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.
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.