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Thursday, 12 August 2010

Reverse Mortgages Part 6: The Home Appraisal

category_bug_journal2.gif Until the bank makes their offer of the principal amount of one's reverse mortgage, the numbers you have been working with in the Good Faith Estimate of loan costs from the broker are just that, an estimate.

In my case, since I bought this place fewer than three months ago, my broker used the purchase price for the calculations.

In the years since the inception of the Department of Housing and Urban Development's FHA-insured HECM program, loan brokers hired the appraiser. Recently HUD changed the rules. Now, the appraiser is picked randomly by an appraisal management company from a pool of state-certified appraisers. The reason for the change is to eliminate influence or pressure to inflate the value of the home and to ensure it is unbiased.

In practice, that means a new business has been created, a middleman who facilitates the process of choosing. The fee for the appraisal is, in some cases, paid by the applicant up front and in others is tacked onto the reverse mortgage.

Due to the additional layer of bureaucracy, the new system has increased the price of the appraisal to the borrower. In my area, it now costs between $450 and $550, up from $350 to $450 and the appraiser, who once got the full fee, now collects only half. The rest goes to the appraisal management company.

The nerve-wracking part of the appraisal process for the applicant is waiting for the value the appraiser places on your home because that, in the largest part, determines the amount of the reverse mortgage. In addition to a physical inspection of your home, recent sale prices of comparable properties in your vicinity are used to determine the appraised value.

Comparables, according to my broker Jerry Gilmour, are nearly everything in determining the appraised value, about 80 percent.

In past economic times, home values remained relatively stable over several months and easily predictable within a few thousand dollars. To decide the asking price of my New York home five years ago, I checked sale prices over the previous two years of condominium apartments that matched as closely as possible the location, size, age and desirability of mine.

By the way, that's how I knew the housing market was beginning to tank and I should sell as quickly as possible. There had been a steady and clearly discernible decline of about five to six percent over those two years in the sale prices of my comparables. Which leads one to wonder what those hotshot masters of the universe at Wall Street banks, not to mention the Fed chairman who kept saying the housing bubble was stable, do with their time.

In our current depressed housing market, home values are continuing to drop and many people are selling, when they can, at any price to get out of underwater forward loans. Plus, there may be low-priced foreclosure sales which, my counselor Buz Zeman says, is an unclear factor in reverse mortgage value determinations.

Jerry says foreclosures and short sales do count, but it is a hot topic in the mortgage business with many varying opinions.

Last week, Jerry told me an appraiser would call sometime this week to make an appointment to see my home. Depending on his/her schedule, I figured it might be a week or two until then. But on Monday, “Randy” phoned to say he had a hole in his schedule and could come by that day at around noon.

He was distantly friendly, efficient and clearly experienced as he wasted no time getting started. First, he measured the exterior bounds of my apartment. Inside, I showed him all the rooms and helped hold the tape measure as he recorded the dimensions on his clipboard.

I tried a minor sales pitch on him, pointing out that all the kitchen appliances, granite countertops and cupboards; the two toilets; all the windows; the carpeting and kitchen flooring were new within the past one to three years. Randy was noncommittal. He asked if the fireplace is gas or wood burning.

My concern is that when I was looking at potential homes in April, I saw two others in this condominium complex that were priced substantially lower, but had not been upgraded or maintained nearly as well as the this one. How the appraiser would know that is the unanswered question.

Randy wanted to know the amount of the condominium homeowners' association dues and what they cover – exterior building and grounds maintenance, landscaping, water and sewer fees, trash pickup, etc. He also asked about amenities – swimming pool, assigned parking, meeting/party room, rental apartment for guests.

He took a bunch of photos, inside and out; then he was gone. At most, Randy spent 20 minutes here. He called the next day to ask about the amount of guest parking and the number on my personal parking space. Who knew such details matter.

Randy said the appraisal would be sent today, Thursday, but I suspect that is a fluid time frame. When Jerry receives it, it will be packaged with the rest of my application papers and sent to the bank. I have requested a copy of the appraisal and if the value comes in too far short of the purchase price, I will ask to speak with Randy.

I have no idea if my inspection is typical. The couple who bought my Maine home did not have it appraised.

But when I sold my Greenwich Village apartment four years ago, the buyer's appraiser spent an hour with me and was fascinating. That building is more than 200 years old and he, obviously expert in New York City building codes and practices over centuries, showed me, among other things, what parts of the interior exposed brick were original and what had been replaced - more than a hundred years before - and how he could tell.

And, he pulled out a loose, two-inch nail in the utility room ceiling that was so old – original, said the appraiser – it had been hand-forged in a square shape. I have kept it as a souvenir of that beloved home.

I'll let you know if the appraisal comes in at an amount that is satisfactory.

The TGB Reverse Mortgage Series
Part 1: One Reason For a Reverse Mortgage
Part 2: The Basics
Part 3: Finding a Lender
Part 4: Do Not Fear HECMs
Part 5: The Mandatory Counseling Session
Part 7: Lender Conditions


At The Elder Storytelling Place today, Lyn Burnstine: Memories


Posted by Ronni Bennett at 05:35 AM | Permalink | Email this post

Comments

I believe there are a number of companies (like Trans Union) that sell database products that appraisers and banks use to compare with an on-site appraisal. I don't know which version is viewed a the key, but it should make the process very quick.

It is nail biting time, but I think that you will come out with a good appraisal and that the condition of your condo will add to the value of the appraisal.

Interesting process. Over the years, I picked up the info that there's a difference between market value and marketability. The market value has more to do with the basics (number of rooms, square footage, age, etc.) and the marketability has to do with the amenities, updates, improvements, etc.
Good luck, Ronni. I hope it comes in high. I'm glad you saved the nail from your NYC home.

Thanks Ronni, for all this very useful research. I'm not quite ready for this yet, but the info is money in the bank. Good you have your nail; I too have a square nail - from my grandfather's garage. Growing up we moved sometimes several times a year with Dad's job, the grandparents' houses were the closest things we had to home, and I treasure that nail. I feel good everytime I see it.

I have a friend who is a real estate appraiser who claims she has the perfect job: she gets to do what she most enjoys, sticking her nose in other peoples' business and snooping around their houses. These are very accurate descriptions of what I've seen of her, so her job is probably a relatively benign direction for the impulse.

She also deeply resents the relatively recent deskilling she feels has been imposed on her profession. She is given less time to explore a property, expected to derive her description almost entirely from measurements and comps, and then is paid less for the work. Lenders can't quite send the appraisers' work overseas, but they can make it mechanical and routine -- and thus cheap. It's not clear the customer gets any of the benefit of the cost reduction -- I think it is just skimmed off as profit somewhere near the top of the chain.

When mortgage companies evaluate applications, they like to see consistency. If you have a credit card, mortgage lenders want to see at least 24-36 months of perfect payment history on it; that is, 24-36 months with no breaks in between. If you’re fortunate enough to be able to pay your credit card off every month, you might want to rethink this strategy if a mortgage is in your future.

I have to say I think comparables are just a lot of bs. I have looked at two homes for sale, where the selling realtor hands me comparables to justify the seller's asking price. In the first instance i was very familiar with the homes, area and prices and the comps did NOT take into consideration the condition of the home interior and in some cases just bore, to my eye, no relation to the dump I would have been purchasing. With that particular home it sold at $50,000 below asking price which made it's obvious to me comp comparison totally invalid.

With the second home for sale I am now contemplating the realtor showed me comps for homes which sold at the asking price of the home I was contemplating buying. In other words, to my suspicious mind, she went through the recently solds and plucked these out just because they sold at the asking price of the house I was contemplating thus justifying supposedly the seller's price. I know for sure there are other comps around that sold for less.

maybe they look at the interior of the home for appraisals as you describe, but realtors dont take condition into consideration when they show you the buyer the "comps."

goodness sorry for all the miswordings and mispellings esp on your blog dear Crabby.

What a wonderful blog to find and read. I too am getting older now and although not quite ready for retirement, some of the blogs sure hit home. I think for me it is the "fear" of the unknown. The world has and is changing so much (and not for the better) saftey, finances, not having the health to be able to work.....like I said it truly is a fear. Thank you for taking your time to write your thought's and opinions. You never know who you are touching!

As to appraisal of my home: I was told that FHA did not due the same inspection that would be required for usual mortgages (not HECM). And I would say he did little. Not even looking at the basement or condition of roof, wiring, etc. He took photos and he did not want to know about the well. I got the loan to fix the house but he did not want to know why. He ended up stating my house did not need any repairs (1926 house with no CO). I recently read at the HUD site that the FHA requires a more detailed inspection for HECM. I then asked to see the inspection report and was floored to see that he made claims about the property that said he went into the basement, etc.

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