There was a time, not that long ago, when appraisals were a mere formality in most home purchases in San Carlos. Times have changed.
How we got here
The implosion of the country’s housing and mortgage markets in 2006-2008 brought about sweeping national legislation which was targeted at regulating the entire home purchase process. The Real Estate Procedures Settlement Act (RESPA) was overhauled during this time and the result was a much more stringent set of rules for all to follow. Agents, lenders, title and escrow companies, brokers, appraisers and all others connected to the real estate industry have been affected by the changes to RESPA.
These changes were so substantial that many in the lending industry did not know how to react or what the changes meant on their local levels. Combining this uncertainty with the general malaise of the housing market at the end of 2008, saw many big banks drastically changed their guidelines for lending. Jumbo loans (above 729K) became almost impossible to get…..making purchases for homes in San Carlos more difficult. The entire industry recoiled and cut all loan programs with the exception of only the most conservative programs.
How did these changes affect appraisals?
The recent changes in the appraisal industry was a by-product of the changes to these loan programs. Banks reaccessed their entire loan process and in doing so changed their appraisal process. Many of the big banks started using appraisers to blanket areas that were simply too big.
It’s just not San Carlos, but much of the peninsula is covered with niche areas. A 1/4 mile, or even a single block can make a big difference in valuation. With the new conservative approaches taken by many of the big banks, the decision to use a small group of appraisers to cover such large areas with niche markets really makes very little sense. As an agent with a property in escrow, the last thing you want to see for your buyers is a call coming in on your phone with a (707) area code. It’s most likely the bank’s local appraiser on his way down from Vallejo. There is one bank, that shall remain nameless, that hires these local appraisers on a routine basis. It’s certainly not the appraisers’ fault They are simply doing as they are told.
The Result
Ascertaining values and market fluctuations in San Carlos is tough enough for those of us that do it every day. Appraisers coming from out of our local area don’t stand a chance. Using out of area appraisers does not benefit anyone. Buyers, Sellers, agents, brokers and the banks, themselves, ultimately lose in the end. Because our inventory levels have been relatively low many appraisers start using comparable properties in their reports that are outside of San Carlos. Nothing against Redwood City, but a 3/2 off of Jefferson Avenue is not a comparable property for a 3/2 home on Eaton Avenue on an 8,000 square foot lot. The two properties are within a mile of each other, so for the appraisal guidelines for many banks the comparable is accepted.
If a lower than expected appraisal comes in on a property, the financing may be in jeopardy. In most cases, the banks will not lend more than 80% of the appraised value. The following example illustrates how an incorrect appraisal can end a transaction
Buyer A enters into a contract to purchase her new home for $1,000,000. She has a $200,000 down payment and a loan for $800,000 (80%). The appraiser incorrectly identifies the value of the property at $950,000. The bank will now only lend 80% of the appraised value. Her new loan amount is now only $760,000 (80% of $950,000). Combine this new loan amount with her $200,000 down payment and the funds available for the transaction are now only $960,000 instead of $1,000,000. The transaction now falls through unless Buyer A can scramble to find another $40,000 or the seller reduces their price substantially. Either way, everyone loses because of an incorrect appraisal.
It’s just not home purchases in San Carlos that are being affected, its refinances and construction loans as well. The bottom line is that incorrect appraisals and the system that has been set up by some of the larger banks to guide the appraisal process has created headaches for many people in San Carlos and will continue to do so for 2011.
4 Comments
Bob,
Timely article. We are going through a refinance that has taken close to 5 months. At the start of the refi, they did an appraisal. The bank is finally ready to close and needed a 2nd appraisal since our 1st one was over 4 months old. The second appraisal came in approx. $150k lower than the first appraisal (note that this was the same apprasal company but two different people came to the house). When comparing the two, the comps used were drastically different along with different market data. There was no consistency in how the two differenet appraisers from the same company came up with a value. The bank is contacting the appraisal company to review and I am hoping they get it resolved quickly. Here is my question: What recourse if any do homeowners have in these type of situations? How are we protected?
Thanks!
MC
Hi MC,
Thanks for your post. You have fallen victim to what many others in San Carlos have also experienced. First, 5 months for a refinance is a very long time. Unfortunately, there is not a whole lot you can do. I would have some serious questions for the appraisal company. If anything, your value should have climbed a point or two over the last two months. There is not one piece of statistical data in San Carlos that would suggest otherwise.
I don’t know what bank you are going with, but as mentioned in the article, it makes a significant difference. If you are unable to get this resolved, I would recommend a local mortgage broker who can offer you a program that will allows him or her to use a single, trusted, local appraiser who knows the subtle differences. I have one in San Carlos who is very good with this exact issue. Feel free to email me and I am happy to make an introduction.
Thanks again for the post.
Bob
i agree with you comments on out of town appraisers.. should never happen..i dont think appraisers should hardly ever cross city boundries as the city name carries so much weight in most cases..i think the appraisers do face a problem due to the fact that most homeowners still believe their homes are valued at prices from 2-3 years ago..wake up.. values have dropped, even in san carlos
Appraisals in many cases are no more accurate than the Zestimates on Zillow. And they certainly cost a lot more.
I once had two appraisals done within 3 months of each other to refinance when rates were dropping fast. The same comparable sale showed up in the two appraisals but the adjusted sale prices for that same house were different by 15% according to the two appraisers. And the Zestimate was somewhere in between.
The so-called “adjustments” for comparable sales are also so subjective – square footage is valued anywhere from $50 to $100 per sf. How can it be so low?
My guess is that appraisers start out with some number in mind, then they massage the comparables to hit that number, although they would like you to believe that they are objective and letting the data do the talking.