In a market starved for inventory, where bidding wars throughout the city send the price per square foot soaring above records set just weeks prior, the difference between what buyers will pay for an apartment today versus the figures deemed suitable by banks is creating an ever-widening rift. For those who want to take advantage of still historically low interest rates for purchase or refinance, the appraisal process is the bank’s system for evaluating the value of a property–usually up to 80% of the loan. When an appraisal falls short of a contract price, this directly affects how much an individual can borrow and either forces a buyer to put more money down or kills a deal altogether. Since the process for contesting a low appraisal can be an uphill battle, many are left to wonder how appraisals can keep pace with neighborhoods seeing prices rise 5% each month and comparables off by as much 20% from current sale prices.
Back in 2009 in response to the housing crisis and the lax appraisal rules blamed for inflated home values, the Attorney General of New York worked out a deal with Fannie Mae and Freddie Mac to end the perceived sweetheart relationship between mortgage brokers and appraisers. The Home Valuation Code of Conduct prohibited loan officers from selecting and communicating with appraisers, and this state provision very soon became a federal regulation. Banks now use appraisal management companies who, in turn, bid jobs out to appraisers. Because lenders want to pay appraisers the lowest fees possible, the least experienced appraisers and those who live far outside the city and are unfamiliar with a particular building or neighborhood are usually chosen. Incorrect floor plans and room counts are frequent, as well as ignorance to the simple truth that similar apartments just a few blocks away from one another can have drastically different values. The comparables or “comps” as they are known in the industry are value estimates based on sold homes of like size within an approximate one-mile grid that closed within the past 90 days. The climate of limited inventory translates into fewer sales, which then limits the number of even reliable comps that an appraiser can reference. Add to this equation the fact that appraisals are subjective, meaning that what floor an apartment is on, the caliber of renovation and other considerations to determine worth are in the eye of the beholder (who isn’t the buyer). For sellers, an emotional factor also comes into play when highly personal and expensive renovations fail to translate into a higher appraisal value. The original cost of the work, as well as the owner’s sense of personal investment in a particular project or enhancement, which doesn’t pay off at the bottom line can lend a sense of dramatic insult to the financial injury.
Since those who seek financing have enough to worry about from competition with all-cash purchasers and others willing to waive mortgage contingencies, the roles of the agent, the buyer and the seller have changed. To make the appraisal process work for all, researching sales and the condition of these units, showcasing an apartment in its best light, understanding the particulars of a coop and condo’s reserve fund, knowing what lenders have recently financed purchases, highlighting recent improvements or planned enhancements to a building, and having all of this information ready to present an appraiser is imperative.
Even if an appraisal comes back low, all is not lost. While it may be a challenge to contest a low appraisal, an experienced and knowledgeable agent can furnish examples of recently signed contracts that up the value of the subject property. Although buyers are understandably hesitant to pay between $350-$500 for a new appraisal with another bank, the variation between contract price and the appraised value can often be bridged–which makes the extra expense more than worthwhile.
While it might be a touch glib to think of the appraisal gap as a “happy problem” or the byproduct of a robust market, the information and action necessary to remedy this situation rests in the hands of a qualified sales professional who, more than ever before, must know the competitive landscape of a thriving and rapidly-changing market.