Appraisals are a necessary evil when it comes to buying or selling a home, since the value provided by the appraiser is what the lender will use as a basis for deciding how much money the buyer will be able to borrow for the purchase of a home. The appraiser is working for the bank in an effort to protect the bank from financing a property for more than its market value, and is not working for the buyer or the real estate agent.

So what happens if the appraisal comes in low? Do you back out of the deal, or is there the possibility that the value indicated on the appraisal is 100% wrong?

First of all, an appraisal is an opinion of value that is supposed to be supported by facts. The appraiser should pull “comps”, or comparable sales data, from similar homes in the area that are either currently for sale or that have closed escrow recently, as the basis for the appraisal report. The appraiser’s knowledge of the area comes into play here, since you cannot accurately comp a home in North Valencia with a home in Northbridge Pointe even though they’re in the same zip code. Santa Clarita homes are typically tract homes organized into specific development areas, so it’s best to start ultra-local and expand out from there when looking for comps.

Standard guidelines allow for a range of size (interior square footage), age and location (proximity to the home being appraised) as part of the appraisal process. Typically the appraiser will go +/- 300sf from the size of the property being appraised and will attempt to use homes that are within the same age range as well as the same development area. For the area, the same tract is preferable, but the search can be expanded to the neighborhood and surrounding areas if necessary.

Unfortunately, this week has shown that appraisers do make mistakes, and in all appearances they may make intentional mistakes, in the data that they report. However, with a dilligent Realtor, you may be able to successfully challenge a low-ball appraisal by providing corrected data and additional (valid) comps to the appraiser via the lender that hired him.

Case #1: Bridgeport home with about 2200 square feet of living space was comped against homes that were 1600 and 1700 square feet. The appraiser bumped up the square footage of each comp home to about 2200 square feet (added 600sf and 500sf to comps, respectively), but left the price unchanged for these smaller homes, thus resulting in a much lower price per square foot. This appraiser also used a home in Plum Canyon as a comp for Valencia Bridgeport, which is almost 3 miles away, as well as a home in Valencia Northbridge with only 1300sf. With this appraisal, the appraiser used comps that are truly not valid comps, and falsified data by adding square footage that doesn’t exist.

Case #2: Canyon Country home built in 1988 in an area that has very few valid comps. The appraiser in this case decided to “create” a comp, using the address of the property being appraised (DUH!) as well as that property’s list price, and altering all other data (including adding a pool) to make this look like another home listed for sale. A search of the MLS and all other third-party websites turned up NOTHING that came close to the data on this “comp”, so it is definitely something that the appraiser created out of thin air.

In Case #1, we were able to successfully challenge the appraisal and get it modified to take into consideration the actual data instead of the modified data, which resulted in a successful close of escrow. Case #2 is just entering the battlefield, so there are no results to report on that one yet.

It is entirely possible that appraisals have included bad data for a long time now, but when they come in at a value that is at or above the home’s purchase price, there is no reason for anyone to examine or dispute the details. However, when an appraisal comes in low it affects the buyer’s ability to puchase their home of choice, so the data should be analyzed with a fine-toothed comb to either verify that the data is correct or dispute it as in the examples above.

If the lower appraisal is indeed correct, then the buyer has three options: 1.) Ask the seller to lower the purchase price to agree with the appraisal; 2.) Bring in extra money to fill in the gap between the purchase price and the appraisal price; or 3.) Walk away from the deal and find another house to buy. Since most of the homes for sale in the Santa Clarita Valley are either bank-owned (REO) or short sales, you’ll be dealing with the bank’s pocketbook instead of the sellers (homeowners) in most cases, so you won’t be affecting a family’s ability to put food on the table by reducing the price. Getting the bank to approve a reduced price may create its own challenges though, so your Realtor should be prepared to back up your request for a price reduction with an abundance of well-organized relevant data.

Declining Market Issues

Getting a home loan funded has become much more challenging with the recent decision to deny loans based on a single check-box on the appraisal document that indicates that the property is in a "declining market" area. One quick tick of the pen, and a previously good deal can go south in an instant. No matter that the appraised value is significantly higher than the purchase price… if that dreaded box is checked, then your loan amount will automatically be reduced by 5%, meaning that you’ll either have to come up with the additional funds or lose the deal.

Question: How do we know if an appraiser really considers a home to be in a declining market area, or if he is just doing a big CYA by checking that box? How many potential homebuyers are going to be left in the lurch because of one person’s opinion?

I was shocked to hear that the appraiser’s opinion overrides any other data that the lending institution may have regarding the area that the home is located in. What power these lowly appraisers wield these days! Imagine being able to deny homeownership to someone just by checking a single box on a form…

Both buyers and sellers will be affected by these new guidelines, but buyers take it in the shorts a bit more because this "declining market" issue tends to rear its ugly head too late in the game to either save the deal with a different lender or back out of the deal without penalty. To add insult to their injury, if this happens after the buyers have removed their contingencies, then the seller may also keep their escrow deposit as "damages".

What Can You Do to Protect Yourself as a Buyer?

How do you protect yourself as a buyer? There’s truly no way to be 100% protected these days unless you can qualify for an FHA loan or have additional funds in reserve (or wealthy relatives) who can ante up more funds if the "declining market" issue rears its ugly head.

Do be sure to stay on top of your lender to make sure that they have everything in order, and ask via email so you have the response in writing. Many loans fall apart due to lender’s failure to get certain tasks, such as appraisals and appraisal reviews, done in a timely manner.

Keep your fingers crossed that the higher FHA lending limits will get approved, since those loans don’t have the same requirements as conventional loans.

All of the businesses on this Spruce Street corner, with the exception of the American Legion Hall (at least for now), have been given notices that their properties will be taken by the City of Santa Clarita via eminent domain if these owners don’t "voluntarily" sell their properties to the City in the very near future. Eminent domain lawsuits will be filed in 30 days, to be exact, after the current owners receive the City’s "appraisals" for their properties.

Manny provides some very interesting history of the old jail building that I think is worthy of sharing here. Per Manny:

Through the years, it not only served as the jail, but was used as an attorney’s office, a used car lot, a tire shop, a storage area and presently houses the Antique Flower Garden.

The concept of the jail goes back to 1888 with proposals to construct a wooden two-cell jailhouse measuring 12′x20′ for $236.25 with iron bars or a slightly larger structure 13′x22′ for $248.00 There is some confusion as to whether the wooden jail was ever built at all.

Throughout the years, some additions have been made to the front of the building; a restroom and storage cages were added and a large office area was also added to the rear of the building. Never was the original structure compromised. Its 14 ½" thick concrete walls and concrete roof seem to have withstood the test of time.

Behind the front door lies an open area once divided by bars from its high ceilings down to the floor with its associated doors each heading into the cells. To the right are three small barred windows that allowed sunlight to enter. Across from the steel door on the opposite side of the room is another large barred window designed to provide light and ventilation. Below this window is where the Constable’s desk once stood and near the desk was a potbelly stove that provided heat. A vent through the wall and roof were part of the original design and are clearly visible.

Once in the cells, you can see etchings on the walls from prisoners past; what is not considered modern day graffiti. Two concrete benches lined each cell to accommodate overnight stays; one still exists in its entirety. A drain in the middle of the floor is a reminder that, yes, it was once a working jail and it was used for wash-down. This building was a predecessor to today’s modern jails. It is believed that William S. Hart, Amelia Earhart, Tom Mix and W.C. Fields would spend rainy days playing cards in the jail with the constable.

In April of this year, Manny and the other Spruce Street property owners received two letters: One from Valentine Appraisal stating that they wanted to appraise the properties (cc’d to Barbara Stoll, Acquisition Specialist for the Santa Clarita Redevelopment Agency); and one from the City of Santa Clarita that was a "Notice of Decision to Appraise" and "Notice of Land Acquisition Procedures" (cc’d to Robert Newman, Director of Public Works; Paul Brotzman, Director of Community Development; Chris Price, Assistant City Engineer and Sarona Vivanco, Senior Management Analyst).

This second letter outlined Section 6184 of California Relocation Assistance and Real Property Acquisition Guidelines, and Section 6188 of a Notice of Decision to Appraise and Notice of Land Use Acquisition Procedures. Or, in plain English, the City’s right to force the current owners to "sell" their properties to the City of Santa Clarita. In Manny’s words, "Bottom line is that this historic site is now in the first stages of Condemnation Eminent Domain."

One of Manny’s biggest concerns is that it appears that the City of Santa Clarita is considering relocating this historical building, rather than keeping it in place. "Is this our will that we erase our history or heritage? Keep in mind that the jail has certainly earned the right to stay where it was built, but if it does survive the move, it will be just another old building in a County Park. If left where it’s at, it can become a historical site, never to be moved."

"I may be the owner of the old jail or as I like to think of it, the caretaker of it while I’m here on God’s green Earth. This jail is part of our town, our history and each and every one of us should be concerned about preserving Newhall’s history for ourselves as well as our children’s children," says Manny.

So far, the overall public interest in the plight of the downtown Newhall business owners (as well as the owners of residential properties in the area) has been lukewarm at best. Will anyone step forward to help Manny and others preserve the history of the downtown (now dubbed Old Town) Newhall area, or will the jail be moved to join the buffalo at Hart Park instead?

Manny’s wondering whether he should start circulating petitions… seems he should start moving pretty quickly on this, since word is that the appraisal letters are due to be presented to these Spruce Street property owners as soon as the Santa Clarita City Council returns from its break in late August.

Interesting to note is that the designer for the Antique Flower Garden website is "Rising Ashes Productions"… Hopefully Manny will be able to do just that!

Washington Post’s technology columnist Leslie Walker says "Offering automated property valuations via the Internet turns out to be much harder than it seems — especially if you expect them to be accurate. But after running extensive tests on this ambitious national real estate service, I found it to be so inaccurate that it’s not useful."

Richard Powers, president of the Appraisal Institute says "What scares me is the consumer who goes out there and makes a decision based on that data. Consumers really have no way to judge the accuracy of the estimate — that really is the problem."

Even Zillow’s president and co-founder Lloyd Frink said that the free site doesn’t aim to replace home appraisers or real estate agents. "It is meant as something to help buyers and sellers start a conversation."

"Trouble is, because Zillow is loaded with dirty data in some places and missing key factoids in others, its Zestimates often miss the mark — sometimes so widely that I fear that anyone trying to buy or sell a home could get burned by relying on Zillow" says Leslie Walker.

Zillow runs its own internal analyses to calculate its accuracy rate by comparing actual transactions as they occur with the automated estimates provided by its computerized valuation system. Nationwide, 62 percent of all Zestimates fall within 10 percent of the selling price, according to Zillow. That means 38 percent are more than 10 percent off the mark, which is quite significant!

Bottom line: Zillow is just another tool to start the process of determining a property’s value. If you want a true estimate based on all available data as well as a qualified professional’s opinion as to value, contact an appraiser or a Santa Clarita real estate agent.