Dallas-Fort Worth Real Estate Investor Club

Hard lessons learned

  • 08 Feb 2019 3:43 PM
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    Message # 7154372
    rockne ardoyno

    In the process of acquiring and holding a few rentals this year I have learned a few hard lessons that I will pass on to others in hopes that they do not fall victim to the same cons.

    Underwriters are like grisly bears, each has their own unique personality making their behavior impossible to predict. They are fond of the old "bate and switch" con. They will often give you a verbal commitment to lend along with an official looking but worthless disclosure of terms and ask you for permission to order an appraisal. Then after the custom ordered appraisal comes back they will explain to you that they just can't loan at the previously disclosed terms for one reason or another and you must now accept their new terms if you still want their money. Never let them order an appraisal until they are willing to give you something in writing that states that the only condition they are placing on the loan is the appraisal value itself.

    Appraisers are a loosely regulated industry in Texas and follow no set of standards. Any complaints will fall on deaf ears in Austin. Even though Dodd-Frank attempted in spirit to build a wall between the lenders and appraisers presumably to avoid a repeat of the 2008 Great Recession, the lenders still manipulate the appraisers to return whatever value they like. The invention of appraisal management companies simply added a layer of abstraction to provide the illusion of independence. Many of the lenders even own the appraisal management companies. The appraisers themselves have too many tools at their disposal to legitimize raising or lowering their opinion of value. Square footage can be measured from outside walls, or inside walls. Closets can be conveniently overlooked and stairways can be subtracted. The lender's goal is to minimize the appraised value so that the 80-20 loan that they are graciously offering to you is really a 70-30 or 60-40 loan. They sleep better knowing that they have an extra 10% of equity built into every deal in case it goes south and they own the property one day.  

    Last modified: 08 Feb 2019 3:45 PM | rockne ardoyno
  • 10 Feb 2019 1:20 PM
    Quote
    Reply # 7156656 on 7154372
    Robin Carriger (Administrator)

    Interesting post that seems worthy of exploring further...

    Your experience with lenders doesn't really sound like it matches mine.  I tend to be very proactive, comprehensive and detail-oriented in my communication with lenders from the moment I first meet them, and that has served me well in minimizing certain challenges.

    Over the years, I've worked with more lenders than I can count, and everything has not always gone perfectly every time.  Despite a few bumps in the road that I've assigned to what I'll call my "loan process education," I've never felt any of them did an intentional "bait and switch con" on me.  To the contrary, they all wanted me to get the loan and, for the most part and to the degree they could, they were up front about trying to help identify and eliminate roadblocks.  I've dealt with one or two people in the lending world whose competence I questioned.  I wish they'd been better at their jobs at the time, but I didn't feel like they had any malice of forethought.

    With only one or two exceptions, the appraisals on my properties have either been about what I had expected them to be or a little higher.  Have I just been lucky?  Or maybe I've just been sufficiently conservative in my property value calculations.

    I'm intrigued by your assertion that, despite the relevant Dodd-Frank regulations, the invention of the Appraisal Management Company (AMC) was just to provide an illusion of independence.  Even if that's true, which I won't dispute for now, why is it ultimately a problem?  Conservative lending seems like a good thing.  Isn't it?  If I were making a loan, I would be conservative too.  Wouldn't you?

    I realize there are times you need an appraisal to come back at a certain minimum value and that a lower number can be frustrating, but I'm not sure how adding more government regulations will help prevent underestimation.  Appraisals are, at the end of the day, educated opinions.  Unless we want to try to take the human element out of the picture altogether (i. e. eliminate the job of "an appraiser"), it will likely be easier for those of us who perform unofficial real estate valuations for our own purposes on a regular basis to adjust to the system instead of trying to make appraisers and lenders adjust to us.
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