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!

The Bank of Canada announced yesterday that they were holding their overnight rate steady. This means prime rate will remain at the ultra low level of 2.25% for a while yet.

What is more important is the bank’s commentary. They reiterated their commitment to hold rates at the current level until the end of the 2nd quarter in 2010 (July 2010 approximately). This is good news for anyone that opted for a variable rate mortgage in the past few months as they can be assured that their rate will remain at current levels, but will also allow them the right to convert to fixed rates if the fixed rates remain low or fall lower.

I’d like to share with my readers some of the “off the record” commentary I hear from lenders and market insiders.

One of my lenders was in SHOCK at what people were paying for houses in East Vancouver. Almost on cue, the local paper published an article saying that the East Vancouver market was the hottest in BC. While this sounds great, history has shown that by the time the mass media gets hold of what market is “hottest” it’s far too late to consider getting into that market. We’ve seen a massive run up in prices in East Vancouver in the past 4 months, and I would be very conscious of this fact if I were considering buying in this market.

My top realtor referral source and I were having a discussion a few days ago and I was saying that I couldn’t see the market continuing at this meteoric pace upward pace for long because EVENTUALLY there won’t be anyone else willing to pay more than the past buyer. This is the “greater fool” theory of markets, and Garth Turner does a great job blogging about the troubles that are becoming evident in our market. Look him up online. He has an amazing following and I agree with darned near everything he says.

Is this hard evidence that the market is slowing down or turning? No.

It’s purely anecdotal. However, I started hearing these rumblings in May of 2008, and that was just before a MAJOR pullback in the market. This isn’t conclusive evidence that would hold up in court, but it’s just an example of what market insiders are thinking. Again, by the time you hear it on the front page of the Vancouver Sun, you are about 6 months behind the market.

There are several people out there that claim I avoid talking about the “supply side” of the real estate market, and that it is just as important as rate and demand in the market. They are correct in this assumption, and I feel this way because I find that demand is far more prevalent right now in terms of what is determining sale prices of homes. Supply of homes for sale hasn’t vacillated as much as people like to think. The number of prices of sale rises at roughly the rate of population increase. It’s close enough to say that people aren’t RUSHING to sell their homes to get the maximum sale price.

Can deals still be found? Of course.

Will they be in North Vancouver, Coquitlam, Port Moody, or especially, East Vancouver?

My personal opinion is “No.”

If you think buying and flipping (even if you renovate a LOT) is a good financial move, you are assuming a VERY high amount of risk in thismarket. This isn’t a buy and flip market. It is likely a buy and hold market. I’m putting my money where my mouth is, and I’ve bought a property myself (in Langley) that I consider my “dream home.” In other words, I intend to live there for 20+ years, and for this reason, I don’t care what the market does or if I a paying a bit too much because ultimately, I need to have a home, and with the current historically low rates, I can do so and own the home I’ve always wanted.

If you feel similar about a home you are considering buying for your family, then you SHOULD buy and hold on, as real estate prices will always go up in the long term. If you are buying and thinking you’ll upgrade in next 1-2 years, then you should reconsider your purchase.

This is my opinion, and I’m sticking to it.

Please, I beg, someone post a comment.

Most of the public is unaware that no down payment or zero down mortgages still exist. On October 15, 2008 the rules passed by Canada’s finance minister took effect, and the existing no money down program was canceled. However, only that one program was canceled.

There IS another way…

There are a few banks that will “give” you 5% of the purchase price allowing you to get 95% financing. This program is called “flex down” and here is how it works:

1. You pay posted rates instead of discounted

2. The cash is given to you at closing allowing you to put it as the 5% down payment

3. You need to show cash assets of 1.5% of the purchase price of the home to prove you can afford to close on the transaction

4. Still need a deposit!

5. You pay higher CMHC fees

POSTED RATES:

In mortgages, as in all other elements of business there is no such thing as a free lunch. The 5 year posted rate is 5.49% as of today, with discounted rates in the 3.89% range. You will need to pay the higher 5.49% rate. This way, the bank recoups it’s 5% gift of money that it gave to you over the 5 year term. And yes, you MUST take a 5 year fixed term. It doesn’t matter if you only want a 3 year, or a variable rate, you MUST take a 5 year fixed term at posted rates. In this way, the bank is getting the 5% back from you spread out over the 5 years.

Think of it as forced savings of the 5%, but you get to live in the home while you save!
CASH GIVEN AT CLOSING

The 5% cash gets sent to the lawyer’s office handling the transaction. Then, the mortgage money shows up for the other 95% and the house is yours!
NEED TO SHOW 1.5% CASH ASSETS

The bank needs to know that if they give you the 5% that you can still put up some money to cover property transfer tax (if applicable), move in costs, utility transfers, etc… WITHOUT borrowing the money. You’ll need to show 1.5% of the purchase price of the home in an account in your name. How it got there isn’t an issue. It just has to be in your account.
STILL NEED A DEPOSIT

When you write an offer, you will still need to have money to give as a deposit. This is generally considered “good faith money” as it is non-refundable. Typically, it is customary for the deposit to be 5% of the purchase price. However, this is just CUSTOMARY. You need to tell your realtor that you need the deposit loan as low as possible ($1,000 or $5,000) and you need to be able to write this cheque! You can get it on a visa cash advance, borrow it from friends or family, or what have you.

Remember, you will get it back at the closing date when the bank’s 5% shows up but you still need it in the interim and this is an often forgotten element to no money down purchases.
HIGHER CMHC FEES

Whenever you put less than 20% down on a purchase you face CMHC fees. They are government mandated fees, and you can find out more about them and what they are by doing a search on my blog for “CMHC fees” as I’ve written several articles explaining them.

When you do a “flex down” purchase or no money down, the CMHC fees are 2.90% base instead of 2.75% base and they are BUILT INTO THE MORTGAGE – meaning you don’t have to write a cheque for them up front.

THAT’S IT!

I’m working on two of these deals for clients as I type this blog entry, and both are getting approved. So, if someone says zero down or no money down mortgage isn’t available, give them my contact info and I’ll get them set up!

Thanks again, and happy house hunting!