You might have heard that the Federal Housing Finance Administration (FHFA) has relaxed standards for appraisals. It’s hard to comply with social distancing rules when performing a traditional inspection, and appraisers might be reluctant to potentially expose themselves to COVID-19. Therefore, the FHFA authorized coronavirus alternative appraisal methods.
Even though alternative appraisal methods have been authorized, Tom Cullen of Cullen Real Estate and Appraisal, an appraiser certified by the national Appraisal Institute, says that “the scope of the appraisal methodology and reporting requirements are always to meet appropriate regulatory guidelines such as those set forth in the Uniform Standards of Professional Appraisal Practice (USPAP).” You can rest assured that your appraiser will still return an accurate value.
While these rules only apply to mortgages issued through Fannie Mae and Freddie Mac, other lenders tend to follow their lead. What do you need to know about alternative appraisals as a real estate agent or homebuyer?
You’ll still need an appraisal
As strange as the current situation may feel, this isn’t the Wild West. You’ll still need an appraisal to secure the mortgage loan. The new home serves as collateral for the mortgage, and lenders use this requirement to protect themselves from loaning more on a home than it’s worth.
But, the appraisal probably won’t be the 1004 that is normally required. A 1004 appraisal requires an on-site inspection by an appraiser, in addition to other valuation methodologies, such as pulling comps. Due to social distancing, self-isolation, and quarantine from the coronavirus pandemic, these won’t be required on transactions through at least May 17, 2020.
Because of the current situation, appraisers who are still performing in-person inspections are requesting that the homeowner vacate the home, and they are wearing masks and gloves. Justin Woodall, an Athens, Georgia agent who sells 87% more single family homes than his peers, just had a situation where the current tenants wouldn’t allow the appraiser into the property unless they wore protective gear. With situations like this occurring more frequently, and shortages of these items, alternative appraisals will become necessary.
The alternative options for appraisals
When on-site appraisals aren’t an option, the industry has developed two alternatives: desktop appraisals or hybrid appraisals. According to Tom Cullen, “There are and always have been alternative appraisal methods. Depending on the loan amount, loan to value ratio (LTV), borrower creditworthiness, and overall perceived risk to the lender, it is fairly common for a lender to require an alternative appraisal method, such as an exterior-only (drive-by) hybrid appraisal or desktop appraisal.”
Alternative appraisals have been common in the real estate industry, and if you choose an experienced appraiser, you should have no issue getting the appraisal you need for a mortgage.
With a desktop appraisal, the appraiser never leaves their desk. A licensed appraiser does market research, pulls comps, and determines how much the subject property is worth — without ever visiting it. They’ll use tax and MLS records to guide their decision.
Now, more than ever, it’s important to pay attention to other recent sales when making an offer. In the past, if the buyer offered considerably more than other properties in the neighborhood had sold for, the appraiser could potentially find a justification for the home’s higher worth (a pool, fancy kitchen remodel, or additional garage space). But now, without an in-person visit, the offer price should be close to the neighborhood’s standard, or the buyer risks losing financing.
A hybrid appraisal combines a desktop appraisal with other inputs to gauge a home’s value. A licensed appraiser performs a desktop appraisal — but also uses some additional resources to help them determine the home’s condition.
These resources might include:
- Photographs of the exterior and interior of the house
- Someone else’s interior inspection
- Driving by the outside of the house
- Getting a tour of the interior via video-chat with the homeowner
Hybrid appraisals will consider a real estate agent, inspector, or another’s appraiser’s interior inspection. If the home was recently bought, or another buyer had an inspection performed on a sale that fell through, your appraiser could use their findings.
Drive-by appraisals tell the appraiser about the home’s exterior, but even though curb appeal can indicate a well cared-for home, the inside could still have some unpleasant surprises. That’s why a buyer or lender may ask for a curbside appraisal, where the current homeowner walks them through the house via video chat. These are particularly useful if your city or state has instituted shelter-in-place regulations.
The good news is that digital advances have made coronavirus alternative appraisal methods possible. If you’re buying a home in an area that has had enough recent sales to provide good comparables, and your new home matches their size and condition, there’s little to worry about with an alternative appraisal.
Which choice is better for your clients?
A hybrid appraisal will contain more information and therefore likely be more accurate — but of course, timing matters here. Unless you have extended your closing date or added a COVID-19 addendum, you’ll need to stick to the timeline in your purchase agreement.
If the house in question is in more or less average condition, a desktop appraisal will probably suffice; if the house is in above-average or below-average condition, your agent may advise you to get a hybrid appraisal so that’s taken into consideration. It will be more thorough, and you might need that extra data to support a purchase price significantly above or below the area’s norm.
Regardless of what an agent and their client chooses, they can rest assured that “every appraisal report, whether desktop, hybrid, or other is required to provide sufficient research methodology and reporting to support a defensible value conclusion,” Cullen points out. With so much uncertainty in the world right now, you should be able to rest assured that you can still get an accurate home appraisal.
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