Aug 7, 2009

Are Appraisals Useless?

It sure looks that way.

Hello Neighbors,

It happened again yesterday. An appraisal came in on a great Granite Bay home (we are in escrow on) at roughly $46,000 below purchase price. Yep, that’s right. A HUGE gap between what we’ve agreed to pay and what the bank’s appraisers say it is worth.

Unfortunately, this is to be expected – but it sure makes this process difficult, and can really challenge the buyer / borrower confidence.

For me, it started in 2006. We had an appraisal come in at $6,000 below the agreed upon purchase price.

Since then, the appraisals have been close to worthless.

Remember – we do loans too. Every purchase loan or re-fi loan requires an appraisal. In the last year, we’ve had two different transactions that required 4 appraisals each !! Why? To account for appraiser fear and appraiser incompetence. Multiply 4 by the average appraisal price of $350 - $490 and you can see how hard this is on the buyers and borrowers. It’s awful.

Why is it happening?

1) Appraisers are afraid. Collusion between some appraisers and some lenders was the first step to this downturn, as far back as 2005 – 2006. So? Appraisers got scared and started getting overly conservative in their valuations. Of course, since the markets have continued to decline – the conservative nature of appraisers has only increased.

2) Appraisers aren’t able to talk to anyone relevant! As of May 1st 2009, appraisers aren’t allowed to discuss values directly with the parties involved in the transaction. That’s right – they go in blind without much data or insight on the specific property. It’s now illegal for us to talk to them. We do a ton of work making sure an offer is at the right market value – but aren’t allowed to discuss this research with the appraiser! Insane. Google this one – “HVCC legislation”. It will explain how the appraisal rules have changed, and the creation of these new “Appraisal Management Companies” (AMC’s).

3) Appraisers aren’t familiar with the area they are appraising. This one is the worst. Lenders used to be able to pick the appraisers they used. Not anymore. Obviously, lenders would choose local appraisers who knew the neighborhoods and areas well. Now? The appraiser may not even be from the same County in California! The example I gave of our $46,000 gap yesterday? The appraiser was from El Dorado Hills – that’s a County away from the property in question in Placer County’s Granite Bay. The appraiser used comps that were 50 years old, backed to Auburn-Folsom road, and sat under major power lines… with no adjustments. She was not at the slightest familiar with the different Granite Bay neighborhoods and nuances.

Also yesterday - I was sitting with 80 or 90 mortgage brokers at the monthly Sacramento Association of Realtors finance session. One lender shared a scary story…. Two appraisers from San Diego were flying up here to appraise 15 houses – during a 1 day trip. All for a bank. The appraisers were earning $150 per house. Wow. Out of the area appraisers, working for below market wages, and spending a few minutes per home. What does that tell you about this process?

In summary? Appraisals are very near worthless.

What is important is making sure you have confidence in the agent representing you, and making sure that person is doing a very thorough job of reviewing home values.

Want to talk more about appraisals, give me a call.

- Jim

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