Real Estate Analysis and Commentary in Peoria, Arizona

Appraisal Waivers (Risks & Rewards)

by Jason Clow, owner and founder of West Valley Appraisal Services
11/16/2019

I am going to preface my blog, stating that any information, examples, etc. are regarding residential properties from my area of expertise in Maricopa County Arizona (the fourth largest county in the United States).  For reference, I have been an appraiser in Maricopa County for over 20 years and a Realtor in Maricopa County for nearly 20 years.

Appraisal Waivers for residential properties really started in early 2017 for low Loan to Value (LTV) mortgages.  Currently they are being used in a much wider range of mortgage products and for a larger pool of borrowers.  Currently (taken from the Fannie Mae website (dated 08/07/2019).  The following link shows the list of the criteria regarding qualifying for an AW (appraisal waiver): 

https://www.fanniemae.com/content/guide/selling/b4/1.4/10.html

Fannie Mae has been collecting information / data from appraisers for years on all mortgage transactions that appraisals were performed to assist in the AVM (Automated Valuation Model).  What is an AVM?  Well it is a computer-generated appraisal to provide a quick risk assessment based on what the AVM states the value range is of a specific residential property.  Basically, borrowers with good credit, good equity (based on the AVM) for refinances, and a typical down payment putting the loan to AVM value ration in a low risk scenario. 

Why would Fannie Mae allow loans to be funded without an appraisal?  Well the simple answer is simplification of the mortgage process, a reduction in cost associated with the loan to the consumer, and confidence in collected data from previous appraisals over the years.  It is basically an accepted risk tolerance for a specific borrower. 

What are the risks associated with appraisal waivers on the overall real estate market (regarding Maricopa County, but could possibly be applied to other cities and counties throughout the U.S.)?

1. Computer collected data can not determine quality differences or differences in conditions / upgrades, or any improvements performed / or damage done since the last real appraisal was completed. This can result in a borrower purchasing a home that can be drastically above what the actual market can support (see real life examples below).
2. Although, yes it can speed up the loan / purchase time frame, have you ever asked yourself why anybody would want to make one of or the largest purchase decision of their life, and have that process sped up an additional week or so? What would you be giving up? Well a physical measurement of the home to ensure that it is the square footage you are purchasing; A professional appraisers inspection and rating of the home based on review of other sales in the market area; A review of the actual most similar comparable sales available and what others were willing to pay for them; And finally having peace of mind knowing that a licensed / educated appraiser agrees that the opinion of market value is current and supported.
3. Allowing people and entities interested in the financial gain attained through a residential mortgage loan value the property. What does this mean? Well, on a $300,000 purchase, the real estate appraiser typically earns 0.1 to 0.2% of the purchase price for their non-biased opinion of value (appraisal fees are not based on sales price or value, but rather on complexity of the assignment), while realtors involved in the transaction typically earn 4-7% of the $300,000 purchase price, and lenders typically earn between 2-7% of the loan amount (the higher end is typically only on higher interest / more risk loans).
4. Appraisal waivers can increase prices drastically, which is good for residents in the communities; however, this is an artificial inflation, and trying to sell your home for the inflated price could result in long marketing times, unrealistic expectations, damages in planning, and pricing out buyers.
5. The actual loss of new information to collect for Fannie Mae’s AVM (example would be a home that sold three years ago not remodeled, then re-sold to an appraisal waiver buyer, the AVM would not have collected that information for future AVM’s).
6. There are a lot of other flaws in this process, but this touches on a few of them.

What are the benefits associated with appraisal waivers for individuals involved in a transaction an appraisal waiver was allowed?

• For well qualified borrowers with real equity in their property, the cost involved with the appraisal is eliminated and the loan can typically close a few weeks sooner.
• Savvy individuals who already have a good handle on property values, etc. can eliminate an unnecessary cost.
• Lenders can streamline the process. I am sure everybody has heard the terms for super-fast loans, well an appraisal is a non-biased process historically that determined the market value of the property, which could often dictate lending limits, etc.
• There are other benefits; however, this blog is focused more of the dangers and/or risks involved.

Below is a list of three real life examples I have personally had in the past six months regarding failure of appraisal waivers.  Two are as an appraiser and one is as a Realtor.

Example 1.

I was representing a client to sell their home, so I have my Realtor hat on.  As a Realtor my job and obligation is to assist my client to obtain the best sales price for their property as possible and protect the interests of my client.  I am going to use false numbers, but similar % differences for reference.

I took the listing and we discussed the initial list price.  This home was in a strange market with differing quality of homes located basically across main / different streets.  3,000 sq.ft. homes on one side of the street would typically sell for $500,000+-, 3,000 sq.ft. homes between the two main streets the same quality of home would typically $400,000+-, and 3,000 sq.ft. homes to the south of the main street would typically sell for $325,000+-.  This is all with-in about a two-mile radius, with limited (recent sales in the middle section, but historic data coupled with current data showed these differences.  The market data in the exact micro market was showing a list price of approximately $425,000 on the high end.  I showed my client all the market data and they decided to list the home on the lower side of the historically superior neighborhood.  So, we listed the home, with the understanding, they would be willing to lower the price after a few weeks on the market to a price point that would attract more foot traffic.

With-in the first week we had a few showings, and we received an offer.  The offer was negotiated and an agreed upon sales price was made.  This contracted price was well above market value; however, automated AVM’s free to the public (just google find your homes value), showed a value close to the contracted price.  I told them that is due to the neighborhood on larger lots with superior community amenities, better setbacks, and better architecture and I prepared her for the appraisal process.  We had a plan in place, but again, my job as a Realtor is to obtain the highest sales price available.  As an appraiser, the contracted price was well above market value.  Well, in a few weeks, we found out that the buyer had an appraisal waiver, and the home was never appraised and closed at the contracted price.  This now created a recent arm’s length sale in this community like the historically higher priced community, just across the street.  Since this sale, there has been another home that has been listed and not yet contracted.  This micro market just jumped 10%.  Sure, this can happen with all cash buyers also, so this isn’t the first time I have seen this, but the first time with a buyer that needed a mortgage.  Who does this hurt?  Well it hurts all buyers in the near future, the buyer of this house, etc.  Had they had a professional appraisal; it is very possible the home could have been purchased for tens of thousands less.

Example 2.

This example is as an appraiser.  Recently, I was assigned to appraise a property for a home equity line of credit.  The owners / borrowers recently purchased the home with over 20% down and received an appraisal waiver.  Now they wanted to get a HELOC (home equity line of credit). 

As I do on all residential appraisals, I physically measured the home.  I immediate noticed that the square footage of the home was off.  This happens all the time, that there are large discrepancies in square footage.  The home was 15% smaller than what they thought they were buying.  Not only did the owner pay more than the home was worth with the marketed square footage they thought they were buying, now the home is 570 sq.ft. smaller.  The market value of the home was well below what they purchased the home for just a few months ago, as there was no appraisal / measurement made on the property.

Example 3. 

This example is as an appraiser.  Recently, I was assigned to appraise a property for a home equity line of credit.  The owners / borrowers recently purchased the home with over 20% down and received an appraisal waiver.  Now they wanted to get a HELOC, very similar to Example 2.

I physically measured the home like always and performed my appraisal (and the physically measured square footage was very similar to the assessors square footage).  The home was sold in average condition with minimal remodeling / updating performed in the past 15 years (this home was built in the early 80’s) but priced like a remodeled home, while the market norm and all other sales near the price point this home was purchased at were complete remodels.  There was a lot of market data available in the community, and the range of sales for the same floor plan was $190,000 to $300,000 (this also including things like site size, pools, etc.).  Homes that were in very average condition similar to the Subject property were selling at the very low end, while the remodeled homes with new surfaces (quartz / granite counter tops, new flooring, new bathrooms, new trim, new roofs, newer dual pane windows, etc.). 

Needless to say, my appraisal utilized comparable properties in similar condition (not remodeled) and was much less than the original purchase price a few months ago, while the market was slightly increasing. 

There are other examples of the damages that can be caused by appraisal waivers, as computers can’t replace professional experienced appraisers who examine all aspects of the property including but not limited to condition, quality, location, site size, site amenities, curb appeal, square footage, garages, etc.

So in summation, this is just a blog entry to try to inform any readers that in my opinion, if you are buying a home regardless of what the “public” information states or what AVM’s say the value is, purchasing a private appraisal (in an instance where you quality for an appraisal waiver) would be a small price to pay if something is not noticed or misrepresented in the buyer’s research.  I also recommend always getting a home inspection on any home you purchase to find out if there are any major issues that can cause what seems like a value to be a nightmare.

If getting a private appraisal takes an additional week, so be it, when making the largest purchases in a typical person’s life, gathering information can only help the situation.  Just like finding your future spouse, you don’t meet and get married in 30 days, you have an “inspection period” for better terms to determine if this is the best decision.