Inside San Francisco Real Estate

As many of you know, I used to be a real estate appraiser (and in a way, always will be).   Appraisers are paid for their professional opinions, honesty, and expertise.  If they are lacking in any of those three areas, well, they’re just not cut out for the job.  I’ve heard a few stories about appraisers lately that made me cringe.

The Good: [Honest and expert] Appraisers not only protect banks from lending more than a home’s value, they also protect the buyer.  Let’s say that a buyer is in contract on a home for $500K and the appraisal comes back at $400K.  As a result, the buyer does not get their loan and they get angry with the appraiser.  In actuality, they should be extremely thankful that the appraiser saved their butts from overpaying by 25%, but appraisers are rarely thanked.  Instead, the appraiser gets bashed from the real estate agent (thanks for killing my deal), the buyer (hey, thanks, I lost my home), the seller (you imbecile, I was just about to cash in), and the loan officer (thanks pal, I’m not going to get my fee).  If the appraiser is truly an expert, there should be nothing stopping them from doing honest work, including pressure from any of the aforementioned parties.  Unfortunately, appraisers can be coerced and threatened (we’re not going to use your services anymore if you don’t hit our number!).  This is the reason new regulations are in effect that limit who can talk to an appraiser.

The old days: "If you don't hit my number we're never using your services again!"

Let’s face it, if you have three different appraisals on a property, you’ll get three different values.  A buyer can always go to another lender and try again.  And they do.  But what happens when appraisal #2 comes in at $415K?  That’s the point where the buyer should stop and ask themselves if they should even be moving forward in this transaction.  And they should ask themselves if their agent is representing their best interests… after all, the agent is the one who is facilitating the purchase, and if they are worth their salt, should be the one keeping you from overpaying.  Here are some tips:

• Always request your appraisal report from the lender.  The lender must provide you with one.
• Always take note of where the appraiser comes from — this is printed in the appraisal report (more on this later).
• If the value is in question, there is nothing stopping you from picking up the phone to order your own appraisal.  The bank won’t use it, but you’ll have piece of mind.  Select a residential appraiser with the MAI designation after their name.  They are the best of the best.
• If your appraisal does not make value and is way off (say, 15% or more), question whether you should be moving forward at all.
• If your appraisal does not make value and it is just a percent or two short, try another lender (who will subsequently order another appraisal).

The Bad: We recently had an experience where we were in contract on a home for $999,000 and the appraisal came back at the sales price, with plenty of supporting data.  The appraiser then sent off the report to his AMC’s quality assurance department.  AMCs are “Appraisal Management Companies”.  They have been around for a long time, but with new regulations in place, an AMC is now a mandatory step in the appraisal process.  All appraisers (even if they previously owned their own firms), must now work for AMCs if they want to practice.  In any case, the AMC’s QA department approved the $999,000 appraisal, and off it went to the lender in New York.  The lender had an in-house review appraiser take a look at the appraisal.  We got a phone call telling us that the review appraiser had slashed the value from $999,000 to $985,000.  Seriously??  From a desktop in NYC, they made this judgment call?  On a million dollar home they’re going to get their panties in a ruffle over 14 grand?  I’m sorry, but appraisals on million dollar homes don’t get to that level of granularity… at least from a desktop 3,000 miles away they don’t.  It was almost as if they just wanted to kill the deal… to not make the loan.  We were shocked and scrambled at the last minute to come up with $14K so the buyer could get their home.  How can a review appraiser in a different state supersede local expertise?  Just doesn’t make sense.  The system still needs fixing.

"Ah ha ha haaa, I just totally screwed with these people in California. Ah ha ha haaaa!"

The Ugly: Because all appraisers now work under the umbrella of AMCs, their earnings have been cut dramatically.  Appraisers used to earn around $300 to $500 for a typical residential appraisal.  Now, their fee is nicely trimmed by the AMC for which they work.  They’re now getting significantly less for the same work (and the work is anything but easy).  I feel bad for them, I really do.

As a result, many appraisers (unfortunately) are taking all the jobs they can get.  This oftentimes means that an appraiser will venture outside of their area of expertise in order to make a couple hundred bucks.  This happens all the time… we’ll get a call to let an appraiser into a home and they have a 925 area code.  Not a good sign.  The only appraisers that should be appraising San Francisco real estate are those that are intimately familiar with the City and all its nuances.  We recently heard of a story where an appraiser drove 85 miles (one way) just to do an appraisal.  And another story of an appraiser who drove around Mission Bay for 2 hours looking for the subject property.  Because many streets in Mission Bay are new, the appraiser’s GPS couldn’t find it.  Bad, bad, and bad!!  Furthermore, how can this possibly be OK with the bank?  Don’t they see the risk in this?  Oh, wait, these are the brilliant banks we’re talking about…

"Excuse me, how do I get to the Radiance at Mission Bay?"

Geographical competence is an absolute must for appraisers or they should not accept the assignment. Matter of fact, it’s written into USPAP (the book that governs the practice of appraisers).  USPAP stands for “Uniform Standards of Professional Appraisal Practice”.  USPAP’s geographic competency rule states: 

“Prior to accepting an assignment or entering into an agreement to perform any assignment, an appraiser must properly identify the problem to be addressed and have the knowledge and experience to complete the assignment competently… [continued]  In an assignment where geographic competency is necessary, an appraiser preparing an appraisal in an unfamiliar location must spend sufficient time to understand the nuances of the local market and the supply and demand factors relating to the specific property type and the location involved. Such understanding will not be imparted solely from a consideration of specific data such as demographics, costs, sales, and rentals. The necessary understanding of local market conditions provides the bridge between a sale and a comparable sale or a rental and a comparable rental. If an appraiser is not in a position to spend the necessary amount of time in a market area to obtain this understanding, affiliation with a qualified local appraiser may be the appropriate response to ensure development of credible assignment results.”

So what is “sufficient time”?  That’s a tough question, but I can say with certainty that expertise in the San Francisco market cannot be attained in a few hours, days, or weeks.  It takes a long time to be “sufficiently competent”.

To sum it up, most appraisers are out there doing good.  If you’re a buyer, seller, or agent, make sure that the person who appraised the property for your transaction is local and qualified.  Because you can’t choose your appraiser (the bank does), this will have to be done after the fact.  You don’t want a “rubber stamper” (especially if you’re a buyer), and you certainly don’t want someone driving 85 miles for the assignment.  Always request a copy of the appraisal (read it, and have your agent read it!).  In it you will find the appraiser’s contact info and their address, so you can see if they’re local.  If you receive an appraisal that you believe is inaccurate –and note the difference between inaccurate and unpleased-with– order an appraisal on your own so you can get a second opinion.  If there is a huge discrepancy between the two, then you know you’re on to something.  If not, then the first appraiser was probably right.  Good luck out there.

For more home-buying tips, click HERE.