Real Estate Appraisal: What’s a Comp?

Posted on by Joe Wolvek

In addition to being a Realtor, I worked as an appraiser in Boston during 2003 and 2004, when things were very different. It always surprises me when even some Realtors don’t know what a comp actually is.  The Globe’s Sam Schneiderman goes deeper into appraisal world:

Last week, I wrote about why more properties won’t appraise at sale price due to recent appraisal guideline changes. Readers’ comments made it clear that there is confusion over what makes a good comparable sale.

Most residential values are determined by comparing properties to each other. Comparable sales (and now listings and pending sales) are known as “comps”. Although many web sites offering online value estimates use sales in the area as “comps”, not all sales are “comps”, especially for appraisal purposes.

Because I no longer do mortgage appraisals, I checked with Mike Williams of Atlantic Appraisal Associates, an appraiser whose work I respect, to get recent secondary market guidelines for comparable sales. (Fannie Mae and Freddie Mac purchase loans from most lenders and are known as “the secondary mortgage market”.) Mike said:

“Comps (for federally related mortgage transactions) are the most similar and proximate sales to the subject property that fall within secondary market guidelines.

– Comps should be within 1 mile and 6 months, however, most lenders and AMCs (Appraisal Management Companies) require 2 comparables within 90 days plus a pending sale or listing adjusted for anticipated price negotiation, typically 2-5% of the last asking price.

– A comparable should be within 25% of the subject property’s GLA (Gross Living Area) in size, and should not require more than a 10% single adjustment or exceed 15% net or 25% total adjustments for characteristics that differ from the property being appraised. (A comp’s price is adjusted up or down for superior or inferior characteristics as compared to the property being appraised.)

– Although guidelines can be exceeded with explanations, most underwriters and lenders do not consider them good comparables. (The 3500 square foot colonial that sold for 1.2 million on the same street as a 2000 square foot split level that sold for $800,000 would not be considered comparable to it.)

– Sales in towns like Brookline, Newton and Cambridge can have wide variations in sales prices on the same street, depending on factors like size, condition and amenities. Good appraisers typically list recent sales on the street and comment as to why they were not utilized on the comparison grid if they were not considered comparable.”

As the secondary market learns from experience, their guidelines and forms are updated. Lenders use the guidelines as their baseline, adding their own guidelines or requirements. Although secondary market guidelines are not rigid requirements, appraisers report that some lenders and AMCs initially review appraisals with automated software and kick them back to appraisers if guidelines are not met, before reading the appraiser’s explanations. Some reviewers double check appraiser’s estimates against online estimates and question it if it differs significantly.

Mortgage rate report: 8.4.2010

Posted on by Joe Wolvek

Here’s Brian Cavanaugh’s weekly mortgage rate/float or lock report:

Mortgage rates are at all-time lows right now; 30 year fixed, 20 year fixed, 15 year fixed and even jumbo rates, and they are showing no signs of rising!  I don’t see them going any lower but staying down at these levels for a while.  What’s moving mortgage rates?  No one really knows right now but this is usually what happens, bonds go up, stocks go down.  Stocks go up, bonds go down.  It’s really pretty easy to understand.   However this mortgage market that we are in is nowhere near normal.  In fact, it’s the total opposite, it’s like nothing we’ve ever experienced.

The housing market is stagnating at record low levels.  Refinance loans account for the majority of all present loan production.  Credit guidelines are as strict as they’ve ever been, it’s really brutal.   Home values are off  by incredible amounts.  Mortgage Rates are showing no signs at all of rising anytime soon!

30 year fixed mortgage rates remain in the 4.375% to 4.625% range.  The 30 year fixed rate mortgage is 4.375% for a qualified borrower. 4.125% is presently being offered for two points.

FLOAT or  LOCK

If I was closing on a Home Mortgage in the next 0 to 15 Days – LOCK
If I was closing on a Home Mortgage in the next 15 to 30 Days – FLOAT
If I was closing on a Home Mortgage in the next 30 to 60 Days – FLOAT
If I was closing on a Home Mortgage in the next 60+ FLOAT

Economic Data

Wednesday’s bond market has opened in negative territory following modest stock gains. The Dow is currently up while the Nasdaq has gained. The bond market is currently down, which should push this morning’s mortgage rates higher by approximately .125 of a discount point.

There is no relevant economic data scheduled for release today. This leaves the stock markets to influence bond trading and mortgage rates. If the stock markets move higher from current levels, we should see bond prices fall and mortgage rates rise if the move is sizable. However, if the major stock indexes fall from where they are now, the bond market would likely improve, leading to slightly lower mortgage rates this afternoon.

The only relevant data scheduled for release tomorrow are weekly unemployment figures from the Labor Department. They will post the number of new claims for unemployment benefits filed last week, giving us a small measurement of employment sector growth. This data usually does not lead to noticeable changes in mortgage rates because the data tracks only a single week’s worth of new claims. Analysts are expecting 455,000 new claims, but it will likely take a fairly large variance for the markets to have much of a reaction to this data. This week’s release may carry a little more significance than usual because there is no other data scheduled for release that day.

Friday brings us the release of July’s Employment report that compiles several key employment readings and is based on an entire month’s worth of data. This is a very important report for the financial and mortgage markets and could lead to sizable changes to mortgage rates. I would not be surprised to see the traders prepare for the report by adjusting portfolios late tomorrow and Thursday. This could lead to some pressure in bonds or possibly improvements if market participants are betting on bad economic news coming. The results on mortgage rates should be fairly minimal and could easily be erased after the report is released Friday morning, but it is worth mentioning.

This is only my opinion of what I would do if I were financing a home. It is only an opinion and cannot be guaranteed to be in the best interest of all/any other borrowers.

By Brian Cavanaugh bc@SmarterBorrowing.com 617.771.5021
Presented by Joe Wolvek, Gibson-Sotheby’s  Int’l Realty  www.bostonrealtyweb.com

Credit: Bloomberg, Yahoo Finance, Mortgage News, MBS Quoteline, WSJ, NY Times

Appraisals becoming more difficult…and realistic.

Posted on by Joe Wolvek

Great blog entry on Boston.com by Sam Schneiderman regarding real estate appraisals.

Regardless of what a buyer or seller thinks about a property’s value, in the end, the only opinion that probably matters is the appraiser’s.

When mortgage financing is involved, the lender sends an appraiser to the property to make sure that it is habitable, marketable, and worth at least what the buyer intends to pay for it. The appraiser’s job is to do a brief walk-through of the property (not a home inspection) and develop his or her opinion of value based on an analysis of recent sales and current market activity. There’s a saying amongst appraisers that they are the eyes and ears of the lenders.

Until fairly recently, appraisers developed their opinion of value by comparing the subject property to at least three of the nearest, most recent, and most similar sales available. Now appraisers are also asked to include pending sales and/or currently listed properties in their reports. By including currently listed properties or pending sales, the lender is able to better see whether or not current market values are trending up, down or remaining stable.

When appraisals were based solely on historical sales data, it was possible for a property to appraise higher than competing properties were offered for in the marketplace. Now that current listings and pending sales are included in the analyses, we are seeing more properties that don’t appraise for the amount that buyers and sellers have negotiated, particularly when the inventory of unsold properties in some areas causes sellers to lower their prices in order to sell. This could also happen as a result of normal seasonal market cycles.

For most transactions, since it is no longer easy to challenge an appraisal, a low appraisal is cause for the lender to deny the mortgage. Based on fairly standard local purchase and sale language, when that happens, a buyer can choose to pay the difference between the appraised value and the agreed purchase price or cancel the transaction and receive the deposit money back. An alternative to canceling the transaction is for the buyer to ask the seller to reduce the purchase price to the appraised value. Since most sellers have already made plans to move on, most will usually agree to lower the price to the appraised value.

PERSPECTIVE:
If the buyer has negotiated for the seller to pay some closing costs out of the sale price, the buyer usually has to accept the fact that the seller won’t be too excited about lowering the price while still paying the buyer’s closing costs. In those cases, most buyers need to give up that concession in return for the lower price.

Mortgage Rate Report for 7.28.2010

Posted on by Joe Wolvek

Brian Cavanaugh’s excellent weekly mortgage rate report:

I have never seen Jumbo Mortgage rates as low as they presently are right now.  Absolutely everyone with a loan amount of $523,750 or greater (depends on county) should be reaching out to their Mortgage Banker for updated mortgage pricing, etc.   The New Home Sales report helped the stock market post strong gains yesterday, so when stocks advance, their gains come at the expense of higher interest rates.   MBS prices are holding steady down near record highs and mortgage rates are holding steady near record lows.

The lowest 30 year fixed mortgage rates remain in the 4.25% to 4.625% range. The standard mortgage rate with closing costs is  still at4.50%, 1 discount point of origination presently can get you 4.375% for qualified borrowers.  Borrowers must have a mid FICO credit score of 740 or better and a loan to value of 80% or less.

FLOAT or  LOCK

If I was closing on a Home Mortgage in the next 0 to 15 Days – LOCK

If I was closing on a Home Mortgage in the next 15 to 30 Days – LOCK

If I was closing on a Home Mortgage in the next 30 to 60 Days – FLOAT

If I was closing on a Home Mortgage in the next 60+ FLOAT

This is only my opinion of what I would do if I were financing a home. It is only an opinion and cannot be guaranteed to be in the best interest of all/any other borrowers.

Inquire within for current Mortgage Rates or guidelines bc@SmarterBorrowing.com 617.771.5021

Economic Data

Wednesday’s bond market has opened relatively flat even though we saw weaker than expected results in this morning’s economic news and a negative open in stocks. The stock markets are posting minor losses with the Dow and nasdaq down. The bond market is currently up, which will likely improve this morning’s mortgage rates by approximately .125 of a discount point.

The Commerce Department gave us this morning’s important economic news with the release of June’s Durable Goods Orders. They announced a decline of 1.0% in new orders for big-ticket items when analysts were expecting to see a 0.7% increase. This data is known to be volatile from month to month, but this is still a sizable difference. Even if larger, more volatile transportation-related orders were excluded, we would have seen a drop of 0.6%. That was also well short of forecasts, indicating that the manufacturing sector may have been weaker than expected last month. Therefore, this data can be considered favorable for the bond market.

The Federal Reserve will release its Beige Book report at 2:00 PM ET this afternoon. This report is named simply after the color of its cover, but it is considered to be important to the Fed when determining monetary policy during their FOMC meetings. It details economic activity and conditions by region throughout the U.S. Since Fed Chairman Ben Bernanke’s testimony to Congress last week gave us a recent update, I don’t think we will see any significant surprises in this report. Therefore, we will likely see little movement in mortgage rates as a result of this report.

Also today is the first of this week’s two Treasury auctions that may influence mortgage rates. Today’s sale is the 5-year Note auction while tomorrow brings us the 7-year Note sale. Their results will be posted at 1:00 PM ET both days, so any reaction will come during afternoon hours. If investor interest was strong, the bond market may rally and mortgage rates could move lower later today. However, lackluster demand could lead to bond selling and higher mortgage rates.

There is no relevant monthly or quarterly economic data being posted tomorrow. The Labor Department will post weekly unemployment figures early tomorrow morning, but this data usually has a minimal impact on mortgage rates. Since it tracks only a week’s worth of new claims for unemployment benefits, it takes a large variance from forecasts for the bond market to react enough to influence mortgage pricing. Analysts are expecting to see little change from the previous week’s 464,000 new claims.

Credit: Bloomberg, Yahoo Finance, Mortgage News, MBS Quoteline, WSJ, NY Times