Revised Appraisal Guidelines Haunt Investors

Revised appraisal guidelines haunt investors
Posted on January 28, 2011

Just in case you haven’t run into it yet, our wise government – particularly the agencies that oversee mortgages – instituted more new guidelines in December that are just now starting to affect real estate investors. Effective Dec. 2010, in order to continue policing the mortgage industry, the Federal Reserve System engaged new policies for Automated Valuation Models on appraisals. (See http://www.federalreserve.gov/newsevents/press/bcreg/20101202a.htm) The newest guidelines require “interagency cooperation” in inputting data into the huge property database. These agencies include the Office of the Comptroller of the Currency (OCC), FDIC, Office of Thrift Supervision, Federal Reserve System, and the National Credit Union Administration. Further, the guideline goes one step further requiring actual visits to the property for a property condition report. Certainly, this inspection is needed in many circumstances. However, it does slow the process down by several more days and, on REO and foreclosure properties oft times, this can be the kiss of death.

How does this affect you? If you are a real estate investor that uses mortgage financing on potential rentals or flips, you may run into a new set of appraisal problems. Most affected are non-owner occupied loans, second mortgages, and lines of credit. If you’re one of those rare birds that still has a line of credit in place, it means when the bank is reviewing their collateral for the line, your ability to borrow may be reduced – sometimes drastically.

For potential new homebuyers, this doesn’t change things much. If it is an owner occupied property for a traditional or FHA first mortgage, lending institutions policies on appraisals are fairly close to the same as they were prior to December 2010. Some, however, have gone to the “two appraisal” rule. This means, to be safe, they are requiring two independent appraisals on each property. Whether they select one appraisal to go with, choose the lower of the two, or average the two varies with each institution.

Bottom line: In the near future, if you have been dependent on mortgages to purchase investment properties, you may want to adjust your business model. Several investors I know have already been shocked by hugely reduced values lenders are willing to do on investment properties. This is no fun when you’re expecting to have a closing. So, to be safe, do one of two things: (1) Use property you already own to collateralize lines of credit. Realize there must be plenty of equity available to do this smoothly; or (2) Even if you do fewer transactions, simply pay cash. Whether this is your own funds or those of an angel investor doesn’t matter. Paying cash is and has always been the path of least resistance. All others to the back of the line.