Appraisals

Significant Impacts Hitting: Registry and Court Closures, Closing and Financing Delays, Social Distancing, School Closings, Quarantine Potential

As I was writing this post tonight, Gov. Baker ordered the shutdown of all schools through April 6, closed down restaurants and bars, and is banning gatherings over 25 people. Also announced tonight is the shut down of all Trial Court facilities on March 16 and March 17, which includes the Cambridge and Suffolk (Boston) Registries of Deeds. We are now hitting the tipping point, and going forward there will be substantial impacts on the real estate and legal industry.

I first wrote about the Coronavirus (COVID-19) global pandemic five days ago. Seems like an eternity ago. As of that writing (data as of March 9), there were 729 reported cases in the US, with 27 deaths. As of tonight March 15, cases have over quintupled with Johns Hopkins reporting 3,722 confirmed cases and 61 deaths. With the well publicized testing delays, the real number of cases are likely far higher.

Registry of Deeds Impacts

As mentioned above, Gov. Baker just ordered the closure of all Trial Court facilities for Monday March 16 and Tuesday March 17. Both Cambridge and Suffolk (Boston) Registries are housed in Trial Court facilities so they will be closed for those two days. I spoke to Maria Curtatone, Registrar of Deeds for Cambridge Middlesex South, and she indicated that this may well be the precursor to widespread shutdown of all registries of deeds and courts throughout the state. We will await further announcements on that.

Update (3/17/20) — Suffolk and Cambridge are closed to the public until at least April 6. Currently, they are both still processing electronic recordings for recorded land. All Land Court recordings and plans must be sent in by overnight or regular mail.

We have just received a chart below showing current Registry status:

I remain concerned, however, that all Registries will be forced to shut down and will not offer in person, mail or electronic recordings. If that occurs, we will see a potentially catastrophic impact to real estate in Massachusetts. Title insurance companies have assured its attorney agents that they will offer “gap coverage” in case recordings are delayed. This coverage offers insurance coverage between the time of the physical closing and the time of actual recording of documents at the registry. However, it remains to be seen how this will play out. Will mortgage payoffs still be processed even though deeds will not be recorded? Will sellers allow buyers to get keys and move into homes if deeds aren’t recorded and their sale proceeds are held in escrow? We will need to work through these issues.

I am also concerned if COVID-19 starts hitting closing attorney offices. If a lawyer or staff member is infected, it could result in the quarantine of their entire office, essentially shutting it down for some time.

COVID-19 Contingency Provision

In my previous post, I discussed a new COVID-19 Impact Clause for Offers Purchase and Sale Agreements. (Sample language below). It is imperative that these clauses are used in both Offers and PSA’s. It’s also very important that all parties and their attorneys work together cooperatively throughout this crisis, acknowledging that there will likely be substantial impacts and delays. The goal, as always, is to get to the closing and complete the deal, by any means necessary.

COVID-19 Impact Provision. The Time for Performance may be extended by either Party by written notice for an Excused Delay which materially affects the Party’s ability to close or obtain financing. As used herein an Excused Delay shall mean a delay caused by an Act of God, declared state of emergency or public health emergency, pandemic (specifically including Covid-19), government mandated quarantine, war, acts of terrorism, and/or order of government or civil or military authorities. Notwithstanding anything to the contrary contained in this Agreement, if the Time for Performance is extended, and if BUYER’S mortgage commitment or rate lock would expire prior to the expiration of said extension, then such extension shall continue, at BUYER’S option, only until the date of expiration of BUYER’S mortgage commitment or rate lock.  BUYER may elect, at its sole option, to obtain an extension of its mortgage commitment or rate lock. Notwithstanding the foregoing, said Extension shall not exceed [insert number of days].

Virtual and Remote Closings

Another impact that we are already seeing is that parties to the real estate transaction are afraid of traveling outside their homes right now (or even being visited at home) and being in contact with other people, especially those who are high risk. My colleagues and I are working on an emergency executive order for Gov. Baker to sign which would temporarily authorize remote or virtual closings using such technology as Zoom and Docusign.

For more information on this please read my new post, Massachusetts Remote Notarization Bill Filed in Legislature

Court Closings

Update (3/17/20): The Supreme Judicial Court today ordered that, because of the public health emergency arising from the COVID-19 pandemic, beginning tomorrow (March 18, 2020) and until at least April 6, 2020, the only matters that will be heard in-person in Massachusetts state courthouses are emergency matters that cannot be held by videoconference or telephone. Each of the seven Trial Court departments, in new standing orders to be issued today, will define emergency matters for their departments.  As a result of the SJC order, courthouses will be closed to the public except to conduct emergency hearings that cannot be resolved through a videoconference or telephonic hearing.  Clerk’s offices shall remain open to the public to accept pleadings and other documents in emergency matters only.  All trials in both criminal and civil cases scheduled to commence in Massachusetts state courts between today and April 17, 2020, are continued to a date no earlier than April 21, 2020, unless the trial is a civil case where the parties and the court agree that the case can be decided without the need for in-person appearance in court. Where a jury trial has commenced, the trial will end based on the manifest necessity arising from the pandemic and a new trial may commence after the public health emergency ends. Courts, to the best of their ability, will attempt to address matters that can be resolved or advanced without in-person proceedings through communication by telephone, videoconferencing, email, or other comparable means.

A link to the SJC Order OE-144 is here.

In addition to the closings on March 16-17, the Massachusetts Court System announced over the weekend major “triage” changes reducing the number of persons entering state courthouses. These rules are effective Wednesday March 18, 2020. A link to all of the new changes can be found here — Court System Response to COVID-19. A summary of each court and respective changes are as follows:

Superior Court — All jury trials postponed until April 22. Motions handled by individual judges with preference for telephonic hearing and postponement where necessary to limit number of people entering courtroom. Emergency matters may proceed normally. The new Standing Order 2-20 can be found here.

Housing Court — All cases including evictions (except emergencies) postponed until after April 22. Matters may be heard earlier upon a showing of good cause. New Housing Court Standing Order is here.

Probate and Family Court — Trials postponed until May 1. Motions and pre-trials heard telephonically or postponed until after May 1. Modification complaints won’t be heard until after May 1. New Probate and Family Court Standing Order 1-20 is here.

District Court — No jury trials until after April 21. All criminal appearances rescheduled for 60 days, and no earlier than May 4. Arraignments and Bench trials may proceed. The new District Court Standing Order is here.

Land Court — All trials postponed until after April 21. All other motions and proceedings shall be held telephonically at judge’s discretion. Registration of title documents should not be done in person. Mail or email is now preferred. (Not sure how that will work). New Land Court Standing Order 2-20 is here.

Appeals Court — Oral argument for March will be telephonic.

Supreme Judicial Court — Please see the Court’s website.

As you can glean from the changes, virtually all trials are being pushed out through the end of April. Motion hearings are court specific with telephonic hearings being substituted for in-person hearings. Of course, if the courts are all shut down, all bets are off. With no staff, the courts will not even be able to handle new filings. The system would just stop in its tracks, except for the most emergency of matters.

Lender/Financing Delays

This week we will see if there are any major disruptions to lenders’ ability to provide financing. I am seeing some smaller mortgage companies moving to remote employee staffing. I’m also hearing about appraisal delays. If there are government employee impacts such as at the IRS for processing tax transcripts, there could be delays with underwriting. I think it’s inevitable that we will be seeing lender delays moving forward.

Municipal Closings

I am also hearing of closings of municipal departments, which may affect the availability of final water/sewer readings and possibly smoke detector certificates. Title 5 inspections could also be impacted.

25 Person Social Gathering Restriction

New restrictions on crowd sizes that Gov. Charlie Baker issued on Sunday, March 15, could upend open houses. The restrictions banned gatherings of 25 or more people. Brokers seemed to anticipate a possible drop-off in attendance, even before Baker’s restrictions and despite strong numbers the past couple of weeks. “Next week may be a different story,” Jason Gell, a Keller Williams broker and president of the Greater Boston Association of Realtors, said on March 12. “Unfortunately, any decline in open houses or listings is likely to make the conditions for buyers even more difficult.”

Social Distancing, School Closures and Possible Lockdown

The impacts of COVID-19 are manifesting not necessarily in the actual infection and sickness of patients (which I’m not discounting at all) but all the measures we are taking to “flatten the curve.” I want to urge all my readers that COVID-19 could wind up being the worst global pandemic since the Spanish Flu and should be taken as seriously as life and death. If you can work from home, do that and don’t go into the office. If you can arrange for remote employee access, please do that. Take advantage of technologies like Zoom, Docusign and Dotloop. Please keep your kids at home. No playdates, family gatherings or hang-outs. They say we are only 2 weeks behind Italy and you see what’s going on there. Stay safe! More updates to follow as I get them.

-Rich

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The “Standard Form”

In Massachusetts, buyers and sellers typically use the standard form purchase and sale agreement created by the Greater Boston Board of Real Estate. This form has been around since the late 1970’s and last updated in 1999–which might as well be 100 years ago in real estate life. Along with the standard form, attorneys for sellers and buyers customarily add specialized Riders to the agreement which modify the standard form and add contingencies particular to the deal.

A Vastly Changed Landscape

The legal and mortgage financing landscape has changed so much in the last few years, with Fannie Mae and regulatory agencies issuing a new policy what seems like every other week, and short sale and REO transactions becoming much more prevalent. With the recovering market and new appraisal guidelines, some homes are not appraising out. Moreover, lenders have tightened underwriting requirements considerably. As a result, borrowers have more difficulty qualifying for mortgage loans, it takes longer to get a loan commitment, and there are often delays in getting the loan “cleared to close.” All these changes in the real estate landscape require re-thinking of the standard form purchase and sale agreement and the associated riders.

As experienced Massachusetts real estate attorneys, it shouldn’t come as a surprise to know that we are on top of the latest changes in the Massachusetts and national real estate landscape, and have adapted our legal forms accordingly. I’ll go through 3 recent changes that I’ve adopted in my practice.

Low Appraisal Contingency

These days, appraisals are administered is a completely different fashion. New rules – the Home Valuation Code of Conduct (HVCC) – hold appraisers to higher standards and sharply limit communication between appraisers and lenders. Mortgage professionals can no longer select their “hand-picked” appraiser now; there is basically a random lottery system to select the appraiser. The downside of this lottery is that the appraiser may not be very familiar with the town or neighborhood being appraised. So the appraisal may fall short of the agreed-upon selling price.

I always insist on this provision to protect a buyer against the risk of the property not appraising out.

Appraisal– The buyer’s obligations, hereunder, are contingent upon the BUYER’s lender obtaining an appraisal of the property in an amount at least equal to the purchase price of the premises.

What happens if the property doesn’t appraise for asking price? Sometimes you can ask for a second appraisal or bring different comparable sales to the appraiser’s attention and he can revise the appraisal. Sometimes, the parties must re-negotiate the purchase price. Talk to your lender and Realtor about the options. This provision, however, gives the buyer an “out” if a low appraisal cannot be overcome.

Condominium Fannie Mae Compliance

Tougher Fannie Mae and FHA condominium rules have made condo financing much more challenging. I add this clause to deal with this situation:

The Condominium, the Unit, and the Condominium Documents (including but not limited to the Master Deed and By-Laws/Trust) shall conform to the requirements of Federal National Mortgage Association (“FNMA” or “Freddie Mac”), Federal Housing Administration (“FHA”) or Federal Home Loan Mortgage Corporation (“FHLMC”) or other secondary mortgage market investor, and shall otherwise be acceptable to BUYER’s mortgage lender.

Rate Lock Expirations

Delays happen. There may be a title problem which the seller needs a few days or weeks to correct. But what if your rate lock will expire and you are facing a higher interest rate loan? This provision protects the buyer in this situation:

MODIFICATION TO PARAGRAPH 10: Notwithstanding anything to the contrary contained in this Agreement, if SELLER extends this Agreement to perfect title or make the Premises conform as provided in Paragraph 10, and if BUYER’S mortgage commitment or rate lock would expire prior to the expiration of said extension, then such extension shall continue, at BUYER’S option, only until the date of expiration of BUYER’S mortgage commitment or rate lock.

There are many other contingencies and new provisions that I use, but I cannot give them all away!

___________________________________

Richard D. Vetstein, Esq. is an experienced Massachusetts Real Estate Attorney. For further information you can contact him at [email protected].

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Appraisals, Assessments and Zestimates, Oh My!

by Rich Vetstein on October 25, 2010

Welcome back Guest Blogger, Gabrielle Daniels Brennan, from Coldwell Banker Residential Brokerage, Sudbury, MA, Check out her fantastic blog, Living In Sudbury (www.liveinsudburyma.com).

What Is Your Massachusetts Home Really Worth?

OK folks, you want to know what your house is worth? Stop obsessing over your town assessment and online estimates. At the end of the day, your house is worth what someone is willing to pay for it.

But while you follow the sale prices of your neighbor’s house and e-mail me to ask what your house is worth (sight unseen), I’ll explain to you that it is neither an exact science, a mathematical equation, or a guesstimate. So many factors go into the value of your house. In this case, perception is, for the most part – reality. The location, the condition, the square footage, the updates, the amenities, the lot, the neighborhood, the neighbors, proximity to school, the floorplan – and so much more. Size matters, but it’s not the only thing.

It’s so easy to want to use the two words interchangeably, but please know that an assessment and an appraisal are totally different things.

ASSESSMENTS: (Think – measurement rhymes with assessment) Assessments are based upon the town’s opinion of value of the land and the value of your house, based on the measured square footage and condition (excellent, very good, good, fair and poor). The square footage includes everything in the house – closets, hallways, two-story foyers, stairways, etc. So, although you may add up the square footage from each room, it’s not the same. The taxes you pay are based on your assessment. Years ago, houses were priced close to, or above, their assessed value. If a house were priced below the assessment, it was featured as a fabulous thing. Priced WAY BELOW assessment, translated, meant: “Don’t forget your checkbook as you’re running like a madman to the open house.”

These days, assessments may be in the general vicinity of the asking price. Not a lot of weight is placed on the assessed value as it compares to the true market value. Most are priced around the assessed value, especially if they sold in the past 10 years.  The assessor’s office does not take into account all of the items within a house that a buyer perceives as valuable (age of systems, paint vs. 1970s wallpaper, neighborhood full of kids the same age, master bathroom rivaling the one at the Four Seasons in Nevis, etc.) Just the square footage, value of the land and the town’s rating of the neighborhood.

APPRAISALS: An appraisal is a valuation made mathematically by a real estate appraiser for the purposes of providing security to the lending institution. The bank wants to be sure that the money it is loaning – for a refinance, home equity loan, line of credit or a purchase – can be recouped in today’s market if the owner defaults on the loan. Essentially, they need to know that they would not have a problem selling the house for the amount borrowed.

The appraiser formulates his/her appraisal based on the sale prices of the houses nearby that would be comparable for the square footage, the amenities, and the condition. In some towns, it’s not necessarily apples to apples, because a house down the street may have been foreclosed upon, thus skewing the value of the subject property.

Appraisals used to be more of a formality, and now they are extremely strict. As a result of the mortgage debacle, banks have cracked down and the rules have changed. Banks used to be able to communicate with the appraisers – now they have been prohibited from having direct communication. If you have recently refinanced and your appraisal came in at one price, it doesn’t necessarily mean that that price is what you would get from a buyer if your house went on the market.

ZESTIMATES: I think Zillow is an entertaining and somewhat informative website. It is a great site to search for homes and to take advantage of all of the interactive features. The “Zestimate” is Zillow.com’s term for “estimate of the value of your house.” For houses in Middlesex County, Zillow states that its accuracy is 99 % of the homes in Middlesex County that are on Zillow. Ninety-nine percent of homes in Sudbury are on Zillow. Ninety-nine percent of those have “Zestimates.” Of that 99%, only 32% sold within 5% of their Zestimate. Fifty-eight percent sold within 10% of its Zestimate and 82% sold within 20% of its Zestimate. Median error is 8.3%.

Dizzy? This means that if your Zestimate is $800,000, your sale price may be closer to $640,000 or $960,000. It’s a pretty big spread! So, fun site – yes. Accurate – not really. Why? The information pulled by Zillow is information that is available online – and if one piece of data is incorrect (it happens all the time) then everything is skewed.

Zillow does not know what streets are busy, what houses have just updated their kitchen and bathrooms, furnaces, roofs, etc. Zillow also does not know the motivation of sellers. So, if your neighbors won the lottery and just wanted to sell the house so they could sail around the world and sold for about $50K less than they could have – according to Zillow, your house just went down $50K, also.

Unless he or she has a really good sense of humor, please don’t tell your real estate agent that you disagree with his/her extensive analysis because your “Zestimate” states “X.” It would be like telling Todd English that you know how to make his signature dish because you just Googled the recipe. So, enjoy the site, have fun searching, reading the real estate news, etc., but don’t get excited or freak out because of your Zestimate. It will likely change the next time you log on.

COMPARATIVE MARKET ANALYSIS: This is the best, and most accurate, way to know the value of your house. A comparative market analysis is written by a real estate agent. It would best completed by an agent who knows the market, knows each house that your’s would be compared to, and has his/her hand on the pulse of the buyers. A real estate agent preparing the market analysis should take into account everything about your house – the square footage, the condition, the style, the location, the demographic of the potential buyers, the market conditions, the intangibles, and the perceived value within the town.

We then analyze the house in comparison with the houses that are on the market, have accepted offers, are under agreement and have sold (closed). A market analysis conducted today would not include sales from the spring as it was a different market. It’s also very important to have a sense of what comparables appraisers will use when appraising the house for the buyer’s mortgage company.

So, assessments (pain in the assessment = taxes), appraisals (think = approximate), Zestimates (Zillow.com), market analysis (call me/real estate agent).

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Welcome back Guest Blogger, Realtor Gabrielle Daniels Brennan, from Coldwell Banker Residential Brokerage, Sudbury, MA! Gabrielle and her mother-partner, Carole Daniels, just launched a fantastic blog, Living In Sudbury (www.liveinsudburyma.com), which our company, HubConnected, designed and created.

Having grown up in Sudbury and now settled there with her family, Gabby’s knowledge of the Sudbury and surrounding market is unparalleled. Plus, she re-defines “concierge” service, going so far as to ensure that her buyers meet their neighbors ahead of time, get local nannies, and find the right preschool. Gabby is writing today about the mutual respect buyers and sellers should have for each other during the real estate process.

Home Buyers And Sellers, You CAN Just Get Along!

Once upon a time there was a newlywed couple house-hunting in the suburbs. They held hands as they strolled into each house, they conversed with their real estate agent about every detail of their wedding and giggled like sixth graders whenever they spoke the words “husband” or “wife.”

Then, they found the house of their dreams. The dreams that mirror “happily ever after” — it was the house they imagined having babies (2 boys and 2 girls – the girls would be twins of course and would share a room painted with Benjamin Moore’s Cotton Candy).

The happy couple told their real estate agent that they wanted to make an offer for asking price, closing the exact day that the sellers wanted to close. They had enough money from their wedding gifts and unfortunate passing of Great Grandpa Charlie to pay for the house in cash. The husband dabbled in construction, so every item that appeared as a result of the home inspection would be “no big deal.”

Both sets of parents came to see the house and everyone oooh’ed and ahhh’ed instead of bringing up the fact that the kitchen wasn’t updated, or that the family room was a little smaller than what they had thought it would be, or that the garage was under the house. The parents all talked about how happy they were and they never said anything that remotely sounded like “YOU paid ____ for this??? Our house cost $37,000 when we bought it …” And then the sellers threw a welcome party for the buyers before they moved in – just to make the proper introduction to the neighborhood.

I’m sure you are thinking that this story is a work of fiction. Nope. Well, aside from the buyers volunteering to pay the asking price and the gushing in-laws, the concept of a truly pleasant real estate transaction doesn’t have to sound so foreign. Without compromising the financial objective of either party, the real estate transaction can be pleasant and satisfying to all parties involved.

The decision to buy or sell a home is as much a personal transaction as it is business. It’s an exciting one, and a process in which I truly love being involved. And although it’s certainly not as straightforward as a show on HDTV about finding the right house, it doesn’t have to be challenging. As much as buyers would like to say that they won’t buy with their hearts, that is crazy – of course they will. It’s a home. It’s where you live. It’s where your heart is. Your life is not one big business transaction.

Everyone remembers the details of their real estate transactions. Even if they bought or sold their house 12 years ago, they will tell you exactly how the buyers or sellers acted, the items negotiated during the home inspection, the credit they received, what they negotiated during the purchase & sale agreement, and the details that still make them happy or cringe.

They may not remember the date they bought their house, but they will remember everything about the closing.

I have been involved in scores of real estate transactions. When multiple persons are involved in the decision-making process for a major life event, so much can get lost in translation and people don’t always behave in a way that they, let’s say, would be proud of if a TV crew were following them around. In addition to the number of family members and friends who know EXACTLY what is best for you, there are many people involved in a real estate transaction — buyers, sellers, two real estate agents, two attorneys, possibly two paralegals, one mortgage broker, one appraiser, at least one inspector, and, sometimes, the nosy neighbor.

If my intention with this piece were to promote the value of experienced real estate agents, this would be the part where I emphasize that it is the role of the real estate agent to quarterback the entire team involved to ensure that everyone wins.

In general, buyers are excited to buy a house. When an offer is made, it is the beginning of negotiations with the seller with the goal of consummating the sale of the home.  In today’s market, prices have adjusted and many sellers are having an understandably difficult time grasping the reality of the market.

Because of the resources available in 2010, today’s buyers are also the most knowledgeable, well informed and cautious. The market value of a house is what a buyer is willing to pay. Without giving up any money on the sale side and overpaying on the buy side, there are so many ways in which to make the real estate transaction one that is not so painful.

My thoughts below may seem pretty uncomplicated, and that is my objective. It is easier to have a smooth and seamless transaction than it is to have one that feels more like an act of Congress. It is a business transaction, but the basis of the transaction is emotional. You certainly don’t have become new best friends, but cordial is always appreciated.

1. MUTUAL RESPECT. The tone of the entire transaction is set with the first round of communication between both parties.

*   BUYERS: Be respectful of the sellers and their real estate agent. This does not translate into paying more. It shows that you will be a pleasure to deal with. Appreciate your sellers. They have cared for and maintained the house you fell in love with.

SELLERS: Appreciate your buyers. They love your house enough to buy it. If you receive an offer the first day on the market, it is because your house was priced right and the buyers know the market. Don’t be greedy, it will backfire.

2. DON’T TAKE THE MARKET PERSONALLY

*   BUYERS: If a seller decides not to accept your offer, it has nothing to do with what great people you are and how many friends you have in common. It’s usually about the financial picture.

*   SELLERS: Most likely, you didn’t overpay for your house.  You paid what the house was worth when you bought it. It’s exactly what the buyers want to do now – pay what the house is worth in today’s market. I’m certainly not suggesting that you don’t get frustrated or upset if you are taking a loss or not netting what you had planned, just don’t take it out on your potential buyers. What you “want” and “need” to get for your house is irrelevant. Buyers will pay what they feel it is worth and their mortgage company will lend based on what they feel it is worth.

3. WORK SMART. CHOOSE YOUR REPRESENTATION CAREFULLY.

*   Work with real estate agents and attorneys with whom you are comfortable and have trust. This isn’t the time to cut corners and do someone a favor. You deserve to have the best people on your team.

4. HICCUPS

*   Every transaction has their “thing” – something that needs to be clarified, negotiated, extended, explained. Know this ahead of time so when your own situation arises, you know that it’s normal and just needs to be dealt with.

5. NEIGHBORS

*   SELLERS: Keep in mind that the buyers are now going to have your former neighbors as neighbors.

*   BUYERS: Keep in mind that your soon-to-be neighbors are your sellers’ current neighbors.

PeopleSudbury Wayland MA Real Estate Homes like to talk, especially about real estate.

At the end of the day, it’s about common decency. It’s about mutual respect between the buyer and seller of the same house. As much as this is a business transaction, it is even more a personal one.

Gabrielle Daniels Brennan and her mother, Carole Daniels are The Daniels Team of Coldwell Banker Residential Brokerage in Sudbury. You may contact them by phone at 508-277-6956 (Carole cell), 617-320-8150 (Gabrielle Cell), or by Email to [email protected]

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We are pleased to have a new guest blogger, Jonathan Steinberg, a Certified Residential Appraiser with Abelis Appraisals which provides residential appraisals throughout Massachusetts. Jon was quoted extensively in a recent Boston Globe Magazine article on the challenges of appraising residential property. Jon is here to write about the recent overhaul of the Home Valuation Code of Conduct which revamped the residential appraisal system in the U.S.

This week Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which is one of the most radical overhauls and reforms to the banking industry since the days of the Great Depression. The bill will fortunately “sunset,” or put an end to, the Home Valuation Code of Conduct, an ill-advised attempt to revamp the residential real estate appraisal system back on May 1, 2009. The HVCC impacted all Freddie Mac and Fannie Mae loans and has stirred up quite a bit of controversy within the real estate industry.

A Failed Experiment: The HVCC

The HVCC essentially re-wrote how lenders order appraisals. The HVCC’s goal was to remove incentives for mortgage lenders to apply pressure on appraisers to inflate values, understanding that lenders and mortgage brokers normally only get paid if a loan closes. No longer could lenders choose from their own roster of local appraisers who knew the local real estate market. Instead, the HVCC prohibited mortgage brokers from even communicating directly with appraisers, and required that appraisals be ordered through an independent Appraisal Management Company, or AMCs.

One of the biggest complaints of the HVCC and the Appraisal Management Companies is that local, reliable appraisers who had built relationships and business with mortgage companies at reasonable fees were suddenly shut out, and the new AMC appraisers frequently lacked the competency and knowledge of local markets. How could an appraiser from Burlington, Vermont come down to Winchester, MA and effectively appraise a home? Furthermore, while the HVCC may have succeeded at eliminating pressure to inflate appraised values, the common result was that an AMC could now set the market for the fees paid to the appraisers. The AMC profits by distributing appraisals who accept the lowest fees. Additionally, if for some reason the loan doesn’t go through with the first lender, consumers had to get a brand new appraisal for each lender, adding more time, and of course more cost, to the process. A further glaring conflict is that the largest national lenders have significant interest in their own, appraisal management companies. The lenders have created a profit center through the appraisal fee by passing on as little of the appraisal fee to the actual appraiser as possible.

What Remains Of The HVCC

Even with the passage of the financial overhaul bill, some of the HVCC’s skeleton remains. The new regulations still requires lenders to order appraisals and will have AMCs be prevalent in the process.  Lenders can maintain their interest in appraisal management companies, however, appraisers must now be paid a fee that is “customary and reasonable” for that market area. Whatever that means. For the homeowner, appraisals should become more portable; the new rules are supposed to ensure the portability of the appraisal report between lenders or mortgage brokerage services for consumer credit transactions secured by a lien on the principal dwelling of the consumer. The to-be-created Consumer Financial Protection Agency will have the authority to protect the consumer and assure “appraisal independence” through the issuance of new appraisal rules within 60-90 days from the date of the legislation’s enactment. The HVCC is to sunset at the time the new rules go into effect.

Many questions remain however. How will these new rules look and how they will affect this industry? Will they create transparency so the appraisal fee reflects the fee paid to the appraiser and the fee paid to the appraisal management company is itemized on the HUD-1 Settlement Statement? Will borrowers be protected by ensuring that the appraisals are not simply awarded to the lowest bidder with the fastest turn around time, regardless of competency?  Only time will tell.

Thanks Jon for the great insight. And thanks to Patrick Maddigan, Esq. of TitleHub for assistance with this post.

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haunted_house-1.jpgThe well maintained 4 bedroom Colonial in a North Shore suburb with a great backyard looked nice enough thought “Debbie,” the buyer. However, she was dismayed to learn from neighbors after closing on the property, that the prior owner had committed suicide in the house. The real estate agent never advised her of this, and she says she would have never purchased the home if she had known this.

In Massachusetts, real estate brokers struggle to sell homes tainted by shocking murders, suicides, or even suspected “haunted houses.”  For real estate brokers, sellers and buyers, these “stigmatized” properties are particularly difficult to deal with as they raise unique valuation problems and disclosure issues.

“Haunted Houses”

Under Massachusetts law, however, real estate brokers and sellers are under no legal obligation to disclose that a property was the site of a felony, suicide or homicide, or has been the site of an alleged “parapsychological or supernatural phenomenon,” i.e., a haunted house. Thus, buyers are on their own to discover these types of stigmas—however, a quick Google search on the property address or prior owner may have revealed the prior suicide in “Debbie’s” case.

Power Lines, Cell Towers & Underground Gas Pipelines

Less notorious, but equally challenging, are stigmas such as high tension power lines, cell towers, high pressure underground gas pipelines, landfills, nearby sex offenders, former Army bases, and other environmental concerns. These are much more challenging to handle, and are becoming increasingly prevalent.

While there is an ongoing debate whether electric and magnetic radiation emitting from powers lines and cell towers are harmful to humans, there are studies suggesting that buyers perceive them as health hazards and will drop asking prices accordingly. Neighborhood opposition to cell towers and new gas lines are becoming increasingly widespread, vocal and well-organized. Also, virtually all power lines and gas pipelines running over property will carry with them recorded easements which typically restrict building near the lines. Depending on the proximity of the lines, these easements may impact potential home additions and backyard activities such as pool installations, etc.

Buyers need to be cognizant of the impact of all potential stigmas, whether well-publicized or not. For most off-site conditions, Realtors and sellers are under no legal obligation to disclose them to buyers. Buyers, you need to do your due diligence. Check the town assessors maps (often available online), registry of deeds information, the Mass. sex offender registry, use the internet and Google Maps to verify any potential impacts on the property, and drive around the neighborhood. You’d be surprised what you’ll find.

Helpful links:  National Ass’n of Realtors Field Guide To Stigmatized Properties

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The mortgage lending underwriting environment has changed dramatically in the last several years. At the peak of the bubble, mortgage professionals joked that you needed only to be able to fog a mirror to get a loan. These days, even borrowers with good incomes and good credit scores can get turned down.

Much of the change is driven by the stricter underwriting standards imposed by Fannie Mae, Freddie Mac and FHA. There are two major issues which come up repeatedly in transactions today which can derail a borrower’s loan: (1) extensive home repairs, and (2) a low appraisal.

The house requires substantial repairs

A lot of properties on the market these days are foreclosures owned by banks, short sales, or otherwise aren’t in great repair. Further, in a buyer’s market, sellers will not hesitate to agree to a list of repairs.

Broken windows, defective appliances, roof leaks, unfinished renovations, and serious water damage can all cause problems with obtaining final lender approval of the loan. At worst, the a substantial amount of required repairs could cause a lender to bail out. At best, the lender will require a pre-closing inspection and make the loan commitment subject to the satisfactory completion of all work.

Talk to your lender before the purchase and sale agreement is signed to figure out the extent to which substantial repairs will affect the underwriting process.

The appraisal is lower than the purchase price

Occasionally during the bubble an appraiser would decide a home was worth less than the price a buyer and seller had agreed upon. But that was relatively rare. Critics accused appraisers of colluding with lenders to “hit the number” — deliver the values needed for loans to be approved.

These days, appraisals are administered is a completely different fashion. New rules – the Home Valuation Code of Conduct (HVCC) – hold appraisers to higher standards and sharply limit communication between appraisers and lenders. Mortgage professionals cannot select their “hand-picked” appraiser now; there is basically a random lottery system to select the appraiser. The downside of this lottery is that the appraiser may not be very familiar with the town or neighborhood being appraised. So the appraisal may fall short of the agreed-upon selling price. Even if the first appraisal goes well, a second evaluation — known as the review appraisal and now ordered by most investors that buy home loans — may not.

Today buyers, sellers and their agents often attempt to manage the appraisal process by recommending better comparable sales available than the ones the appraiser used. As a buyer’s attorney, I always negotiate an “out” in the purchase and sale agreement for the buyer’s protection in case the appraisal comes in too “low.” If the appraisal remains under the purchase price, buyers may need to reopen negotiations with the seller or come up with a bigger down payment to make a deal work — or pay down their mortgage in order to refinance.

Have you felt the change when you have tried to get a loan?

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I’m pleased to have Donald J. Griffin, MAI, SRA, an experienced appraiser with Don Griffin Appraisals, Inc., who is here to guest blog about a topic very much on the mind of Massachusetts homeowners, buyers and sellers:  Massachusetts property values.

Don Giffin, MAI Appraiser

What Happened?  The Last Three Years

The Massachusetts real estate market was artificially stimulated by forces outside the normal supply demand model. This led to artificially increased values, mostly at the lower end of the value range in communities at the lower end of the income range. Once the stimulation was terminated, around 2006, and market forces returned to normal, the correction process began. The Massachusetts market has to absorb all of the artificially induced value, before it can start to act in a normal supply demand model.  Any particular property will be affected by the market that it is in, therefore to answer the question, “How much has my property value declined?”, look at the community it is in, and the location of its value in the community’s range of value, i.e. low medium and high. In general a high end valued home in a community with high incomes will see little to no loss, while a low end valued home in a community with low income will see high declining value. Most communities will continue an upward trend in average value. The upper end in both markets will continue to feel the pressure of the recession and tight credit for 12-18 months until the recession’s negative effects are mostly dissipated and we have moved into a strong growth mode. Properties at the low end of the value range in all communities will wait a long time to attain the values seen in 2006.

The Broad Strokes

In general, decline in real estate value is a result of an imbalance in supply and demand.  More sellers than buyers, cause reduced prices. If possible sellers wait, hoping the market will improve.

The Impact of the Sub-Prime And Credit Crisis On Massachusetts Property Values

There have been many articles written describing the sub prime mortgage market in relation to the collateralized mortgaged backed security market. For our purposes I will simply state that the effect was to increase demand for real estate, mostly at the low end of the value range. I say the low end because the goal was to bring marginal buyers into the market by lowering the bar for qualification for a mortgage.

This did not affect the middle and upper income value ranges in Massachusetts as much, since high income earners were already in the market.

However, there was an “upsurge effect.” When a low value owner sold for a profit, they moved up to the middle market, creating a secondary effect on the middle and upper markets.

From 2003 to about 2006 we can document an upsurge in Massachusetts property values, which we attribute to the excess demand entering the market during this period.

Case Study, Arlington, MA:  The Middle Market

I’ll use Arlington, Massachusetts as a sample middle market community. I’ve tracked the average sales prices of single family homes from 2003 through 2009 Year to Date, shown here:

arlington graph

Case Study, Wellesley, MA:  The High End Market

I’ll use Wellesley, Massachusetts as a sample upper market community where I’ve tracked the average sales prices of single family homes from 2003 through 2009 Year to Date, shown here:wellesley graph

What Markets Have Been Affected?

In general, middle market Massachusetts communities, such as Arlington, have seen declines at the low end, with recent increases at the middle value ranges, mostly correcting the effects of the oversupply caused by the subprime mortgages. The upper value range in a middle market community has mostly seen steady growth in value, but is now starting to feel the impact of the recession.

High income communities, such as Wellesley have seen similar changes. The YTD value declines at the upper level are more pronounced and reflect not only the recession but also the lack of ready loans for jumbo mortgages.

Property Value Predictions:  What Does The Trend Tell Us?

Following the trend lines we would predict that the lower and middle value ranges in most Massachusetts communities will continue an upward trend in average value. The upper end in both markets will continue to feel the pressure of the recession and tight credit for 12-18 months until the recession’s negative effects are mostly dissipated and we have moved into a strong growth mode.

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Thanks so much for the informative post, Don.  We look forward to your future contributions to the Massachusetts Real Estate Blog. As you can see, Donald J. Griffin, MAI, SRA really knows his stuff. So please contact him for your appraisal needs.

Richard D. Vetstein

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