How much is your house worth in this turbulent market? That's the question on the minds of many Bay Area homeowners, but it's become increasingly tough to answer, even for the pros.
Instability in the region's housing market is making it difficult to determine values, according to mortgage brokers and real estate appraisers. "It's miserable," said Karen Mann, who runs a small East Bay appraisal firm called Mann & Associates. "I've been in the business 28 years, and this is the worst downturn I've seen."
While Mann's Discovery Bay office is in one of the hardest-hit parts of the Bay Area, appraisers in San Francisco and other places where the market has fared better echoed many of her concerns. "They are shooting down the value of appraisals like I've never seen before," said Rick Gordillo, whose practice specializes in residential real estate. "It's almost as if they don't want the business. They are turning away loans even when the values are there."
Even seemingly low appraisals are being questioned by lenders, who have been burned by the mortgage crisis and are now scrutinizing loan applications with much more care, said Ed Craine, vice president of the California Association of Mortgage Brokers.
During the housing boom in the first half of the decade, lenders typically evaluated appraisals submitted as part of a loan application by running their own comparisons from their desks. Now, banks are much more likely to send appraisers out into the field to drive by a property and the nearby homes listed as comparables to help establish a home's value. "You can have what I call a very realistic or conservative appraisal done by an independent fee appraiser and that will go to a lender's underwriter, and the lender can come back saying we don't think that value is accurate," said Craine, who is also president of the San Francisco mortgage brokerage Smith-Craine Finance. "It used to only happen once in a blue moon. Now it's happening maybe 1 in every 10 times."
Finding the right price is crucial, not just for getting a sale closed, but also because it plays a huge role in attracting buyers.
The down market has meant that more real estate agents are seeking an appraisal early in the sales process, asking for help determining the price before they put the home up for sale, Mann said.
"I'm seeing an increase of about 20 percent in Realtor activity," she said. "In a market like this, you have to be as exact with the listing price as possible. If you over-list, you run the risk of staying on the market too long and becoming stale."
The art of appraising a home is about number-crunching - putting together a series of comparable recent real estate transactions to help determine the value of a property. The declining market makes it particularly important to use current sales numbers rather than relying on information that is 3 to 6 months old, which in a more stable market is considered a perfectly acceptable comparison, experts said.
"It's most important to deal with the most recent sales," said Aldo Congi, a vice president at McGuire Real Estate in San Francisco. The tougher guidelines and declining home prices throughout most of the Bay Area mean that what goes into an appraisal - both those required by lenders for home purchases and those done for homeowners who are refinancing their loans - has changed.
The Appraisal Institute, a trade group with 32,000 members, has even begun offering a series of daylong seminars in cities across the country to retrain its members. The lectures are designed to help the group's appraisers adapt to the current market and learn how to better evaluate data.
The seminars began last spring, and enrollment has exceeded the Appraisal Institute's expectations, said spokesman Aaron Hultgren. The declining sales volume that comes with a down market is one factor that has made it especially difficult to come up with accurate values, appraisers said.
The number of homes sold in the Bay Area's nine counties fell almost 10 percent in June, the most recent month for which data are available, according to DataQuick Information Systems. That decline put June sales volume at its lowest level since 1993.
In San Francisco, neighborhoods are small, which compresses the number of comparable homes, making appraisals particularly complicated. "Any time you have a reduction in volume, especially because that is when the underwriting criteria of lenders tends to become more stringent, it's difficult," said Charles Warren, who runs a San Francisco appraisal business called Warren and Warren. "Lenders want to see comparables from the last 30 days, and all of a sudden you are left without any valid data. That exacerbates the problem."
For cities in eastern Contra Costa County, where foreclosure levels are among the region's highest, it is even worse, said Mann, the Discovery Bay appraiser.
"Foreclosures and short sales don't really conform to the definition of market value because they are done under duress," Mann said. "At the same time, you have people who are selling homes who just want to move and are not in distress." That creates two price levels within one neighborhood, she said.
"The challenge for us is to determine what's normal for the neighborhood. We have to be very careful and be sure that we're reading the market correctly and don't over- or undervalue the property we are looking at."
During a down market, sellers - both home builders and individuals who are selling their houses - also are more likely to throw in extras that skew the value of a home.
For appraisers, that means spending a lot more time working the phones calling real estate agents, developers and others involved in each transaction to make sure they understand exactly why a home that is being used as a comparable sold for the price it did.
"You need to be able to back out a seller's concessions and to make adjustments to the sale price to get what the true sale price is for the real estate only," said Leslie Sellers, vice president of the Appraisal Institute. "If there is creative financing - if the seller helps with the loan and the buyer gets to live in the house for 12 months interest-free, for example - you need to make adjustments to get what we'd consider the market-equivalent price."
The extra calls and the extra work to sort out home values mean that instead of being able to complete two appraisal reports a day, she is able to do only one, Mann said. At the same time, the slowdown in the market has meant cutting her staff from 17 people to four.
Independent appraisers like Mann typically charge between $350 and $500 for their reports, and these days, sellers are reluctant to pay that.
Still, appraisers and mortgage brokers said, there are some things buyers and sellers can do to make the appraisal process less painful.
Buyers should be sure to protect themselves by keeping their financing contingencies in place until the lender has signed off on the appraisal, said Craine, the mortgage broker.
Sellers need to work with their agents to determine whether they'll stick with the buyer and try to make the deal work should a lender reduce the home's appraised value.
Like many other parts of the housing market, what's happening with appraisals is directly tied to the turmoil in the mortgage industry, experts said. "What we've seen with the return to proper underwriting guidelines is that lenders are looking much more closely at appraisals," said McGuire's Congi.
"Appraisals are extremely important," he said. "It's not that that wasn't true in the past, but we tended to minimize that during the real estate bubble. We're getting back to it now."
What you should know
-- Use a local appraiser. Determining the value of a home in the Bay Area is very different from appraising a home in other parts of the state and country.
-- Check to see whether your appraiser is a member of the Appraisal Institute or the American Society of Appraisers, the two biggest trade groups. These appraisers have completed more coursework than those who are just licensed by the state.
-- Ask your real estate agent to see a copy of your appraisal report and make sure you understand it.
-- Buyers should make sure to leave their financing contingencies in place until the lender has signed off on the appraisal. The down market means that lenders are reducing appraisal values more often.
-- Sellers might want to consider getting a professional appraisal before putting a home on the market.