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.

Economic and tax considerations make right now a super-favorable time for parents (and grandparents) who are willing and able to help their adult children make first-time home purchases. Home prices are low, interest rates are low, and the tax factors are almost unbelievably beneficial. How long this ultra-good scenario will last is anyone’s guess, but we would bet not too much longer.

Make sure you negotiate a good interest rate. And for God's sake, clean yer room!!

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Beneficial Tax Factors

“First-time Home Buyer Tax Credit. As a first-time home buyer, your child or grandchild may be entitled to a tax credit of 10% of the home’s purchase price, up to $8,000 ($4,000 if they are married and do not file a joint return). The credit can be used to offset the child’s entire federal income tax bill, including any AMT. Furthermore, since the credit is refundable, your child can collect in cash any amount leftover after his or her federal income tax bill tax bill has been reduced to zero. Better yet, he or she can get the refund right away (as opposed to waiting until the 2009 return is filed) by claiming the credit on the 2008 Form 1040 (or Form 1040X if the 2008 return has already been filed).

However, unless this benefit is extended by Congress, the credit is available only for home purchases completed by November 30, 2009. Also, the credit is phased out (reduced or completely eliminated) if your child’s Modified Adjusted Gross Income (MAGI) is too high. The phase-out range is between MAGI of $150,000 and $170,000 for married joint filers and $75,000 and $95,000 for unmarried individuals and married individuals who file separately.

0% Capital Gains Rate. For 2009, taxpayers in the 10% and 15% tax brackets for regular taxable income will enjoy a 0% tax rate on long term capital gains. Thus, your child won’t pay any federal income taxes on any long-term capital gains they realize this year to the extent his or her taxable income (including long-term capital gains) does not exceed $67,900 if married and file jointly, $45,500 if head of household, or $33,950 if single. So, if the child’s income (after the standard deduction and personal exemptions) will fall in this range in 2009 and you hold appreciated stocks and mutual fund shares in taxable brokerage firm accounts, you could give him or her some shares. They can then sell them and use the proceeds to help finance their home purchase. Gains will be long-term (and federally income tax free) if your ownership period plus their’s is over a year.

As long as the stock you give your child this year is worth $13,000 or less (when combined with any other gifts to the same child this year), your taxable estate is reduced without any adverse federal gift or estate tax consequences-thanks to the annual gift tax exclusion privilege ($13,000 for 2009 gifts). Married taxpayers can double this amount-they can give up to $26,000 this year without triggering adverse estate and gift tax consequences.

Low Federal Interest Rates. If additional funds are needed for your child to purchase his or her first home, you might want to consider loaning the additional funds to them. Now is a very good time for taking this step too. With loans between family members, the Applicable Federal Rate (AFR) is a big deal. Why? Because that’s the rate the lending parent can charge without causing any unwanted tax complications. Right now AFRs are very low by historical standards, so making a loan that charges the AFR is a great way for a parental lender to give an adult child borrower a favorable deal without having to deal with the complicated below-market loan rules.”

-Article by Bertorelli, Gandi, Won & Behti.  Tax question?  Click HERE to get answers.

And don’t be surprised to see log jams at lending institutions and title companies around November 30th, which could add complications for those trying to squeeze in.  Good luck!

You snooze, you lose (regardless of how cute you are)

For more buyer tips, click HERE.

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1. You tell Closing.com the address of the property you’re looking to buy or sell and the property type (condo, single family, etc).
2. Plug in the purchase (or sale) price, down payment, interest rate, and whether you intend to occupy this property or rent it out.

Plug in some basic info...

That’s it.  Closing.com will spit back a monthly payment estimate, and it knows the tax rate for the zip you entered.  Next, it will lead you to some title insurance and home warranty providers.  Select (or shop) policies to arrive at the final screen, your Estimated Closing Costs Report.  Handsomely laid out, this report will detail the line items associated with closing.  You can enter additional numbers into blank fields, for example, if you want to plug in $500 under “Pest Inspection”.  Closing.com also seems to understand the transfer tax in San Francisco, which is generally paid by the seller (unless buying into a new development or a probate sale).

Monthly payment breakdown

The best part about Closing.com is that people thinking about buying, selling or agents wanting to give their clients more specific numbers, can use it for free without signing up for anything, and print out reports.  The reports clearly label “Monthly Payments”, “Total Closing Costs”, and “Cash to Close”.  Pretty nifty.

Enjoy it!!  For more gadgets, click HERE.

Sample report with clearly labeled sections

Click HERE for a convenient 1-page PDF document you can print and take with you.

The first half of '09 is over. What wisdom has shone through? (photo courtesy of travel.internetindia.com)

The first half of 2009 is officially history and we have some general observations about the real estate market.  Three dramas are currently playing themselves out which can be discerned by dividing the market into three segments; the high end (luxury market), the middle, and the low end.

The luxury market held out longer than any other segment during the downturn, but has now made up for lost time and is experiencing drastic price reductions.  It has not yet stabilized, and it could be some time before it hits bottom.  The availability of reasonable jumbo loans has played significantly into the fate of the luxury market, making it tough for things to improve.  In San Francisco, the luxury market includes homes priced at $2M+.

The low end of the market has shown the most activity in 2009, and it is safe to say that it seems to be stabilizing.  It was the first to react to the downturn, and will be the first to stabilize.  Homes in San Francisco priced below $750,000 generally fit into this segment.

The middle market is a mixed bag of tricks.  There is a gradient of decreasing stabilization as you move from the $750,000 price point up to $2M.

Overall, sales activity in Q2 has picked up quite significantly from a dismal Q1, but is still down year over year.  City-wide, prices are down year over year anywhere from 10% to 35%, depending on the neighborhood.  Neighborhoods with high foreclosure rates (those south of I-280) have been hit harder than those in the northern parts of the City.  Inventory levels also play a major factor in how specific neighborhoods are holding up.  Those with a glut of inventory fell harder than those with tight inventory.

Stemming from these observations, we have some of advice that you may find helpful.

The market is extremely price sensitive right now.  If you are a seller, you will want to price your home realistically at the outset.  Well priced, well located homes are selling quickly, at or near their asking prices, and in some instances, above asking with multiple offers.  Sellers that are out of touch by pricing their homes too high will have little chance of selling in this market.  Pricing a home at levels as recent as 12 months ago is way out of touch with the current state of affairs.  A home that is priced too high will meet the fate of price drop after price drop as it sits on the market.  And the longer a home is on the market the less interested buyers become in it.  A home that sits on the market for too long risks becoming “stigmatized”, meaning that buyers think there is something wrong with it even though it may be in perfect condition.  Bottom line:  Price right, be in touch with reality, face the truths of the current market, and don’t select the listing agent that gives you the best price on your home.  Select the one that is upfront with you about price and market conditions.

For buyers, things are a bit rosier.  If you are buying into the slow-reacting luxury market, you may want to wait a while or submit low offers.  For low and middle buyers, the timing is good as long as you intend to hold your property for the long term.  Interest rates are low, and will continue to be for the short term.  In the long term there is only one direction for them to go, so keep that in mind.  Real estate may also be a successful hedge against looming inflation, which could become an issue in a few years.  Tax credits and incentives are ripe for buyers through 2009.  Prices are lower than they’ve been in recent history.  Competition is also less, as the pool of qualified buyers is assuredly lower now than in the past.  FHA loans can be a good option and only require 3.5% down, but be prepared for obstacles and a longer escrow.

For past Quarterly Reports, click HERE.

While it’s true that your purchase price is a very important part of acquiring real estate, it isn’t everything.  Who cares how cheaply you scooped up a property… if you can’t sell it 5, 10, or 15 years from now because it isn’t appealing to the market, your “investment” serves you no good.  Desirability is the name of the game.  You’re better off investing in a home that people will find absolutely irresistible when you’re the seller, rather than thinking strictly in terms of price and discounts.

It’s true, even in today’s down market, you may end up competing for those special homes.  But you’re buying a little extra insurance that when you one day become the seller, you’ll have a liquid asset that others will be crawling over each other to buy.  And as a seller, there’s no better position to find yourself in.

So while you may run across those “builder closeouts”, “slashed prices”, and “everything must go” sales, keep in mind that there is a reason those properties are having to resort to such aggressive sales tactics.  It’s because no one wants them!  And the only card the seller has left to play is to drastically reduce the price, lure someone in, and sell them an illiquid piece of crap.  Beware when you see these words in real estate advertising.  If you’re going to be lured by anything, be lured by quality homes in quality locations.  Good luck out there.

Watch out for the pricing lure. It looks yummy but it'll kill ya.

For more home-buyer tips, click HERE.

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Try it out HERE.  And if you’re bored and want a few giggles, check out StreetViewFun.

Google maps puts a dot everywhere there is a listing

Click a dot for details

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1.  The Finished Product Buyer: This buyer wants a turn-key home.  They want to move in, unpack, and get busy living.  They have no time for fix-it projects.  They are conscientious about finishes and materials.  Price is not necessarily an issue for them… they just want a home they’re not going to have to do too much to in a location that they’ll enjoy for many years.

Tip:  If you are this type of buyer, make sure you plan on holding for the long term.  Because you value comfortable living over price, you’ll need the market to carry you upwards.  This will happen with time.

2.  The Value Buyer: This buyer searches for properties in good locations with good bones that need a little work.  They are all about adding equity themselves and don’t want to wait for market to carry them up.  This buyer can see past horrible decor, fugly paint (yes, that’s spelled right), and even bad smells.  They generally have a good imagination and an eye for potential.  Once they find the right place they estimate the costs to cure or bring a contractor by if the property requires more effort.  This buyer will need cash above and beyond their down payment and closing costs to add value to the home.  However, their entrepreneurial efforts will be rewarded down the line when they sell.  This person is not intimidated by market conditions.  They know that they can spot a worthwhile equity spread and create value in any market.  This buyer may also buy something that is perfectly livable today, but loaded with potential.  When more money comes in in the future, they may decide at that point to start making improvements.  Many of these buyers invest in a cosmetic fixer, live in it for two to five years while they improve it little by little, sell for a profit, and pocket the tax-free earnings ($250K for single, $500K for married).

Tip:  If building wealth in real estate is your top priority (as opposed to comfort), buying value is your ticket.

It's smart to be a "Value Buyer", but don't get too carried away.

Two more buyer types… keep reading –>

3.  The Cheap But Not Necessarily Smart Buyer: This buyer has one thing in mind:  Price.  They scour the market looking for the lowest dollar per square foot, the lowest price, or the “best value”.  What this buyer often doesn’t understand is that the properties that match their criteria are the ones no one wants.  And it’s that way for a reason.  Sure, they can scoop up a property for dirt cheap compared to the market area, but unless they are “Buying Value” as in #2, they may be putting themselves in a bad situation.  Once their money is tied up in a property that no one  but the cheapest of the cheap wanted, think about what market it will attract when they become the seller.  Yep, they’ll likely be in the exact same situation.  They’ll be stuck with a virtually illiquid “asset” that will attract only a handful of other cheapies… but only after they drop drop drop their price.  The only time properties like this do well is during a roaring market… where anything and everything is selling.  But who wants to count on that?  Real estate isn’t all that different from other things you can purchase– you get what you pay for.

Tip:  If you’re one of these buyers, hopefully you have an agent that can show you how to evolve into a “Value Buyer”.  Otherwise, you could be setting yourself up for failure.

4.  The Paralysis By Analysis Buyer: I hesitate to even call this person a “buyer” because they never really buy anything.  They entrench themselves in the market, studying its every move like a day-trader studies stocks.  They get so wrapped up in the details that they lose sight of the big picture.  With all the info available out there, they end up overwhelmed, fearful, and unable to make a decision.  I myself like to analyze, and analyze a lot, but I never lose sight of the basics.  Buy location, buy quality (or potential), and hold long term.  Time IN the market is more important than timING the market.  So if you can’t commit, have an insecure job, or don’t see yourself in your locale for very long, you probably should be looking at CraigsList for rentals.

Tip:  If you find yourself in this position, get back to basics.  Talk to your parents, who have likely lived in for many years, paid off, and are sitting on a nice asset in the form of their home.  One of the best steps in personal wealth development is making an intelligent real estate investment, and the younger you can start, the better.  So don’t scare yourself out of the overall idea with too much analysis.

Hey "Paralysis By Analysis Buyer"... don't make things so hard on yourself.

For more buyer tips, click HERE.

We ran some reports to answer this question.  It’s an important question as  there are many people shopping for homes– around 65% of whom are open to TIC ownership.

First, we calculated the number of sales of single family homes, condos, TICs, lofts, and stock cooperatives that have taken place in San Francisco from January 1 through May 1.  We cut off the analysis at May 1st because some agents take a couple weeks to update their sales in the MLS, which would skew this year’s number.

Next, we calculated how many sales during that same time period were attributed to TICs.  Then we divided the number of TIC sales by the first calculation (which represents total sales) to arrive at our final number… the percentage of total sales attributed to TICs. Plotting the percentages over the past few years gave us a trend and a source from which we could make some comments:

Percentage of total sales attributed to TICs over time (click to enlarge)

To see commentary and conclusions, continue reading –>

• The popularity of TICs grew dramatically from 2004 to 2005.  This was due to two factors… 1) a booming market at the time and 2) the introduction of fractional financing.
• TIC popularity peaked in 2007.
• Since last year, TIC sales have declined ~23% in relation to all sales taking place in the market.

Final Thoughts:

Are TIC sales dying?  Our thought is that no, they aren’t dying, but they certainly have slowed. The chart shows a downward trend in the percent of all sales attributed to TICs for two years running, but they still account for ~9% of total sales taking place in 2009.  We expect TIC sales to stabilize somewhere around today’s number.   Just FYI- the tax assessor’s office says that TICs account for around 4% of San Francisco’s total housing stock.

If fractional lending products for TICs went away, then we would expect TIC sales to come to a screeching halt and return to their 2003/2004 levels.  But for now, those products are alive and well.  We feel their biggest chance of disappearing was last fall, but they survived.

In sum, if you’re out shopping and TICs are on your menu, we wouldn’t avoid them but we’d suggest not picking up any run-of-the-mill TIC.  You’ll want to stick to the most desirable TIC properties, as those will keep you more liquid in the future when you become the seller.  The majority of TIC listings we see selling like hot-cakes in this market are the ones in the best locations, offering fractional financing, and have been substantially renovated.  And a seller that can buy down points for you is all the better, as TIC loans are more expensive than those for condos or single family homes.

For more buyer tips, click HERE.

Case in point, 765 Sanchez, which hit the market on May 1, 2009.  Just 11 days later, the home was not only in contract, it had closed escrow (which screams ‘all cash buyer’ when escrow is that short).

The home, a fixer with plans, sits high in Dolores Heights with drop-dead views of the City and nothing slated to block its view in the future.  Its potential to shine with the right renovations and decor is huge.  It was listed at $3,250,000 and sold for an undisclosed amount.  The home boasts 3 bedrooms, 2.75 baths, around 3,271 square feet, and was built in 1959.  The list price was about $994/square foot, and if this home sold near asking, represents the highest sale in District 5 so far in 2009.

765 Sanchez Exterior

Why this spot is adored...

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