Keeping Mortgages Flake Free Since . . . Forever
Some time ago, in a science class I was required to take, I learned something that I actually remembered. Here in the United States, manufacturers of food and other consumer products are required to list the ingredients in the order of their quantity in said substance, largest to smallest – and that’s the reason that when you look at the ingredient list of a lot of products you see “water” listed first. And on those items that enter the health-and-wellness category like shampoo, you’ll see another listing on that back label that reads “Active Ingredient”. In essence, even if the item is, say, 90% water, the active ingredient is the thing that makes the product do what it says it does. For example, the active ingredient in Head & Shoulders shampoo is Pyrithione Zinc, and its job is to control and eliminate dandruff. Here’s another way to look at it: if H&S had ALL the other ingredients EXCEPT Pyrithione Zinc, it would probably clean your hair, but the shampoo would be ineffective as a dandruff fighter. (Dandruff Fighter: good name for an ‘80s cover band.)
In a mortgage, the active ingredient is the appraisal. You could have ALL the other “ingredients” in a mortgage ranging from financial verification and assets to proper debt-to-income ratio and dead-on LTV, but without the appraisal you wouldn’t have a benchmark – no benchmark, no loan, no sale/purchase.
This little exercise bears some attention for both the veteran agents and people who are buying or selling a home for the first time. When an appraiser comes out to do her/his job, they classify the condition of the home with one of six grades, and this factors into the overall value they apply to the home – yes, I know many of you already know that, but let the others catch up. From the Uniform Appraisal Dataset on Condition Ratings and Definitions, I give you the six grades with my English version of each definition:
C1: Brand new – no one has lived in this house
C2: Full remodel – virtually all building components are new or have been recently repaired or rehabilitated
C3: Partial remodel – improvements are well maintained and feature limited physical depreciation due to normal wear and tear
C4: Never been touched – some minor deferred maintenance/physical deterioration due to normal wear and tear
C5: Breaking – obvious deferred maintenance and in need of some significant repairs
C6: Broken – substantial damage/defects that affect the safety, soundness, or structural integrity
Now, think of these grades as the concentration of the active ingredient: C1 and C2 are going to be at full strength, while C5 and C6 are going to dilute significantly the effectiveness of the active ingredient, the appraisal. As I said earlier, everything hinges on the appraisal. If you’re an agent getting ready for a listing appointment, take those six definitions with you and bust them out when you start talking about the price point at which the home should be listed. This will give you more credibility when you tactfully point out that, yes, the neighbor’s home did list and sell for $350,000, but they had fully remodeled bathrooms and new windows – your potential client’s home has the original pink bathtub from 1968 and a window that’s using a plywood sheet instead of a pane of glass. (That’s a LITTLE extreme, I know, but you get the point.) Potential buyers and their agents, when armed with the same information, are going to be better prepared to make offers – the door swings both ways.
Of course, in a mortgage, the biggest ingredient is money – it’s the “water” of the formula, but it’s not going anywhere without the proper amount of the active ingredient (just like many single guys on a Friday evening if they don’t use enough Head & Shoulders during the week).