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Archive for the ‘Appraisals’ Category

Appraisals – When Are They Required?

Sunday, July 11th, 2010

Transcript of Video Blog:

Hey everybody, it’s Rowan Smith of the Mortgage Center. I’m here today to talk about appraisals. There seems to be a lot of confusion as to when appraisals are ordered, when they’re not ordered.

This blog today is going to detail in what circumstances it’s going to be needed. It’s a little counter intuitive. You see there’s typically an appraisal or some assessment of value 100 percent of the time. Does that mean that they go through the property and take pictures every single time? No.

So, I’m going to divide this into three categories, less than 20 percent down, 50 to 20 percent down and greater than 50 percent down. Those are the three main categories. You can argue with me a little bit on this, but that’s the three general guidelines.

Now, less than 20 percent down, the bank’s going to want to make sure they know the value of the property, but do they require an appraisal? The typical answer is not usual. The reason being is less than 20 percent down are insured by either CMHC, Genworth and Canada guarantee. It’s mortgage insurance. That’s that big insurance premium you hear about.

Now, in those circumstances those lenders typically, though not always, have a internal modeling software that looks at sales in the area and the last prices, listings, et cetera. And as long as you’re within a range of normalcy, not wildly above or below, they’re going to accept that value.

Now, there’s times when even when you’ve got the mortgage insurance, they still ask for appraisals. And that’s sometimes when there’s a rental component to the property or it’s particularly unique or a high-end home or for whatever reason that they don’t support the lending value of the home. So, that’s if there is less than 20 percent down, they typically don’t need appraisals. But, again, an assessment of value is always being done.

Now, from 50 to 20 percent down, you will almost need an appraisal 100 percent of the time. Now, some banks, a social bank, has an internal property assessment tool that they use, and they will do similar to those systems through the mortgage insurers.

They’ll do like an electronic appraisal, but they have some guidelines there. The property can’t be more than a certain value and all those eligible for homes beyond a certain age, size or whatnot. Usually, those electronic systems are only allowed in a major urban setting, whatnot.

So, most times 50 to 20 percent down payment, you’re going to require an appraisal. It costs about $250 to $300, depending on where the property is located. This is assuming it’s a general, normal transaction.

The appraiser will go to the property, takes some photos and walk through it and then prepare a report of anywhere from 40 to 70 pages, depending on the complexity and depending on the lending requirements. It outlines everything about the property and makes an assessment of value, based on other comparable sales.

Now, you may think to yourself. OK, well, if I’m putting 20 percent down or more, why do they want an appraisal. When I put less than 20 percent down, they don’t want an appraisal. And the answer is that when you’re putting 20 percent or more that bank is absorbing the full risk of that mortgage.

If you default on it or the property values fall and you walk away, they eat the loss versus the mortgage insurers are the ones that take the loss in the event that you’re putting less than 20 percent down. So, the bank leaves it up to them because they ultimately will be the one at risk to make an assessment of value.

So, less than 20 percent down, probably not an appraisal but you may have to, depending on the property. 50 to 20 percent down in that range, you’re going to need an appraisal of some kind, whether it’s an electronic one or whether it’s a walk-through.

Typically, it’s a walk-through. 50 percent or more down, we can often use tax assessed values because it is such a low amount of financing. It’s a very low risk to the lending institutions.

Some banks unequivocally demand appraisals 100 percent of the time. Other ones will use a property assessment tool if you have that much down the desktop or drive-by appraisals which are less costly and quicker to get. But it will still provide with some comfort.

Those are the situations where an appraisal will be required. If you’re being asked for one and you don’t understand why, just give me a call. I’ll give you an explanation for it.

I’m Rowan Smith from the Mortgage Center.

Appraisal – When Is it Needed When Getting a Mortgage?

Wednesday, February 24th, 2010

We get many questions from clients who think that we don’t order appraisals until everything else in financing is done and that the appraisals is just to “finalize some numbers,” and nothing could be further from the truth. The appraisal is the cornerstone to the entire mortgage deal. If the bank is lending YOU money, they are doing so on the basis of your financial strength, and that of the collateral (the home).

The appraisal is a fundamental part of the purchase process, and takes 2-3 days to do (unless rural takes 5-10 days) and costs around $265 (unless rural is around $500-$750 depending on how remote).

Your broker will (should) know the time on ordering an appraisal, and will order it when he or she thinks appropriate. Certain purchases require an appraisal 100% of the time (former grow ops, stated income, equity deals) and some don’t. You need to trust your broker on when to order it, who to order it from (not all lenders accept all appraisers – usually they have an “approved list”), and what a reasonable price is.

Lastly, the appraisal is $265 – $500 on a purchase that is going to cost several hundred thousand dollars. It’s the “cost of doing business” and you shouldn’t begrudge your bank (or any lender) for requiring it, as it confirms the value of their security (the house you are buying).

Transcript of Video Blog:

Hey, everybody, Rowan Smith from the Mortgage Centre.

I wanted to cover a topic today, which is appraisals and what part in the process they hold. When you’re going to require them, and when you’re not going to require them for financing. Oddly enough, the more you put down, the greater chance you’re going to need an appraisal.

Whenever you buy something that’s CMHC-insured [Canada Mortgage and Housing Corporation], for example, five or 10 percent down, your appraisal is done electronically by the lender, by CMHC, who has an internal valuation model that they use. They’ll look at that model, determine whether the price you’re paying is fair based on comparable sales.

Actually, it’s often an automated process, unless you’re on the high end of the property values, in which case, it may have a person actually involved. If you do have a person involved in the process, they may insist on an appraisal anyway.

The standard rule is up to 20 percent down, you’re probably not going to need an appraisal. Now if you have more than 20 percent down, you will. That’s totally counterintuitive because you’re putting more money down.

Why do they need an appraisal if you’re putting more cash down? The answer is that when you’re not putting 20 percent down, CMHC is insuring that loan so the bank isn’t taking the risk. CMHC is the one taking the true risk that they’re going to lose money in the file.

If you put more than 20 percent down, then the bank is taking the full amount of the risk. In those circumstances, they’re going to insist on an appraisal for sure.

So does that ever stop? Well, with some banks, no; it’s always an appraisal. In a lot of cases, if you’re going to put 50 percent or more down on a property, then you may not need an appraisal. You may just be able to use the tax assessments or a desktop appraisal, which is just something that an appraiser does based on historical sales.

In the event that you’re looking at buying a property, and a broker is telling you that you need an appraisal, you have to realize this is an integral part of the process. Your home, your property, is the security for that mortgage. So to think that they’re going to take your word at the value or they’re going to look at other homes that are for sale, that’s not the lender’s job. That’s the appraiser’s job.

You can guarantee that there’s going to be some form of appraisal or value estimation on every single deal that you do. So if you or somebody you know is being asked to get an appraisal by their lender, this is standard procedure.

For the Mortgage Centre, I’m Rowan Smith.

Appraisal versus Building Inspection – What are they?

Sunday, October 25th, 2009

During the process of getting a mortgage approval, you broker may require you to get an appraisal. Many times, clients respond with, “but I already did a building inspection. Does the bank want that report?”

NO.

Appraisal and building inspection are two different things.

An Appraisal is the process whereby the bank sends in a qualified thirty party appraiser (usually with an AACI or CRA designation) in order to determine the LENDING VALUE of the property for the bank (at the buyer’s cost in most cases).

A building inspection is a third party inspector, hired and selected by the buyer, who goes in to look at the house’s structure, electrical, plumbing, drainage, etc… to determine how SOUND the house is.

Appraisal is for the bank. Inspection is for the buyer.

The bank will only ever want a building inspection if there are some comments in the MLS listing that makes it sound suspicious such as comments about structural issues, asbestos, vermiculite insulation, or some other chemical or mould issues. In my 10 years as a bank employee / broker, I’ve only had to show inspection reports to banks three times, and all three were for asbestos and vermiculite insulation.

Here is an example of when an appraisal will be required: if you are buying a house from a private seller for $450,000 the bank will want an appraisal done to make sure you are paying a fair market value. As a general rule, any time you borrow more than 50% of the purchase price, an appraisal will be required. However, there are “electronic appraisals” that get done when you put less than 20% down and involved CMHC. CMHC is the government organization that guarantees the bank will not lose money in the event you get foreclosed on. They have an internal system called “Emili” that does an electronic appraisal based on recent sales of houses in the area with similar criteria.

Times that an official (non-electronic) appraiser will generally be required (some exceptions apply, but check with me to determine what exceptions they are):

1. Private sales (not sold on the MLS with realtors involved)
2. Any mortgage requiring private financing
3. Any mortgage where you are financing more than 50% but less than 80% of the purchase price or value
4. Any “unique” or “oddball properties” for which the value is higher (or less)

The bank will indicate whether or not they want an appraisal conducted. Most lenders have an “approved list” of appraisers that they do business with and trust. Your broker will generally order appraisals from firms widely accepted so they can send it to multiple lenders if needed.

CONSOLIDATORS

There is a very disturbing trend in the industry right now: the insistence of lenders that brokers order their appraisals through a consolidator. By this, I mean a company that acts as a middle man between the appraiser and the broker. Here is why the banks want them to be used:

As a broker, I have to log into the consolidator’s online system and request an appraisal. Then, the appraisal is assigned to a firm, and as the broker I am unable to know what firm is conducting the appraisal. This is done so that I, as the broker, am unable to talk to the appraiser and affect their estimation of value. Once the appraisal is completed, it is sent to me through the online system.

Sounds fine and sounds safe (f0r lenders), right?

Sure…

It’s a colossal pain. The reason is that many times, getting an appointment set is difficult with sellers often elderly, foreigners, or what have you. Here is something that happened to me last week that was REALLY frustrating, and totally unnecessary, but is a common occurance when these consolidators are used:

I had a client whose bank needed an appraisal. I called up my preferred appraiser, and requested him to go and conduct the appraisal. The seller is an elderly man who is very very ill and bedridden. The appraiser called and called and couldn’t get an answer. Eventually a family member called him back and said the man was in the hospital, but if he wanted to come by, the son would make sure the appraiser got access. The appraiser went by the next morning and met the son (who didn’t live there) who provided access. The appraiser then did a walk through, took his photos, and left.

I then took a call from the bank telling me that they were declining the deal. I quickly switched gears to a lender that was willing to do it, but they wanted the appraiser ordered through NAS (the most painful of all consolidators to use). I called NAS and told them the situation with the seller unable to provide access, and that an appraiser (approved by NAS) had done a walk through and inspection but had not yet provided a report. I requested that they please send the appraisal to that appraiser (or at the very least to his firm – whether or not that specific appraiser does the report or not I don’t care). Their response? No. The reason? I am not allowed to know who is doing the appraisal. This is total B.S. because as soon as the appraiser calls the seller for access I can call the seller and ask him who it is. It’s such a load of garbage. When my client heard of this rule he told me to cancel the file with the new lender and find yet another – making me do the deal a third time…

When I try to cancel the appraisal with NAS? Already charged it on my credit card, and will take weeks to get it back. Then, even when cancelled, the new appraiser didn’t get notified by NAS and kept harassing the elderly seller until I found out about it and called him to get him to knock it off. If I had gotten the report through them and needed any adjustments it’s $75 per change even if it takes them 20 seconds.

Bottom line: I hate these companies. I dislike consolidators in general. All they are is a company that gets a cut of the appraisal fee for standing in the middle and clogging up the process for both buyer and seller. I understand why the lenders are starting to like them, but rather than making life difficult for everyone else (and getting the consolidator paid) lenders should just be choosier about what appraisers they deal with. One of my preferred lenders, Westminster Savings, only uses 8 appraisers (out of 200+), and thus doesn’t need to use a consolidator because they know and trust the judgment of the appraisers on their list.

Ok, this blog has taken me a little farther afield than I intended, but that’s what happens when I get fired up about these things (consolidators…)

Until next time, happy house hunting!

BC Property Tax Assessments Frozen – Help or Hurt?

Thursday, November 27th, 2008

BC announced they would be freezing assessments at the July 2007 value to prevent homeowners from being squeezed.

Upon review, it looked like the province may have actually frozen the values at the peak in the market! This looked, on the surface, that it was going to be a disaster of a decision. When Gordon Campbell spoke about this, he used the words “locked in” and this was a bit of a error. In appears, in comments made later by Kevin Krueger, Revenue Minster for BC, that their intention was to make the 2007 number a “Ceiling” and not a “floor.”

However, some property owners were arguing that their property peaked in 2007 and they don’t want that as the value as the values have since slid downwards. Faced with a potentially crushing number of appeals that would grind the assessment authority to its knees, the government then made the announcement that they would now be publishing both the July 1, 2007 values and the July 1, 2008 values, and letting homeowners CHOOSE which was most advantageous and to pay the one they wish. This will allow home owners the ability to adjust what they pay as to when their area peaked in price.

I appears that in this case, the government has done some that will help homeowners pay a more fair tax on their propert. It’s nice to see the government do something right for a change!