As real estate investors you and I need to be aware of the rules and regulations and their impact on investing and the real estate market. If you haven’t heard yet, on January 26th Fannie Mae, the nation’s largest source of mortgage funds is starting a new program on how it will manage appraisals.
NOTE: Quick Definition of Fannie Mae:
Fannie Mae is a government-sponsored enterprise that buys loans from mortgage lenders, packages them together, and sells them as a mortgage-backed security to investors on the open market. This increases the supply of money available for mortgage lending and increases the money available for new home purchases.
The idea behind the new program is simple; improve the accuracy of appraisals, thus reducing the risk to lenders.
According to a recent article in the Washington post, here a basically how the new appraisal program will work:
“Starting Jan. 26, Fannie plans to offer mortgage lenders access to proprietary home valuation databases that they can use to assess the accuracy and risks posed by the reports submitted by appraisers. The Fannie data will flag possible errors in the appraiser’s work before the lender commits to fund the loan, will score the appraisal for overall risk of inaccuracy and may provide as many as 20 alternative “comps” — properties in the area that have sold recently and are roughly comparable to the house the lender is considering for financing but were not used by the appraiser.”
Basically, using the additional information provided by Fannie Mae, the lender can “question” an appraisal and ultimately have it amended.
Sounds good in theory but undoubtedly, this will add more time to the closing process and add additional cost to the appraisal. As if that’s not bad enough, I also foresee widespread lower appraisals, which not only affect the bottom line profits you and I make on fix and flip deals but also will ultimately slow growth in the market.
Let me play it out for you…
You buy a distressed property and completely renovate it to meet current trends. You list the property for sale and find a buyer for $240,000. Next, an appraiser comes out and determines the home is worth the contract price ($240,000) and writes up a report. So far everything is going as planned.
After January 26th here is what may happen….
The lender submits the appraisal report to the new Fannie Mae program and they run their own comp analysis and come back with what they call “lower-risk comps” that value the home at $220,000. Because there is a $20,000 discrepancy, the lender goes back to the appraiser and questions the integrity of his appraisal, no doubt adding time, cost and frustration to the process.
If the lender does not agree with the appraiser’s reasons for the price difference it will not lend the amount of the original contract price of $240,000. In addition, a once agreeable sale between you and your buyer now turns into a heated debate over the real value of the home.
Not only could that kill your deal in the short term, but over time if appraisers are repeatedly being second-guessed and constantly having to justify their valuations, they will inevitably become ultra-conservative and under-appraise homes. This will slow growth and negatively impact real estate values nationwide.
Here is the lesson you need to learn:
“It’s not what a buyer agrees to pay for your renovated home that matters most, it’s the value of the lender’s appraisal that ultimately counts.”
More than ever before, you need to become proficient at analyzing comps and determining the after repair value (ARV). Watch my video on The Three Most Important Things to Get Right When Analyzing Comps. Instead of looking at 3-4 comps, now you need to look at 20 comps. Instead of just using retail comps, you need to now consider distressed comps. To make this process easier, download my FREE deal analyzer tool.
What it really means is when the rules of the game change, you step up to the plate and learn to play the new rules too.
Share this article if you found it helpful or interesting and leave a comment about how you plan to adjust your real estate business with these new changes…
Until next time, happy investing,