Good News/Bad News
The good news is that the San Carlos market is hitting on all cylinders right now. The bad news is that some appraisers think San Carlos is stuck in 2009. There is no bigger tug-of-war being fought right now than along the appraisal front….not just for home buyers, but for homeowners looking to refinance as well.
What’s Going Wrong?
With record-low interest rates and an escalating market, those trying to obtain a refinance or purchase a home in San Carlos are finding out that the most difficult part of the process is not their credit worthiness, but rather it is surviving the accompanying appraisal that is part of both a refinance and a home purchase. In a nutshell, some of the appraisals coming back to the banks are so badly off the mark, in terms of the true market value of a property, that they are single-handedly killing the financing.
How Does An Appraisal Kill The Financing?
Simply put, most banks will not lend beyond 80% of the appraised value. Note the key difference between appraised value and contract value. In other words, it really doesn’t matter what price the contract states. The bank will ignore that and only lend 80% of whatever the appraiser says it may be worth. If a buyer only has a 20% down payment or the homeowner only has 20% equity, the deal will not happen if the appraisal comes in at less than the contract price because the ratios will be thrown off.
Here’s A Recent Example
This is a real example that took place within the last two weeks. I have slightly changed (although proportionally) the sales numbers to protect the anonymity of the property.
Property A’s List Price: $950,000
After being on the market for less than a week, Property A acquired 5 offers. The five offers were as follows:
1. $1,015,000 (20% down)
2. $1, 010,000 (20% down)
3. $1,000,000 (25% down)
4. $985,000 (all cash)
5. $960,000 (20% down)
The sellers accepted #1 above, for $1,015,000. The appraisal was conducted. The appraiser was aware of the other four offers as well as the length of time on the market (a week) and all other pertinent factors. The appraisal was returned to the buyers at $939,000. Other than being grossly off the mark with comparable properties, the appraiser somehow justified appraising the property for not only less than the list price, but substantially less than all five offers. No matter what anyone says, including appraisers, realtors or sellers, the true value of a property is what the market is willing to pay for it. In this case, it was evident that the market was on an entirely different level than the appraiser.
In the above scenario the appraisal missed the contract value by $76,000. The only way for the buyers to complete the purchase would be to add another $76,000, cash, to their 20% down payment or lose the home.
Why Appraisals Are Off The Mark
There are many different reasons for appraisals coming up short. For starters, my experience has been that some appraisers are unaware of just how fast the market can change in San Carlos. A quick market shift, as we have seen in the first 45 days of 2012, can have a significant impact on values.
There were many positive regulations to come out of the mortgage meltdown of the previous four years. Mortgage guidelines were completely reformed. However, some of these guidelines were so stringent and lacking in common sense that we are left scratching our heads. Some of these guidelines touch on the appraisal aspect of mortgage lending. For instance, your mortgage broker at Big Bank can no longer have any communication with the appraiser. When the appraisal is ordered, your file goes into Big Bank’s system and will randomly get assigned to an appraiser who may, or may not, have familiarity with San Carlos. While all banks will assure you that their appraisers are local and are intimately familiar with the San Carlos market, don’t believe it. Big Bank will have a database of what they consider to be competent and local appraisers. However, when I get the call from the appraiser for a buyer of mine and the number coming up on the phone has a (707) area code…you have to wonder just how local the expertise is going to be. Additionally, when you receive your appraisal report and your home is being compared to homes that do not utilize San Carlos schools or are even in a different town, you have to wonder just how accurate the appraisal may be. You may also question the appraiser’s understanding of San Carlos in general.
Those Looking To Refinance Have it Worse
Those looking to refinance have it worse when it comes to the appraisal aspect of the process. When an appraiser is conducting an appraisal for a home purchase, the appraiser knows the contract price ahead of time because he or she will have a copy of the contract. When an appraiser is conducting an appraisal for a refinance, often times the number the homeowner is trying to hit is not revealed to the appraiser…so there is really not an immediate data point to start from. The result is more appraisals miss on the refinance side, than on the purchase side.
Not Always The Fault Of The Appraiser
This is not intended to be a post throwing all of the blame on appraisers. The system under which we are all involved within the real estate industry is broken in different areas. The appraisal part is one that happens to stick out more than others because its importance to the process. There are some excellent appraisers out there who understand the value in only taking on areas which are truly local to them. Additionally, appraising is a tough, thankless job in many cases. There is very little upside and a ton of liability. The system as a whole needs to be reorganized so that buyers and homeowners are guaranteed an accurate appraisal. In the end, everyone, including the banks will benefit from more accurate appraisals.
It Will Get Worse This Spring
Winning your multiple offer may only be the first hurdle that many buyers will have to clear this spring. There are ways to improve your odds both as a buyer and seller in dealing with the appraisal issue. Talk about this issue thoroughly with your agent and have a plan in place to circumvent the effects of the appraisal process.
Agree on the refinance side. The appraiser seemed off the mark. We recently had an appraisal done on our house to refinance. After seeing the report, I noticed several errors. Wrong pictures for the comparables. It was unclear whether the comparable were the addresses on the written report or the appraiser meant it to be the pictures of the homes with wrong address. There were other errors about what has reported on our house itself. It just seemed like the final was way off base. If a bank is going to rely on their appraiser to determine your rate…is there anything to be done about those errors?