There are many pitfalls to selling a house in San Carlos. Many can be avoided by careful planning, diligence and utilizing expertise. However, there is one not-so-obvious requirement that can quickly sink your prospective house sale and there is not a thing you can do about it. Unless you have an all cash buyer, there is going to be an appraisal ordered by the bank on your property. In years past, the appraisal was nothing more than a formality. Not any more. In fact, appraisals are killing deals left and right in San Carlos. Here’s how it happens:
Example
A buyer agrees to purchase a home for $1,000,000. The buyer is putting down the bank-mandated 20%. In this case, the buyer will be putting down $200,000 and taking a first mortgage for $800,000. The majority of banks today will no longer allow any mortgage where the loan to value is greater than 80/20, meaning the buyer cannot borrow more than 80% of the appraised value. Let’s say that the appraisal comes back in at $900,000. The bank will now only lend up to 80% of the appraised value, not the contract value. Therefore, instead of offering the buyer a loan for $800,000, the bank will now only offer a loan for 80% of $900,000, or $720,000. Now the buyer takes his loan for $720,000, adds his down payment of $200,000 for a total of $920,000 and the buyer is now $80,0000 short in proceeds to complete the sale. At this point, most deals do not make it past the financing contingency and the deal is dead.
Are the Appraisals Accurate?
Many of them are off. Some are off by so much, its almost incomprehensible. Here are some examples that I have seen in San Carlos over the past few months:
(1) A 3,300 square foot home in White Oaks, completely remodeled about 15 years ago. A very nice home on a 10,000 square foot lot. Proposed value: between $1,500,000-$1,650,000.
>>>> Appraised Value: $1,150,000
(2) An exceptionally clean, 3 bedroom, 1,500 square foot home on a prime Howard Park Street. Proposed value:, between $850,000-$800,000.
>>>> Appraised Value: $710,000
(3) A solid home on a premiere Howard Park street on a huge lot. Proposed value: $1,150,000
>>>> Appraised Value: $850,000
The list really does go on and on. The numbers are so far off in some cases it makes you wonder if the appraiser submitted the wrong appraisal to the bank.
Why is This Happening?
There are a couple of unfortunate circumstances that have led us to this point. First, the entire banking industry is under a set of impossible and constantly change guidelines. Sucked up into this turmoil has been the appraisal process. Whether appraisers will admit it or not, they are under heavy pressure from the banks to error on the side of caution with appraisals (and that’s putting it mildly). Many banks will then take the appraisals and lop a certain percentage right of the top of the appraised value. Another problem is that many appraisers are not familiar with San Carlos. It’s becoming more and more common for San Carlos agents to be dealing with appraisers from south San Jose or the far reaches of the East Bay. Many appraisers do not understand that San Carlos is very much a niche area and we still have a very high level of demand. Additionally, that demand seems to have risen over the past three months.
Is there a solution?
Unfortunately, there is no silver bullet here. The hope is that, over time, the pressure will be taken off the appraisals and the true value of the property will be determined by market forces, not an out-of-area appraiser and a bank underwriter in Lincoln, Nebraska. If you do run into a situation where you have an offer or multiple offers on your home, careful consideration should be given to any offer where the amount of the down payment is greater than 20%. For each percentage point of the prospective buyer’s down payment that is over 20%, you should feel comfortable in believing that number is the percentage amount the home could miss by on an appraisal and the bank should still be able to make the loan and keep within its 80/20 lending guidelines. The appraisal process is going to continue to be a major factor moving into 2010. Talk to your realtor regarding a plan for minimizing its effects on your proposed sale.
5 Comments
These low appraisals are also impacting those who have purchased within the past few years and have tried to refinance their homes with recent lower rates. During our recent attempts to refi we received a surpisingly low appraisal which would have forced us to pay down our loan in order to qualify for the 80/20 loan to value. Fortunately, we went with another bank, and got another appraisal that was high enough to qualify. The silver lining in this is that we were able to get a copy of the first low appraisal and use it as support for lowering our tax assessments.
Hello,
Your examples are to simple. You say the house is worth X per your valuation. Then the appraisal comes in to low. To low based on what? Your desire to get the deal done or based on market data.
Saying that the appraisal/appraiser is “Public Enemy Number One” is just killing the messenger and being an irresponsible Realtor. The more things change the more they stay the same.
For example, John says that his first appraisal is good and bad. Bad when the refi deal could not be done. Good when he could use it to lower his property tax.
Yeah, lets go back to the good old days when Brokers would threaten to not pay me or give me any more work if I did not “Hit the Number”. I can’t tell you how much work I lost because I would not hit numbers.
What I admit as an appraiser is I’ve always tried to figure out what the property is worth based on the market. What I’ve experienced is people just want to get the deal done and don’t care what it’s really worth. I understand because all the other parties are emotionally involved in the deal and have money at stake. Oh well I guess it’s just human nature.
The new system (HVCC) is not good and will be modified but don’t believe that the way it use to be was any good. Arguments have been made that part of the housing bubble was caused by appraisers caving into the pressure from Brokers to get deals done.
My hope is that this bad market has driven all the bad apples out our industry. I know I’m dreaming but ya got to have hope.
Yes, appraisals and valuations will be a problem in 2010. Not because of the appraisers but because of our continued economic problems. It’s hard to buy a house without a job. Appraisal 101, no jobs = no money = declining home values:)
I agree with your solution but would add that any body selling a house may want to talk to an appraiser. Find out what the house is worth from an appraiser and then talk to a Realtor to get an idea for a list price. But I would only recommend this for unique or high-end homes.
Good Luck in 2010
Brian,
Thanks for your post. First, let me be clear…I never said that the appraiser was “Public Enemy Number One”. In fact, I was quite clear that it is the entire process that is problematic. Most appraisers I know are doing everything they can under difficult circumstances to do their jobs with integrity.
I do have a problem with an appraiser taking jobs in areas that are clearly well out of a reasonable comfort zone. For instance, an appraiser calling to do a San Carlos appraisal with an area code of (707) is simply irresponsible.
The examples mentioned in the original post are 100% real and are not “simple” as stated in your post. They are very real examples of just how ridiculous the system has become. My examples are not alone either. Try polling other realtors regularly doing business in San Carlos and they will tell you the exact same thing.
The true value of a property is not determined by an appraiser or a realtor. The value of a property is determined by market forces. I do have an issue with a property which obtains multiple bids (at least three) and then the appraisal comes in below all three offer amounts. This just happened to me in San Carlos about four weeks ago and was not included in the original examples. The problem is rampant and a clear symptom of a much bigger problem.
If anyone is in need of an experienced, local, honest appraiser. Dennis Baldini would be an excellent choice. Please email me if you would like his contact information.
Bob
The first comment is an instant classic! So the first appraisal is not fair when it comes to you getting the refi but it works just fine when it lowers your taxes!!!!! So it’s OK to overpay for a house giving more money to sellers and realtors but it’s not OK to use the same rules when it comes to giving it back to the community in the form of taxes.
People, just let appraisers to their job! And be thankful if by dutifully doing their job they help you not overpay for a house. Still wanna overpay for the house? Fine, just come up with more downpayment because the bank is no longer willing tojoin you on a very stupid financial transaction…
I commend the appraiser for taking the time to write such a great response to a clear nonsensical post of an otherwise reasonable blog. The title itself is a shame and should be changed; the public enemy number one for the real estate market (or any market) is the insane thought that you can get money for nothing and always win like in the first post.
Hi Ron,
Thanks for your post. First, I can’t disagree with you regarding the title. Certainly not one of my better titles and different language should have been used.
I can understand your points. The one thing I would ask you to keep in mind is that it’s not the appraisers or them doing their job that I have an issue with… Rather it is the nonsensical results that are produced. For instance if a house has four offers and the appraisal comes in 100k under the lowest bid, it’s hard to defend the accuracy of that appraisal. Second, when you have appraisers who are not familiar with our market trying to identify the true value of the property, it can be exceedingly frustrating. For instance, the comparable houses used for comping a 3/2 in White Oaks should not be from Redwood City , Clearfield Park (east San Carlos) or Alder Manor (which does not attend San Carlos Schools). Local appraisers understand this and understand the differences in resale.
Thanks for the post.
Bob