Price jumps may make appraisers balk

The average Bay Area home sold in April went for 7.1 percent more than the asking price, the largest percentage since the California Association of Realtors started keeping track in January 2008. On a typical home, that amounts to $62,000.

In San Francisco, the typical buyer paid 15.6 percent, or $178,000, over asking. Even in the East Bay, “It is not at all uncommon” to see homes fetch $300,000 over asking, Oakland appraiser Marcia Larsson said.

How can homes appraise for that much over asking? In a growing number of cases, they don’t. But it’s not putting a crimp in runaway home prices.

Remember that appraisers are there to protect lenders, not buyers.

All-cash buyers, who represent about a quarter of the overall Bay Area market, don’t need an appraisal because they are not getting a loan. If they want to overpay, nobody will stop them.

Cash buyers raise the bar for everyone. They provide comparable home prices that appraisers can use to justify higher prices for buyers needing loans, says Hope Broderick, an agent with Grubb Co. Realtors in the East Bay.

She listed a house on Chabot Road in Oakland’s Rockridge neighborhood at $1.295 million

and got multiple offers, including three all-cash bids of $1.8 million or above. The 1,900-square-foot house sold last month for $2 million. “Once Chabot closed, that supported three other sales of mine,” Broderick said.

Zealous overbidding is mainly a result of demand far outstripping supply. After losing out on many homes, some frustrated buyers will pay whatever it takes, often with no loan, appraisal or inspection contingencies. But in some areas it also stems from a culture of underpricing homes, said Grubb agent Dave Higgins. “Everybody is starting low. If you start at full retail price, nobody makes an offer.”

Pricing strategy

A house on Oakmore Road in Oakland that sold for $945,000 in August 2011 was just put on the market at $879,000, even though prices in Alameda County have risen 58 percent since then, according to CoreLogic’s Home Price Index.

That is creating a minor problem for appraisers. Lenders want to see at least three comparable homes that have sold in the past six or 12 months, but they also like to see current listings in the neighborhood. When homes are deliberately underpriced, Larsson might add a note to the appraisal that says, “No listings are provided because the agents’ strategy in the local market is to list under what they expect multiple offers to generate.”

Zach Dawson, Fannie Mae’s director of collateral strategy, has seen appraisers in this situation provide current listings, but adjust them by the average sales-to-list price ratios in the neighborhood.

When she starts an appraisal, Larsson said, she often gets “sticker shock” when she sees the contract price. “By the time I look at the data all around, there is often enough to support these high purchase prices.”

But sometimes there is not. In the last eight months, about six of the 30 home-purchase appraisals she did came in below the contract price. That hadn’t happened since 200607.

In California’s coastal markets, “We are seeing a higher frequency of appraisals come in below the sales price,” said Drew Collins, division sales manager for Wells Fargo.

When that happens, buyers can appeal the appraisal. “Maybe the appraiser didn’t factor in a time adjustment (for rapidly rising prices) or missed a reported sale,” Collins said. “Sometimes the appeal process can generate a higher value. In certain instances, there is simply no foundation, no reported sale to support the price.”

At that point, buyers have four choices:

They can ask the seller to lower the price.

If necessary, they can increase their down payment to meet the required loan-tovalue ratio.

They can try a different loan or different lender.

Or they can call off the deal. If they didn’t have an appraisal contingency, they could lose their deposit.

Higgins represented two clients who bought homes that appraised below the purchase price this year. One was a triplex in Alameda that “was overbuilt for the market. There was nothing else to compare it to on the island.” Upon appeal, the appraisal was raised somewhat and the buyer and seller split the remaining difference.

The other was a Victorian in Berkeley that, after a “studs-to-ceiling renovation,” was the nicest home in the neighborhood. The buyers “were aware there was a high likelihood the property would not appraise” and were putting down enough money that they still got the loan, he said.

Diane Crosby, an executive loan adviser with RPM Mortgage, had an appraisal come in last week at $460,000 on a home that her client had offered to buy for $481,000. Anticipating that might happen, the Realtor had negotiated an appraisal contingency that would let the buyer cancel if the appraised value came in at less than $20,000 below the offer price. The seller lowered the price by $1,000 so the deal could go through.

Some fall short

Kathie Berg, an agent in Berkeley, represented two sellers whose homes had no problems appraising for way more than the asking price this year. One in Rockridge was listed at $725,000 and sold for $1,060,000. Another in Kensington listed at $799,000 and sold for $1.1 million.

So she was surprised when buyers she represented offered $602,000 for a home in Oakland’s Fruitvale district and the appraisal came in at $465,000. The seller reduced the price by 5 percent and “my clients made up the difference with a larger down payment and had to take an inferior loan,” she said.

Berg said the appraiser blamed the shortfall partly on a new software program Fannie Mae began sharing with lenders on Jan. 26 called Collateral Underwriter. It draws from a database of 16 million appraisals that Fannie Mae and Freddie Mac have been collecting from lenders since 2012. The program assigns a risk score from 1 to 5 on all appraisals, and highlights “specific aspects of the appraisal that may warrant further attention by the lenders,” Dawson said. But it does not accept or reject appraisals.

Lenders are not required to use the program. It is intended to supplement, not replace, human appraisals, Dawson said. In fact “our licensing agreement prohibits (lenders from) using (the program’s) findings as the sole basis for a decision.”

Larsson said too it’s soon to say what impact the new program will have on the market. Kathleen Pender is a San Francisco Chronicle columnist. Net Worth runs Tuesdays, Thursdays and Sundays. E-mail: kpender@sfchronicle.com Blog: http://blog.sfgate.com/pender Twitter: @kathpender

Lenders want to see at least three

comparable homes that have sold in the

past six or 12 months, but they also like

to see current listings in the neighborhood.