Sara Benson Real Estate Expert and Consumer Advocate Delivers Advice

Consumers May Soon See Relief From Faulty Appraisals

Posted in Real Estate by sarabensonexpert on August 10, 2010

Appraised $500,000 Low

Foreclosures and tight money have undermined the national housing recovery for years. But in May 2009, a new Home Valuation Code of Conduct (HVCC) began a silent but powerful wave of faulty and inaccurately low appraisals which continue to flood the real estate market in 2010.

Not a law and not approved by Congress, the HVCC is a “settlement agreement” between New York’s Attorney General Andrew Cuomo’s office and the nation’s largest mortgage finance companies, Fannie Mae and Freddie Mac.

Simply defined, the HVCC is a set of “guidelines” for banks that sell their mortgages to the government-sponsored enterprises (GSE) Fannie Mae and Freddie Mac.  Because the GSE giants now purchase only those loans that comply with the HVCC, the nation’s entire real estate market has been negatively influenced.

The HVCC supposedly was designed to protect consumers: it prevents banks from using their “preferred appraisers” and requires them to use, instead, generic “appraisal management companies.”   But the HVCC was poorly conceived. Its deleterious effects have caused (1) many qualified and experienced appraisers to leave the business, (2) appraisals to be performed by out-of area and unqualified appraisers, and (3) increased buyer’s closing costs.  The huge negative impact on the national real estate industry has served to encourage erosion of real estate values with severe consequences to both buyers and sellers.

A recent nationwide study of more than 100 real estate agents and brokers has charged that under the HVCC guidelines, the appraisal business has hit a new low for lack of quality, accuracy and professionalism.

Tim Kuptz, Broker Owner of ReMax Advantage in Las Vegas observes, “Las Vegas has had stable prices for twelve months now. The stability has been documented in trade publications and MLS statistics, and yet we are getting lowball values from appraisers.”  In 12 straight deals, Mr. Kuptz’s partner recently experienced appraised values coming in below contract prices at an average of 8.1% lower.

Kuptz noted with less than three month’s supply in inventory and despite multiple offers, “Appraisers are killing any real estate recovery in sight.”

What prompted the dramatic change in the appraisal industry? A lawsuit against a lender claiming “fraudulent, deceptive and illegal business practices” by allegedly permitting real estate appraisers to be influenced to increase real estate property values in order to inflate home prices.

Dave Biggers, Chairman of appraisal software giant, a la mode, inc., explains the HVCC originated when New York Attorney General Cuomo filed suit against the lender, Washington Mutual and the appraisal management company, eAppraiseIT. The lawsuit eventually escalated into an investigation of Fannie and Freddie directly.

According to Biggers, in order to stop the investigation into their practices, the GSE signed a settlement agreement with Attorney General Cuomo, agreeing to create new rules which would be embodied in the HVCC. At the last minute, the Office of Federal Housing Enterprise Oversight joined in and signed the settlement, which granted it federal rule status.  The HVCC became status quo for real estate appraisers and lenders.

The primary aim of the HVCC was a good one—to safeguard consumers against inflated home appraisals. A secondary goal was to insulate appraisers from pressure to hit a predetermined number by eliminating the relationships between mortgage brokers or real estate agents and appraisers. In order to achieve that goal, a third party middleman was introduced—a strong-arm “appraisal management company” (AMC) that demanded all appraisers conducting business with Fannie or Freddie hand over their client lists—and take a cut in pay.

While attempting to eliminate unethical practices, the HVCC caused a virtual maelstrom in the real estate industry.  In response to the implementation of the HVCC, one expert veteran appraiser states, “All of the experienced appraisers I know left the profession when they were told they had to surrender their client base of 20 years. Rather than take a 50% pay cut, intelligent appraisers have chosen to leave the profession to the newly licensed appraisers.”

Even if the HVCC were repealed tomorrow, the damage has been done.  Appraisers with 20 or more years of experience will never reenter the business. Once again the borrower will pay the price. “First the borrower is forced to pay 50% more for appraisals. Now they are guaranteed the worst quality appraisals on earth.”

Another New York 45-year old appraiser was so enraged by the HVCC he was arrested last December for threatening to kill Attorney General Cuomo.  His initial bond was set at $500 million.

Illogically, the HVCC mandates run counter to the absolute necessity of appraisers to interact with real estate agents. Appraisers must rely on agents and brokers for accurate verification of the very data they use to complete their appraisal reports.  The HVCC’s “do not touch” hands-off status of the newly “independent” appraiser virtually ensured failure.  One appraiser recently told a Chicago real estate broker, “You can’t talk to me. Do not call me.”

Many educated, well-counseled and motivated buyers and sellers have suddenly found their long awaited appraisal now comes in low—often much lower than the negotiated sales price.

Frequently, healthy owner-occupied homes with full warranties are compared—“comped”—to stripped naked, vacant and abandoned “as is” foreclosures or other distressed sales. Frustrated consumers have little recourse when the loan is denied.

Hope for relief from the HVCC debacle is on the horizon. On July 21, 2010, President Barack Obama signed the Dodd-Frank Act. The purpose of the new legislation is to reform the financial markets. Under the Dodd-Frank Act, the HVCC is officially set for elimination in 90 days. In its stead a new set of “appraisal independence standards” will be created by The Federal Housing Finance Agency.

The standards are expected to be written before September 30, 2010.  The good news is nothing in the standards will prohibit a person with an interest in the transaction from asking the appraiser to consider additional information, provide further detail or correct errors in the appraisal.  The bad news is the outcome is uncertain.

Part Two of this article will feature a step-by-step approach on how to get relief from a low appraisal.

A veteran real estate broker and appraiser, published author and national speaker on real estate issues, Sara Benson, CRB, ABR, is president of Benson Stanley Realty in Chicago. Email: Telephone: 312-337-4600

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Critical Contract Contingencies Protect Foreclosure Buyers

Posted in Chicago Real Estate by sarabensonexpert on January 23, 2010

The Sterling

January 22, 2010

Chicago’s Hot Foreclosure Market: Part Two


By Sara Benson, CRB, ABR

As mentioned earlier, foreclosures, corporate-owned and estate sale properties are sold without any warranties–in “AS IS” and “WHERE IS” condition. There are typically no property disclosures and no survey. The purchaser is buying “at their own risk.”

So how does a consumer ensure protection? Before writing an offer, a few basic questions need to be answered. These questions should include, “Who holds legal title?” During the foreclosure process, there are various stages of ownership and it is important to know who actually owns the property.

“How long has the unit been on the market?” Properties often get re-listed by different Realtors. Get an accurate aggregate number of days, weeks or years the property has been offered for sale—not just the most recent listing period. Also find out how long has the unit been vacant and if the unit was professionally winterized. It is also crucial to properly budget for necessary repairs and any hidden costs.

Once these key questions have been answered, disclosures are necessary. Sometimes a diligent Realtor can get answers in advance of writing the contract in order to weed out sick buildings or poorly run associations, but under all circumstances, make certain the purchase contract is subject to the following disclosures:

  • Building’s owner-occupancy ratio, or if new construction, the number of units sold and contract pending.
  • Percentage of units within a single project that are more than 30 days delinquent on condo fees.
  • Percentage of ownership transferring with the unit and upon what basis that percentage is calculated.
  • Any lawsuits or liens filed by or against the condo association or the developer.
  • Any municipal notices of code violations against the unit or the building.
  • Verification of current assessments, including any special assessments levied, due date and total amount due for the special assessment.
  • Name and contact information for the management company and/or association directors.

Finally, once a suitable unit in a well run building is identified, buyers should ask their broker to make the sales contract subject to an attorney’s review and the purchaser’s approval of the following:

  • An inspection of the unit AND the common areas by a State Licensed Inspector.
  • A property report detailing planned improvements in a conversion, or the specs of new construction.
  • Two years of operating budgets including current financial reserves.
  • Twelve months of most recent board minutes. (Minutes are typically considered confidential documents and are not published.)
  • Condominium declaration and association by-laws.

With proper preparation, a consumer can greatly benefit from the “high risk, high return” maxim—except the risk is substantially minimized–and the reward much greater if care is taken to thoroughly research all aspects of the foreclosure purchase with an experienced buyer broker.

A veteran real estate broker and appraiser, published author and national speaker on real estate issues, Sara Benson, CRB, ABR, is president of Benson Stanley Realty in Chicago. Email: Telephone: 312-337-4600

Surviving Financial Ruin When Buying A Distressed Condominium

Posted in Chicago Real Estate by sarabensonexpert on January 20, 2010

January 20, 2010

Chicago’s Hot Foreclosure Market: Part One

By Sara Benson, CRB, ABR

Chicago’s foreclosure market is hotter than a pistol. Ultra-low priced inventory is briskly percolating—and evaporating–as bargain hunters scoop up deals. But among the hundreds of lustrous pearls, are tens of thousands of unsavory swine in inventory. Aside from the visible signs, how does a buyer know the difference?

Without doing Mensa-level homework and performing detailed due diligence, what may appear to be a bargain, can turn into a huge financial albatross. This monster can haunt a buyer for years to come—representing not only a loss of all invested capital, but a future financial drain in the form of special assessments, as well.

The ancient Latin expression “caveat emptor” or “let the buyer beware,” still pertains in today’s real estate market more than ever. Generally, it is the accepted doctrine that controls the sale of real estate after the closing. In the past 3,000 years, times have not changed much.

In the foreclosure free-for-all, very little consumer protection exists. Despite scanty disclosures and government regulations, major risks remain—especially in purchasing a condominium. Many of these hidden risks are overlooked by even savvy investors.

Foreclosures, corporate-owned and estate sale properties are generally sold without any warranties–in “AS IS” and “WHERE IS” condition. There are typically no property disclosures and no survey. Federal and State mandated disclosures cover everything from lead-based paint to mold, asbestos, or any other known property defect including notice of code violations and lot line disputes.

But in a foreclosure no disclosures are available because the “owner” has never occupied the property. This is just one of many reasons foreclosure prices are substantially lower than ordinary real estate inventory. The purchaser is buying “at their own risk.”

Forget about the condition of the walls and airspace within the condominium unit. Focus on the health of the building’s condo association. This is critical in making a profitable investment decision. When purchasing a condominium, the purchaser is also buying into a mini-governmental entity–complete with a President, Secretary, Treasurer and a Board of Directors similar to the Legislature. This government may be as well run as Switzerland, or reminiscent of the worst of Third World countries. So how does a buyer know the difference?

Use caution when purchasing a unit in a newer building—especially anything built since 2005. Due to the recent market downturn, some of these buildings have an extremely low number of owner-occupied units as more and more condos fall into foreclosure. A high ratio of foreclosures will severely affect resale value. With rare exception, conventional Fannie Mae (FNMA) financing prohibits making loans in buildings with less than a 70 percent owner-occupancy ratio (up from 51 percent.) The Federal Housing Authority (FHA) loan threshold, effective December 7, 2009, for owner-occupied units is a minimum of 50 percent

Also exercise caution when purchasing a unit in a smaller building. For example, if one unit in a three-unit condominium is not paying association fees, the operating income of the association experiences a 33 percent deficit. If that same unit becomes a rental, the building will no longer meet FNMA’s 70 percent owner-occupancy ratio for conventional financing. (If the unit goes into foreclosure, the building would then be 33 percent vacant.) This will limit the pool of available buyers—and thus the resale potential–for all of the units in the building.

Buyers should make certain to retain an experienced buyer’s broker who will exclusively represent the purchaser’s best interests, to scour the market, perform complete research and thoroughly analyze data. Without representation, a buyer could easily find themselves swimming with sharks.


A veteran real estate broker and appraiser, published author and national speaker on real estate issues, Sara Benson, CRB, ABR, is president of Benson Stanley Realty in Chicago. Email:  Web Address: Telephone: 312-337-4600