscientific) studies link a buyer’s willingness to pay more for a home that uses less energy. However, most such studies involve new homes where buyers are more likely to have information about estimated energy consumption. Now buyers of used homes in Portland will have the information and scientists, appraisers, and real estate agents will be watching to see what happens. Here is a link to a blog post where I go into more detail about existing studies.
Did I leave anything out or do you want to join in the conversation? Let me know in the comments below.
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Thanks for reading,
Gary F. Kristensen, SRA, IFA, AGA
World class appraiser blogger Tom Horn wrote a great article titled, “Things agents do that appraisers hate.” Tom’s article inspired me to think about the opposite side of that coin. Whenever I speak at real estate offices, agents often tell me about off putting things that some appraisers do when interacting with agents. It is important for both appraisers and real estate agents to understand the thoughts and frustrations of the others so that we can conduct our work in a manner that is both efficient and respectful. Here are my top three agent irritators.
1. Agents complain that appraisers go to vacant lockbox properties without first calling and asking the agent. This is against the rules of the Portland area RMLS (Regional Multiple Listing Service) and to me, it is trespassing. Appraisers do not have the right to use the RMLS lockbox anytime we want.
2. Agents complain that appraisers will show up at the property, not talk or ask questions, and then leave quickly. I understand that appraisals are business and that time is money. It is difficult to make a living as an appraiser these days without being quick. However, the real estate agent and the homeowner hold a wealth of information. Each should be interviewed carefully by the appraiser. From my experience of having several appraisers who work for me, the ones who take time to chat with homeowners and agents build trust. Their appraisals do not get challenged nearly as often, even if the appraisal report quality is similar.
3. Agents complain that appraisers will call them and say, “Can you tell me what the concessions are on this recent sale?” Once answered, the appraiser quickly ends the call. As an appraiser, it irritates me that other appraisers would be short when someone else is helping them, but is also annoying that many appraisers would only be interested in concessions. The concessions are important, but there are many other important things that an appraiser should know about a sale that do not make it into the RMLS. In addition, agents are not only sources of information for appraisers, real estate agents are important sources for continued appraisal work. A Quality Appraisal, LLC is built on non-lender or private appraisal work. Real estate agents generate most of our private estate and divorce appraisal referrals. It is important for appraisers to be courteous, humble, and grateful on the phone or in emails when requesting information. Our company has received many referrals directly resulting from data verification emails and phone calls.
Did I leave anything out or do you want to join in the conversation? Are you a real estate agent with appraiser grievances? Let me know constructively in the comments below.
When speaking at Portland area real estate offices, I often hear horror stories about appraisals coming in at just one thousand dollars or so below the contract price of a property that is being sold for several hundred thousand dollars. This difference, often less than one percent, is beyond typical appraiser accuracy but it results in a big hassle for all parties involved who now need to decide if they will bring more cash at closing, cancel the contract, renegotiate the contract, ask for a second appraisal, or dispute the appraisal. Here is my take on why this occasionally happens and the top three things a real estate agent can do to help avoid the situation.
Appraisers are highly trained and regulated to be independent and unbiased third parties. Most appraisers around Portland know a colleague who has been disciplined by the state appraisal board and most appraisers are terrified to do anything that might suggest that they are biased. This feeling of fear can, at times, become misguided and cause some appraisers to reconcile an opinion of value that ignores the contract price and the limits of the appraisal accuracy when working with imperfect or incomplete sales data.
A very small percentage of appraisers falsely believe that the appraiser should estimate a value and pretend that the contract does not exist. I once had a reviewer say to me, “You reconciled giving some weight to the contract price. What approach to value is that? I’ve never heard of a contract approach to value.” This logic does not take into account why an appraiser looks at the contract of sale for the subject and how pending sales and active listings relate to the sales comparison approach to value.
In a real estate appraisal for a typically-financed home sale, appraisers will be given a copy of the sales contract to analyze. The contract price is not proof of market value, but it can be an indicator of value. The main purpose of the appraiser’s analysis is to determine to what extent the contract is an indicator of value. Typically, if the contract price was negotiated after a property was exposed to the market and the buyer and seller are unrelated and disinterested parties, then that contract is probably a strong indicator of value for the subject. The appraiser can give this contract price some weight in reconciliation of a final value as long as it is reasonable to do so within the context of the other value indicators.
Here are the top three things a real estate agent can do to help ensure that the appraisals do not come back slightly low.
Following these tips should help eliminate a few frustrating closings, but it is still up to the judgement of the appraiser. Sometimes buyers pay a little too much for a property and it is perfectly acceptable for an appraiser to come in slightly below the contract price after analyzing all of the evidence. The important thing to know is that most appraisers do not want to cause trouble and will work very hard to make sure they are right before sending off an appraisal that is sure to become a lightning rod because it is slightly below the contract price.
Real estate appraisers who are following lender guidelines often make home appraisal reports “subject to” or “call out” repairs of certain issues. I recently wrote about how there are often gray areas when appraisers call out these repairs. For this article, I will focus on what happens when an appraiser calls for the repair and later must sign off that it has been completed.
An appraisal that is made subject to inspection by another professional is different than calling for a repair. After a subject to inspection, the appraiser is usually finished with the process. An example is that the appraiser is unsure if the roof has sufficient life left and chooses to complete the appraisal subject to inspection, assuming that the roof is satisfactory. The lender will then hire a roofer or the appropriate professional to provide an opinion on the roof’s adequacy before proceeding with the loan.
When an appraisal is made subject to repair, the appraiser will normally need to return and verify that the remedy has been completed before the bank will proceed with the loan. In this case, and for most types of loans, the appraiser uses the Fannie Mae Form 1004D Certification of Completion. With this form, an appraiser returns to the property and verifies that the conditions in the appraisal have been met.
Often, lender clients or real estate agents will call appraisers and ask, “Can I send you a picture of the repair and have you sign a 1004D that it has been completed?” Lenders make this request to save time and money. The problem is that when an appraiser signs the Form 1004D, they are signing that they “…performed a visual inspection of the subject property to determine if the conditions or requirements stated in the original appraisal have been satisfied.”
In my opinion, this leaves us with bit of a professional conundrum. Given that appraisers cannot edit preprinted forms, I believe that by signing the 1004D, an appraiser certifies that he or she has personally viewed the repair. While it can be argued that seeing a photo or video could also be considered as “viewing,” I am not willing to risk my professional standing by being perceived as misleading (at best) or in violation of licensing requirements (at worst). What do you think? Does anyone know of a definitive ruling on this issue by Fannie Mae? Please share your views in the comments below.
I belong to many online real estate appraiser forums. One discussion topic that never seems to get old is whether or not a particular issue should be “called out” for repair in an FHA appraisal. When I speak at real estate offices, I’m often asked similar questions, like “will this situation result in an FHA necessary repair?”
In answering such questions, I can only refer to what is said in the newest HUD Handbook 4000.1, but in doing so, I always try to explain that although it would be nice if everything was clear cut, there is room for judgement from both the appraiser and the loan underwriter. One appraiser might view something very differently from another. What follows is just one example of many that may help real estate professionals understand how there can be fifty shades of FHA guidelines.
An appraiser recently posted a photo of a weathered gray-looking deck on a house built in 1972. The deck appeared to have no finish and the appraiser asked others if they would call for repair. The HUD Handbook says,
“If the dwelling or related improvements were built after 1978, the Appraiser must report all defective paint surfaces on the exterior and require repair of any defective paint that exposes the subsurface elements. If the dwelling or related improvements were built on or before December 31, 1978, refer to the section on Lead-Based Paint.”
The online answers from other appraisers are numerous and varied.
Some appraisers indicated that any unprotected wood on any structure should always be treated and recommend calling for the repair.
Some appraisers indicated that it looks like faded wood that has been treated or sealed in the past and therefore it should not be painted, stained, or ultimately repaired arguing that additional treatment would reduce its life.
Some appraisers indicated that it is just an old bare wood deck that has not been cleaned in a while and is just a part of the overall condition of the home.
Some appraisers indicated that the subject having been built prior to 1972 was important because there might be some traces of lead based defective finish.
Some appraisers indicated that if there was no paint, there is no defective paint to repair.
Some appraisers indicated that the condition should be noted and let the Underwriter make the call.
The appraiser who originally asked the question came back to the online forum and explained that he just disclosed the condition, implying that no repair was called for. Although the HUD Handbook guidelines seem clear, in practice the rules are interpreted individually by many appraisers and loan professionals which, right or wrong, can produce a wide range of results.
If you are faced with a structural condition that you’re not sure about, consult the HUD Handbook first and then contact the FHA Resource Center by calling (800) CALL FHA. Ultimately HUD is the final judge in determining if properties meet their requirements. The challenge for appraisers is to report conditions found in the field accurately.
Did I leave anything out or do you want to join in the conversation? Let me know in the comments below. (Sorry that my comments are still not working as of posting. My website maker a la mode is still working on a fix.)