PERSON OF THE WEEK: The housing market has seen many changes over the past couple of years, some as a result of the COVID-19 pandemic and some from the rapid changes in the economy. With an increasingly competitive market for buyers, many homebuyers have taken new steps to secure a successful offer.
David Foster, senior real estate appraiser at Enact Mortgage Insurance, recently spoke with MortgageOrb about how the COVID-19 pandemic impacted inspections and appraisals, the changes we see today, and other appraisal factors to consider.
Q: How have inspections and appraisals been impacted since the beginning of the COVID-19 pandemic?
Foster: With COVID-19, the government-sponsored enterprises (GSEs) enacted temporary allowances for flexibilities in appraisals and inspections. In some cases, this meant that interior inspections and appraisals relied on pictures and details from the homeowner or realtors involved in the sale rather than direct viewing.
However, even as COVID-19 restrictions eased, the housing market continued to heat up and homebuyers sought new strategies to have their offers accepted. More buyers began purchasing homes as-is, waiving repairs. Similarly, buyers began waiving inspection contract contingencies, which give the buyer options for negotiating remedies or price with the seller if the inspection reveals major issues. According to the National Association of Realtors (NAR), at the height of this activity in July 2021, 27% of buyers waived the inspection contract contingency. Some buyers have even gone a step further by waiving inspections altogether.
Q: What are the concerns with buyers waiving inspections?
Foster: If you don’t know what you’re buying, then you don’t know what it costs to fix it. With a competitive market, buyers may be willing to overlook certain issues, but it is still important to understand what problems may need addressing. Appraisers are pressed for time and may get caught up in the “as-is” term of the sale when buyers indicate they will not be requiring repairs. This can lead to the assumption that there isn’t anything wrong with the property, but that may not be accurate.
Additionally, appraisers are only qualified to comment on the observed condition of a property. They are required to refer concerns impacting livability, soundness and/or structural integrity to a more qualified expert for further assessment. If there is no inspection completed, then the homebuyers will not have the full understanding of the livability and condition of their home or repairs that may be imminently needed.
For example, during an appraisal, if a crack in the foundation is spotted, then the appraiser typically defers to a more qualified expert to assess. The inspector can examine the property and provide a more detailed understanding of the issue, the potential risks, and the cost and urgency of repairs. These types of problems, including the foundation, heating and air, roofing, and any other critical physical components, all speak to the livability of a home and are cause for concern during the homebuying process.
Q: What other factors impact appraisals?
Foster: Along with the condition of the home itself, you want to ensure any external conditions of the property, such as the location, have been considered. Appraisers use aerial photos to determine if the property is located on a main road, railroad, etc. These types of locations impact the appraisal and the comparable sales used.
In order to get a truly accurate appraisal, the appraiser needs to consider comparable sales that match not only the home’s size and condition, but also the property’s external conditions. In a competitive market, it is tempting to only consider the most recent sales, but appraisers should be prepared to look further, if necessary, to consider truly comparable sales.
If no adequate comparable properties are found within the last year, then the appraiser may need to look at a different area or expand time parameters, adjusting for the location and/or market conditions. If you can’t account for condition and location in your appraisal, then you won’t have a credible one.
Q: How do automated valuation models (AVMs) come into play in the appraisal process?
Foster: AVMs are a tool that can be used to see if potential comparable sales were overlooked. This tool is not used as a decision-maker, but helps the appraisal reviewers confirm the appraiser completed a comprehensive and up-to-date look at the subject property and that all relevant sales were considered.
If items were omitted during the appraisal process, this allows the reviewer to work with the appraiser to make any corrections needed. From a mortgage insurance perspective, appraisal reviewers are trying to find out not what is wrong but what is right and want to work alongside the appraisers and underwriters to do so. All of these pieces of the appraisal process work together to ensure the lender-client is making a prudent business decision in regard to collateral.
Q: Knowing what we know now, what advice would you give when it comes to appraisals?
Foster: The appraisal is a critical piece when it comes to assessing a home. Skipping out on an appraisal or inspection can leave you blind to the potential risks of the property and can result in costly consequences down the road. Buyers should be wary of omitting an appraisal or an inspection from the home buying process entirely, even if they choose to waive contingencies.