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There's no value in closing costs?

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Tim Hicks (Texas)

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Elite Member
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Jan 15, 2002
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Certified Residential Appraiser
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Texas
I just completed an FHA appraisal for Fox & Jacobs Home. They actually have it listed for $121,500 on the MLS. The sales price is $125,900. No problem, probably upgrades. Wrong, closing costs are rolled in. Fine, it is not impossible for the property to be worth slightly more than the sales price. Wrong, many of their sales are on the MLS. The last sale of this plan sold for $116,800. Fine, there must have been a price increase. I have no sales on the MLS that support this price. I speak to the nice lady who is the selling agent. She calmly proclaims that the price is raised for one carpet upgrade and they are paying all the customers closing costs ($4,000+). I ask her for any non-MLS sales she might have that might "close the gap" a little bit. She gives me three sales. One is 400 SF bigger, but sold for $122,900, but they "did not pay all their closing costs" so it is a good comp. I don't even bother to tell her 400 SF does not equal "0" adjustment. She gives me a sale I already have from the MLS that is 400 SF bigger and sold for $130,000. Only she tells me $128,900 and fails to mention the $3,500 lot premium for the 13,000 SF lot (the subject and most sales are 6,600 SF). Then she calmly states I should be able to adjust for those extra closing costs. I explain that there is "no value" in closing costs and if their was it would really be the value of the home that was undersold. She explains that is all she has and I just need to make it work with what she gave me. Somehow, this appraisal that will not justtify the sales price will be my fault. Somehow, I bet when they get my appraised value, new comps will surface. I am amazed at how many loan officers, realtors and sales agents think that closing costs are a line item adjustment on the appraisal. Which brings me to the questions, why are borrower's allowed to roll in closing costs? Why is it assumed that that is part of the value of the home? And, if mortgage companies are going to let borrowers roll in closing costs, why is it a value or appraisal issue? Shouldn't it be a post-appraisal problem, not a pre-appraisal problem? I have debated this with appraisers for years and I contribute it to the manipulation process of the lenders. What are your opinions. I could be wrong, but I would never admit it. However, I reserve the right to change my opinion if you guys and girls influence me enough.


"You must resist the dark side of the force" Yoda
 

Ross (CO)

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Jan 17, 2002
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Certified Residential Appraiser
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Colorado
It's all part of the hokus-pokus and smoke-and-mirrors which pervade the selling side of the process. Everybody gets to look better and make more money if the higher (final) price gets "recorded" and few will ever fess up to the presence of closing costs within that number.....unless someone , like an appraiser, is asking the questions. These closing costs are the grease which makes the buyer slide smoothly into the transaction, and when they are paid by someone else or worked into the loan then the buyer says "yes" and things move forward. It's all about getting someone to say "yes" as the purchase contract is being slid across the desk to the prospective buyer. While there are many mfd./mod. homes in areas of my market I can say that I do not get to appraise them too regularly. It appear, Tim, that you get many assignments involving mfd/mod's and these other clowns are letting their frustrations "get" to you. Just keep researching what you need to find, get the facts out, and do your reports as you know they need to be done. We all know that the good appraisers are the ones least-desired by the majority of the client pool. It is an undaunting task to find the good clients who are out there. While I may serve a few who are worthy, having one for more than a year seems almost impossible. Your clients are simply a collection of personalities, and these personalities rotate around, and come and go, and seems they are always changing. Much of our working relationship with them is lost when we can not look them in the eye as we get bamboozled by them on the phone. I have always wanted to believe that the other levels of "protection" like underwriters and the folks actually shelling out the money for the loan were also on our side and not wanting unworthy appraisals sneaking through the cracks......but many of them really do not care, and they are not efficiently on guard to double-check for riff-raff. Unto your own self be true....and you've got friendly back-up here in the Forum.
 

larryhaskell

Senior Member
Joined
Apr 23, 2002
Professional Status
Certified General Appraiser
State
Nevada
Tim

HUD permits the seller to contribute 6% of the sale price toward the buyer's closing costs. My experience has been that the buyer and seller agree on a price (often the full listing price) and then simply add the 6%. You would be amazed how often the realtor, LO or sales agent actually believes that the seller is contributing something extra toward the closing costs instead of the buyer simply overpaying for the home. Why HUD would possibly allow the home owner to be upside down in their new home is beyond me. Just value the property and let the experts take it from there.
 

Farm Gal

Elite Member
Joined
Jan 14, 2002
Professional Status
Licensed Appraiser
State
Nebraska
I am amazed at how many loan officers, realtors and sales agents think that closing costs are a line item adjustment on the appraisal.
And in many cases they are right and I tell them so!
OK OK don't throw things at me!!!

Once it is explained that the adjustment does not go in the direction they THINK it goes, many of them shut up fast. In my area it helps that I can point them to the county appraiser who also backs out closing costs from closed sale values 8)

If an area typically does not have closing cost participation and a closing cost is 'added in' in the manner you describe ON A COMPARABLE SALE, then as far as I am concerned the comp does requires adjustment... DOWNWARD!

Subject sale participation matters not! The adjusted comparable value is the subject value and the subject's little grid space is greyed out on most programs for a reason! :twisted: Show and tell helps in these instances also :roll:


Which brings me to the questions, why are borrower's allowed to roll in closing costs?
Now this brings up a different debate in some markets... We have a market segment where the typical sale is below most lenders minimum servicing thresholds (they don't make enough money to justify writing the loan!!), thus all loans are through higher interest rate (higher risk) lenders, and nearly ALL of the sales have some seller participation, even some few of the cash sales!!! Now if well over half of the sales have participation, and it is only the marginally atypical sale that does not, then as far as I am concerned THAT IS THE MARKET for that area (only!)!!! Most sales are not listed with participation in mind, some sell for full at or near full list without participation, most sell for at or near full list with... So this IS that market(?). Right guys and gals?

Think on it.

Tim (Texas) said:
Why is it assumed that that is part of the value of the home?
IMNSHO in most cases it IS NOT. and the lenders and more particularly the realtors who want the last nickle squeezed out of their buyers are just going to have to get over it. :roll:

"You must resist the dark side of the force" Yoda
never a more fitting end note was writ 8)
 

Frederick R. Ruffell

Senior Member
Joined
Jan 21, 2002
Professional Status
Certified General Appraiser
State
California
Lee Ann, If iunderstand your last paragraph correctly there is one problem with it. Correct me if I misunderstood.

Subject sells for X. X = Z+Y where y= closing costs. Lender lends in the amount of X (per your appraisal). Borrower defaults on loan. Lender now has to resell the subject with the expectation of getting X, BUT in reality the lender will recieve X-Y because Y goes into someone elses pocket. LL (Lenders lawyer) now calls you asking for Y.
 

Tim Hicks (Texas)

Thread Starter
Elite Member
Joined
Jan 15, 2002
Professional Status
Certified Residential Appraiser
State
Texas
Yesireebob, This must be why I have such a high "default rate". The FHA buyers in our area get a 97% loan, roll in the closing costs, put virtually nothing down, can't really afford what they qualify for and "me" the appraiser is responsible for the foreclosure. Or, I am responsible because their house does not appraise enough to roll in closing costs. What a double edged sword. Isn't it ovibious that our ability to be coerced and manipulated by the lender has transferred to the ability to get the blame?
 

Farm Gal

Elite Member
Joined
Jan 14, 2002
Professional Status
Licensed Appraiser
State
Nebraska
Lee Ann, If i understand your last paragraph correctly there is one problem with it. Correct me if I misunderstood..
You didn't and I didn't say I don't adjust...
In My Not So Humble OPinion: the realtors and lenders are just going to have to deal with it! I didn't mean to imply we the only D3P involved should bow to pressure...

It is jsut that I am not sure that the market has not been defined as 'plan on selling with a discount' unless you have a buyer too uninformed or stupid to understand that they should ASK for the expected discount!!!.

I tend to comment on this fact in my reports in that area.
LL (Lenders lawyer) now calls you asking for Y
Hasn't happened yet, see answer 'a' above...
 

Tim Hicks (Texas)

Thread Starter
Elite Member
Joined
Jan 15, 2002
Professional Status
Certified Residential Appraiser
State
Texas
Gee, Ross, do I really sound like a bitter old man? I don't do many manufactured home appraisals either, (1-2 a month). My problem is, I do too many REO's and Field Reviews on these properties. I have yet to do an REO appraisal on one of these MH's that actually has these numerous upgrades that are supposed to make them worth more than site built homes. They always seem to be the bare minimum home for the $120,000-140,000 price. Sometimes it is good to see other appraiser's work, sometimes it is sickening. We (appraisal profession) are our own worst enemy, but nobody is going to see it until it is too late. We have the power to take control of the situation, but our backs are too weak and we chase the almighty dollar too hard. I am the busiest I have ever been in 11 years, so I can't be bitter because I have lost business to these guys. I am bitter, because they are destroying our purpose and responsibilty.
 

Mike Garrett RAA

Elite Member
Gold Supporting Member
Joined
Jan 14, 2002
Professional Status
Certified Residential Appraiser
State
Colorado
FHA will allow up to 6% closing costs???? I always thought 3% was more typical???? This happens all the time on VA deals. If the property will appraise for the higher figure then no problem. Unfortunately most of the time it doesn't.

Years ago we were instructed to check the listing. If the contract amount was greater than the listed price the appraisal could not be higher than what the seller was willing to accept.
 
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