The Appraisal Issue From February, Should Have Been Resolved
As first written about on the San Carlos Blog back in February, San Carlos appraisals were the one real blemish on a greatly improving San Carlos market. The market shift had been so dramatic, that appraisers did not have the published comps to support contract values that were being turned in by banks. Q1 of 2012 saw our most dramatic upward market shift since 2005. The feeling in the San Carlos real estate community was that once the comps published from Q1, we would have the properties in Q2 start to come in at the purchase price on the appraisals. Inexplicably, that has not happened. Appraisals continue to be the Achilles Heel of the San Carlos market. They are a source of sleepless nights for homeowners, buyers and agents.
Why Appraisals Are So Crucial To The San Carlos Market
Appraisals are the single most important component to all pre-approved buyers who are in contract. It is the one dagger that can sink the deal immediately. Here’s how it works: Most banks will lend up to 80% of the appraised value of a home on a purchase. So, if the buyer and seller agree on a $1,000,000 contract price, the buyer puts down $200,000 and takes out a loan for $800,000 and completes the purchase. However, if the bank’s appraiser says the home is only worth $950,000, the bank will only lend out 80% on the appraised value, in this case $760,000, matched with the buyer’s down payment of $200,000 and the deal falls apart because the buyer is now $40,000 short.
It’s just not home buyers who are being hit with appraisal issues, but home owners as well. Many in San Carlos have had a shocking feeling recently after being turned down for a refinance because the bank’s appraisal was so badly off the mark, causing their loan to value ratios to fall outside the accepted parameters of the bank.
More Blame Lies With The Banks
The natural reaction upon receiving a low appraisal is to get mad at the appraiser. In some cases, it is justified. However, it also pays to remember that many appraisers are simply doing what the bank orders them to do. If the bank wants them to do an appraisal in a city where they have never done an appraisal before, they do it. Appraisers do not like turning work down, especially from a main supplier of much of their business. Using inexperienced appraisers or appraisers who are not familiar with an area such as San Carlos, is setting everyone up for failure. San Carlos can be a tough town to ascertain value. The subtle nuances of the different areas of our town can have a big impact on price. Expecting an appraiser who is not completely familiar with our city to magically understand this is unreasonable.
Where The Line Is Crossed
Low appraisals happen and buyers need to be prepared for them. Given the lending environment right now, it does not appear that any relief is within sight on this issue. However, more recently, there is a line that is being crossed that is putting buyers in terribly unfair positions. Here’s an example: Buyer A agrees to purchase a house at $1,000,000. The appraisal comes in at $1,000,000. The buyer has met all conditions of the approval process and removes their financing contingency. Two days before the close of escrow, an Appraisal Reviewer at the bank decides the $1,000,000 is too high and downgrades the appraisal by over $100,000. The buyers are told to immediately come up with the difference or lose the deal (and their deposit). Keep in mind that the Appraisal Reviewer had never even seen the property. Seem unconscionable? It was. This is an extreme scenario, but similar types of incidents are happening with greater frequency. The above example is troubling because the buyers did everything right, including obtaining an appraisal at the contract value.
The System Is Broke…..Again
At the end of the day, it is the bank’s money and they are certainly entitled to do what they want with it. Where most people have the issue is when banks put people in a precarious situations and leave them hanging. That is exactly what has been happening in some circumstances. The entire appraisal side of financings in towns like San Carlos has gone from very little regulation, to over-regulation. The current system does not allow for local appraisers to account for market shifts, and the subtle differences between homes that have a major impact on pricing.
What Can You Do To Protect Yourself
Be very careful about going in-house to get your financing at a bank versus going with an independent mortgage broker. Both have strengths and weaknesses. Depending on your exact situation, one will probably offer you a better chance at success. Have a very straight forward discussion with your agent and they should be able to advise one over the other. Ask questions of your mortgage broker such as, “How many appraisals have come up short for your clients in the last 120 days?” Ask what the appeal rights may be if a low appraisal does get turned in and the odds of overturning the appraisal. Finally, ask about possible solutions that the mortgage broker may have with regard to a low appraisal. The good ones will have options. If you have any direct questions about this topic, please do not hesitate to email me directly and I will help with whatever I can.
Oh, this is not encouraging news. I had written you before about an appraisal done for our home to refinance. We noticed there were several errors on the appraisal and it came out so much lower than we had ever anticipated. Seemed way off mark and the bank still offered us a refi loan for a rate that we didn’t think was worth it. All we’ve done is decline the offer and write a letter to the bank about our disagreement with the appraisal. Although, it probably won’t do much to change its practice of using someone who understands the local market. But, it seems that basic errors – like having correct addresses and correct property comps is not enough. My question…is any rate below what we’re paying now worth it to refinance?