By VIVIAN S. TOY
Published: September 25, 2009
IMAGINE the agony of a buyer when the bank’s appraiser rules that the apartment the buyer has agreed to pay $750,000 for is worth only $650,000.
What then?
The buyer has three options: move on, because the low appraisal means the mortgage the bank will give is too small to buy the apartment; scramble to come up with a larger down payment to make up for the smaller loan; or use the appraisal to try to renegotiate the price.
Real estate agents, mortgage brokers and appraisers all say that the low-ball appraisal has become increasingly common in today’s unsettled market. The problem is even more pronounced when homeowners are hoping to refinance a mortgage or get a home equity loan, because there is no current agreed-upon sale price as a benchmark, they say.
Low appraisals may reflect reality, since prices in New York City have dropped by as much as 30 percent in the last year. But agents, mortgage brokers and even some appraisers say they suspect that some appraisals are mistakenly low. They cite several reasons:
First, with sales volume having dropped by nearly 50 percent at the beginning of the year and only recently having reached more normal levels, appraisers are often hard pressed to find the comparable sales that allow them to come up with accurate appraisals.
“In a market where you have very little data points, you could have a totally unique property where there just aren’t a lot of comparables,” said Jonathan J. Miller, the president of the Manhattan appraisal firm Miller Samuel.
Second, at a time when local expertise is crucial, recent changes in national lending practices have resulted in the assignment of many appraisers who are not familiar with local markets, brokers and appraisers say. Some real estate agents say that in recent months they have fielded requests regarding Manhattan listings from appraisers from New Jersey, Suffolk County and the Hudson Valley.
Michael Vargas, a principal at Vanderbilt Appraisal in Manhattan, said that because of a major change in the appraisal process that took effect on May 1, appraisal assignments are often shifted “to appraisers who charge the least amount.” But, Mr. Vargas said, “very often those individuals are not the most experienced in your market.”
The policy change, known as the Home Valuation Code of Conduct, essentially prohibits real estate agents and mortgage brokers from ordering appraisals, and gives total control to banks and lenders. The change was intended to eliminate conflicts of interest and to prevent brokers from pressuring appraisers to come back with a specific dollar figure that might just happen to be the purchase price.
But most banks are using appraisal management companies, which are national businesses that act as middlemen and typically assign appraisals to appraisers who offer lower fees.
Mr. Miller and Mr. Vargas say that in New York, that means appraisals that usually cost $350 to $450 are often now being done for half those amounts.
The potential pitfalls are not exclusive to New York. “The least qualified and least experienced people are doing appraisals across the country,” said Jim Amorin, the president of the Appraisal Institute, a national trade group that represents 26,000 appraisers. He estimated that appraisal management companies now handle about 90 percent of the appraisal market, up from about 30 percent before May 1.
Mr. Amorin said he had heard of appraisers in California who travel 150 to 200 miles to do an appraisal.
“It’s hard to believe that they could still be in their geographically competent area,” he said. “And in Manhattan it would be even harder if you have someone coming in from the suburbs, since things can be vastly different from one side of the street to another.”
Subtleties like the inherently higher value of a second full bathroom in a two-bedroom than in a one-bedroom, or the difference between addresses on Lexington Avenue and First Avenue, can be lost on someone who doesn’t know Manhattan.
And without a stockpile of comparable sales for reference, Mr. Miller said, “you have to really know the local market, so you can go beyond the raw sales data and use all the subjective factors you can to really tell the story about a property.”
Of course, an appraiser with a 203 or 516 area code doesn’t necessarily lack expertise in Manhattan or Brooklyn. On the other hand, an unfamiliar prefix can signal unfamiliarity with this neck of the woods.
Dean Feldman, an executive vice president at Halstead Property, said that he recently met with an out-of-town appraiser for a two-bedroom apartment that had been combined from a studio and a one-bedroom.
“This person did not understand what a combined apartment was, and he kept asking me if there were two deeds for it,” Mr. Feldman said. “I had to explain that this was a co-op and it was a legal combination. It turned out fine, but I basically had to teach him.”
When the real estate market was rising, appraisals often came in higher than sales prices, as appraisers struggled to keep up with ever escalating prices. In the current down market, brokers say appraisers are now erring in the other direction — giving lower values since they know banks are reluctant to make loans.
Appraisals are one part science and, especially in a down market, many more parts art. An appraiser can use a tape measure or sonar device to calculate square footage, but how much a recent kitchen renovation is worth and what dollar figure to attach to a park view or a doorman is strictly subjective.
Appraisers readily acknowledge that two appraisers reviewing the same apartment will inevitably come up with two different values, but they add that experts in the same market are not likely to be more than 1 to 2 percent apart.
Since most banks do not send an appraisal to potential borrowers until just before or even after a scheduled closing, a buyer does not have time to challenge an appraisal that he or she believes to be too low.
“If an appraiser missed a bedroom or outdoor space, we used to be able to show them documentation was incorrect,” said Ellen Bitton, the president of Park Avenue Mortgage Group. “But now there’s no way to challenge a faulty appraisal.”
And in the current climate, banks are even less open to reconsidering decisions because most have already increased their scrutiny of loan applications and do not want any appearance of impropriety.
“The only thing you can do is prepare at the outset,” Mr. Vargas said. “Find out who is doing the appraisal and how experienced they are in the market and voice your concerns with the loan officer and if necessary, you can decline to make the appointment.”
You can ask the bank to send a different appraiser, but the bank does not have to comply, which means you risk losing the mortgage.
In most proposed sales, appraisers call real estate agents for an appointment to view the property. For a refinancing, they call the homeowners directly. Mr. Miller advised that appraisers always be met directly by the agent or homeowner.
“Humanize it and provide relevant data to the appraiser,” he said. “Let them know that the apartment across the street just sold for less than this one, but you know it was a fixer-upper.”
Charles Homet, a senior vice president at Halstead, said that “appraisals are kind of cloaked in mystery” and that most appraisers tend to be tight-lipped.
“It’s like a restaurant inspector,” Mr. Homet said. “They need to appear to be above influence. But I always make sure I have relevant comps in hand and I’m prepared to discuss as much as the appraiser is willing to listen why I think the price is supported.”
He said that in addition to recent sales in the same or nearby buildings, he also provides prices of apartments that have just gone into contract that may not yet have been put into the public record.
Mr. Feldman of Halstead said that since the market tends to “like” some buildings better than others, he makes that clear if he’s dealing with an appraiser unfamiliar with a neighborhood or a specific building. “I can point out that it’s closer to the park or to Citarella than the nearest comp, or maybe I know that a more expensive apartment a few floors higher has a much better view because it clears the town houses across the street,” he said. “I try to share as much information as I can, so they’re armed with the proper tools to make a decision.”
Melissa Cohn, the president of Manhattan Mortgage, says the new appraisal world means that to best serve clients, real estate and mortgage brokers should fully vet potential borrowers, to make sure they qualify before they even submit a loan application.
Ms. Cohn noted that because of low appraisals, new developments in particular have been susceptible to failed deals. Buyers who signed contracts a year or two year ago are likely to receive appraisals significantly lower than the prices they agreed to pay.
One of Ms. Cohn’s clients had signed a contract in 2007 for a $3.5 million condo. But as the closing date approached recently, the client’s bank denied the mortgage because the appraisal came in at $3.1 million. The client started the process all over with a second bank, and that bank’s appraiser found comparables among buyers who had closed at their original purchase prices; he came up with a $3.5 million appraisal.
“So the second appraiser’s opinion was the value was there, because people were paying those prices,” Ms. Cohn said. However, she added, purchase prices in new developments are not always actual prices, since many developers are agreeing to pay closing costs or offering other financial concessions. “It just shows you how nebulous the actual value can be,” she said.
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