Posts Tagged ‘Real Estate Appraisal’
Working with HVCC Regulations
A recent article in Banker & Tradesman suggests that consumer confidence in the real estate market is coming back. Coming out of the 2009 Realtors Conference & Expo in San Diego, the article indicates that in spite of the decline of the market, buyers are still looking for vacation and recreational properties.
Industry experts, however, still appear to be concerned about issues surrounding real estate appraisals and the unintended consequences of the implementation of the Home Valuation Code of Conduct (HVCC). As we have discussed in other blog posts, the perceived problem is that appraisers, working for appraisal management companies, are often working outside areas with which they are familiar and may not have access to information about specific markets. Realtors argue that as a result of valuations that sometimes are too low, sales have been delayed and even cancelled.
This Banker & Tradesman article provides some interesting suggestions by realty agents of ways to work with the HVCC changes, including providing appraisers with detailed property comparison information and background materials to help appraisers achieve the most accurate appraisals.
As always, Present Value LLC is both an appraiser and an appraisal management company, which means that it can play the role of the third party required by the HVCC changes and save you the step of having to seek out a separate appraisal management company.
By: Present Value
Income Approach
This is the third installment of our series on the various methods used by real estate appraisers to determine property value. Last week, we discussed the sales comparison approach and the cost approach. This post will focus on the income approach.
The income approach generally is used to estimate the value of income-producing properties, including office buildings, hotels, warehouses, apartment buildings, and shopping centers. It is a method of appraising real estate based on the property’s anticipated future income.
The income approach, which is often viewed as the most reliable of the three approaches, is used when reliable financial data is available for recent sales of similar income properties in a given marketplace. The expected annual income of a property is divided by the capitalization rate to determine the market value of a property.
- The capitalization rate is calculated by a property’s net operating income and sales price for the sale of similar properties in a given area or marketplace. If sales of similar income properties in the area can be determined, one can establish a market capitalization rate by averaging the capitalization rate values of area sales.
- To determine the expected annual income of a property, an appraiser first estimates the annual potential gross income for a property, which includes how much rent each unit could generate in the market. The estimates of potential rental rates are generally derived from the current marketplace. The effective gross income for a property is generated by reducing the annual potential gross income by a vacancy allowance amount, which is determined by current market rental conditions for the type of property being analyzed. Additional income is added to the income estimates, including parking fees, laundry fees, and other profit-generating variables. Operating expenses are deducted from the effective gross income to determine the annual net operating income for the property.
It is important to note that when there is insufficient financial data for similar properties in a given market, appraisers may use all three appraisal approaches that we covered over the last three blog posts.
By: Present Value
Recent Articles About HVCC Changes
We’ve written several posts this year about the HVCC changes and how they affect the appraisal industry. You can read those articles here. Over the last two weeks, there have been a couple of articles written about how those changes affect not only appraisers, but home owners.
The Seattle Times published an article that followed one appraiser’s experience of the industry before and after the HVCC changes designed to keep brokers and appraisers from working too closely together went into effect. For this particular appraiser, appraising is a family business and he describes not only his worries for the industry as a whole, but his personal pain as he watches the HVCC changes’ negative effects on the industry he loves.
The article in The Seattle Times briefly mentions the effect of the HVCC changes on consumers, but another article published in the Chicago Tribune goes into a more in-depth exploration of consumers’ worries. This article discusses a man’s experience selling his home in Massachusetts. He had a successful sale, but found that the HVCC rules designed to protect him made the experience more stressful than it had to be.
To read the article in The Seattle Times, click here. The Chicago Tribune’s article can be found here.
By: Present Value
News About HVCC Changes
There was an article in The New York Times last week about the changes to the Home Valuation Code of Conduct (HVCC) that went into effect in May of this year, which we’ve written about here and here. Essentially, the changes say that only lenders can order appraisals and that rather than going to an appraiser directly, they must order appraisals through an appraisal management company.
During the housing boom, appraisers were occasionally under pressure to overlook property defects, which, in turn, contributed to increasing home prices. Ethical appraisers who refused to overlook defects were in danger of losing work and asked for greater enforcement of laws designed to regulate appraising. The HVCC changes were intended to decrease home appraisal conflicts of interest by putting the entire appraisal process in the hands of those most at risk of losing money – the lenders. But the changes designed to solve one problem seem to have created a whole host of other problems. Some real estate agents argue that the changes block home sales and are asking for the changes to be suspended until 2011. Some appraisers feel that the changes, which were meant to help ethical appraisers, actually hurt them by driving business to inexperienced appraisers.
The changes are fairly new and it remains to be seen how they will affect the industry in the long run. To read the full article and learn about the opinions of those affected by the changes, click here. To read a previous post about how these changes affect Present Value, click here.
By: Present Value
New HVCC Appraisal Rules Blamed for “Destroying the Housing Market”
A recent AP article contends that there is strong backlash against the new Home Valuation Code of Conduct (HVCC) rules that were enacted on May 1, 2009.
“The new guidelines bar mortgage brokers from ordering appraisals themselves, forcing them to do so through a mortgage lender. Lenders may order appraisals through in-house staff or appraisers hired by outside firms known as appraisal-management companies. But neither may talk to the appraisers about the value of the property they’re evaluating.”
Players in the real estate market, including realtors, homebuilders, mortgage brokers, and some appraisers, argue that the rules have created a number of problems, including the undervaluation of properties and delays in sales closings.
The changes state that rather than going to an appraiser directly, lenders must order a real estate appraisal through a third party, such as an appraisal management company. The new HVCC appraisal rules were put in place to prevent conflict of interests that led appraisers to inflate the value of a property, which have been partially seen as responsible for the current crisis in the real estate market. As part of a settlement between New York Attorney General Andrew Cuomo and Fannie Mae and Freddie Mac, the policy was intended to eliminate the pressure appraisers might be under by lenders and brokers to overinflate property valuations to increase profits.
Organizations like The National Association of Mortgage Brokers and The Appraisal Institute have come out against all or portions of the new regulations.
You can find Present Value’s other blog posts on HVCC here.
By: Present Value
The Appraisal Foundation Announces 2010-2011 Edition of USPAP
On June 9, 2009, The Appraisal Foundation, a congressionally authorized nonprofit organization that fosters professionalism among appraisers by setting qualifications and standards, announced that its Appraisal Standards Board (ASB) adopted revisions for the 2010-2011 edition of the Uniform Standards of Professional Appraisal Practice (USPAP). USPAP are the generally accepted performance and ethical standards for the appraisal profession in the United States. Standards are included for real estate, personal property, business, and mass appraisal.
The new edition is expected to be available in October. However, ASB has issued a Summary of Action that will enable appraisers to become familiar with the changes that are part of the 2010-2011 edition. The changes will take effect on January 1, 2010.
The majority of revisions were made to the ETHICS RULE, the COMPETENCY RULE and STANDARD 3: Appraisal Review, Development and Reporting.
Two of the most significant changes are as follows:
- “A requirement was added to the Conduct section of the ETHICS RULE, stating that, prior to accepting an assignment (and if discovered at any time during the assignment), an appraiser must disclose to the client and in the report certification any services regarding the subject property performed by the appraiser within the prior three years, as an appraiser or in any other capacity.”
- “The appraiser’s obligation to allow a client access to his or her workfile when providing a Restricted Use Appraisal Report was removed.”
Present Value is a certified appraisal company and provides USPAP-compliant appraisal reports.
By: Present Value
Decrease in Home Values Correlates to Increase of Homeowners Who Are “Underwater”
Zillow.com, a real estate information service, reported that there was an increase in the number of homeowners who are considered to be “underwater” – meaning that they owe more on their mortgages than the value of their homes – as housing values continued to decrease in the first quarter of 2009. This means that approximately 22% of homeowners have mortgage balances that are greater than the value of their homes. It is estimated that an additional 2.2 million borrowers are at risk of falling into this position if housing values decline an additional 5%. At the end of last year, 17.6% of homeowners owed more than their original mortgage, an increase of more than 3%, from 14.3%, three months earlier.
According to the Standard & Poor’s/Case-Shiller Home Price Indices, in March, the prices of U.S. single-family homes decreased almost 20% from a year ago. And, the index of 20 metropolitan areas from February to March fell 2.2% according to S&P.
The increase in the number of homeowners who owe more than the value of their homes could throw a wrench into the Obama administration’s current plans to stabilize the housing market. Under the current plan, guaranteed loans can only be refinanced if the mortgage loan is a maximum of 105% of a home’s value. So, now more than ever, it is important that homeowners know the most accurate value of their homes.
Experts say the estimate of the number of homeowners who are “underwater” could be skewed on the high side for various reasons, such as differences in home-price estimates, and homeowners who are already in the foreclosure process could be counted as owing more than the value of their homes if the title to their property hasn’t changed hands.
Despite this news, there also are some recent indications that the housing market could be beginning to stabilize; the National Association of Realtors pending home-sales index increased 3.2% in March.
By: Present Value
New Fannie Mae Rules to Prevent Inflated Appraisals
In February, Fannie Mae, the largest source of financing for U.S. home loans, announced that it will work to ban their use of in-house appraisals. An “in-house appraisal” means that the appraisal is conducted by brokers’ employees or by appraisers who are arranged by brokers. Appraisals will now need to be conducted by appraisers who are independent and do not have a conflict of interest. This development has the potential to decrease fraudulent appraisal activity.
Apparently, approximately three-quarters of residential mortgage appraisals are arranged through brokers who only get paid if a loan closes, which creates a financial incentive for mortgage brokers to push appraisers toward higher valuations. Higher appraisals can also contribute to economic instability because homeowners can qualify to refinance their homes and borrow cash against them.
The announcement came in response to a yearlong mortgage investigation by New York Attorney General Andrew Cuomo. Fannie Mae has agreed with the Attorney General of the State of New York and the Office of Federal Housing Enterprise Oversight to assist the regulators in their efforts to enhance home appraisal practices on behalf of consumers. The New York Attorney General’s office also announced it has terminated its inquiry of Fannie Mae, which began in November 2007.
Fannie Mae also will take two steps to assist the regulators in their efforts to enhance the quality and independence of the appraisal process. First, to help ensure appraisal independence and valuation protection, Fannie Mae will adopt a Home Valuation Protection Code, which will establish requirements governing appraisal selection, solicitation, compensation, conflicts of interest, and corporate independence, among other requirements. Additionally, Fannie Mae will provide $12 million over five years to help establish an Independent Valuation Protection Institute, which will monitor and study the area of home valuations.
By: Present Value
1031 Exchanges
Tax time is here, and even while you’re puzzling over that pile of papers on your desk, you may already be planning for next year. If selling an asset and purchasing another is in your plans for 2009, you may want to consider a 1031 exchange.
A 1031 exchange is an IRS-recognized method of deferring capital gain taxes. A capital gain is any profit that comes from the sale of a property, and this income is taxable. However, there is a way around this particular type of tax. If you sell one asset and acquire another within a specific time frame, you’ve performed a 1031 exchange. The logistics of an exchange are the same as in a sale, except that the asset sold and the asset purchased must be of equal value, or like-kind, and must be used for a business in order for the transaction to qualify for the tax deferral. The idea behind this particular section of the tax code is that when money gained from the sale of an asset is used to purchase another like-kind asset, there is no economic gain.
The tax code is fairly clear on its definition of like-kind when it comes to depreciable property, like a piece of machinery, but its definition of like-kind in real estate transactions offers less guidance. This is where working with an experienced appraiser becomes important. Because the IRS keeps an eye on these types of transactions, you want to make sure that you’re working with an appraiser who understands the IRS like-kind definitions.
Potential for Increased Valuation Fraud in Down Economy
In this time of economic hardship, many people are looking to or are being forced to liquidate their assets. The potential for scams regarding asset valuation will only increase, as will the number of individuals who fall victim to these schemes. In addition to individuals being taken advantage of, other larger-scale problems can arise from valuation fraud. Schemes that involve artificially inflated real estate appraisals drive up property tax assessments, and foreclosures resulting from fraud lower surrounding home prices. To prevent being taken advantage of by less-than-reputable appraisers, it is important to find an appraiser who will conduct a fair and accurate valuation.
The FBI recognizes that valuation fraud, specifically with regard to real estate, is a growing problem. During Fiscal Year (FY) 2008, mortgage fraud Suspicious Activity Reports (SARs) increased more than 36% to 63,173. The total dollar loss attributed to mortgage fraud is unknown. However, 7% of SARs filed during FY 2008 indicated a specific dollar loss, which totaled more than $1.5 billion. Only 7% of 2008 SARs reported dollar loss because of the time lag between identifying a suspicious loan and liquidating the property through foreclosure and then calculating the loss amount.
Currently, most of the mortgage industry is not required to participate in any mandatory fraud reporting, and there is presently no central repository to collect all mortgage fraud complaints. However, SARs from financial institutions have indicated a significant increase in mortgage fraud reporting.
Increased monitoring and enforcement would be helpful in preventing mortgage fraud because many mortgage fraud schemes include an appraisal component. A joint task force between the FBI and the Department of Justice – the Mortgage Fraud Working Group – has been created to investigate these issues, but there has been little agreement on exactly how to best fight this type of fraud.
To help combat valuation fraud, it is important for individuals, including real estate owners, CPAs, and attorneys, who are faced with the challenge of accurately appraising real estate assets to find appraisers who have experience in their specific regions.
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