Gradually, the national housing market has moved into recovery. Absorption and housing starts are up. But in spite of expectations to the contrary, the mortgage market remains tight. Getting a mortgage requires a number of steps, each of which, in today’s world, is still fraught with peril. Since large banks, which issue most mortgages, are still being sued by the federal government (new charges against both Wells Fargo and Bank of America came out last week), their guidelines are becoming more and more stringent; ironically, even as the national real estate market improves, getting a mortgage is becoming harder. Borrowers need higher credit scores than ever before. And the always dicey issue of appraisals has, with the well intentioned but misguided intervention of Dodd Frank, gotten dicier than ever.
It is certainly true that, before 2007, many appraisals were faulty. Values tended to be determined by the contract price and then justified, rather than representing an arms-length perspective on the actual worth of the property. But today, as so often happens, the pendulum has swung too far in the other direction. For one thing, appraisers can no longer be selected by actual experience in the neighborhood where the property is located. For those of us working largely in Manhattan, that means we increasingly deal with appraisers from Long Island or Westchester and Rockland Counties. Manhattan’s micro-neighborhoods are tiny: a half mile can make a vast difference in value. An appraiser not familiar with the neighborhoods can easily select incorrect comparables in valuing a property . And these days, inappropriate comps never lead to a HIGHER number! Appraisers came under such harsh scrutiny in the days after the subprime mortgage market collapsed that they now protect themselves by aiming low in all their valuations.
Everything about appraisal is relative. While a skilled professional can do an excellent job of assessing value, the big differences in assigned value between one appraisal and another’s speaks to the variable underlying nature of each appraiser’s assumptions. Here’s an example from my own life: recently my wife and I refinanced our house in Connecticut. Because of appraisal problems, the process took six months. Our first appraisal took place in February of last year. We were not here, and the appraiser came in and out quite quickly. No one was here to explain to him the nature of our renovations, or to talk about the age and quality of the house. The comparables he used, to recently built or post-war houses in this and neighboring towns, had nothing at all to do with our fully restored 1793 colonial. And the appraisal came in SO low, never mind the value of the house, that we could not even refinance the mortgage, which had originally represented only 60% of the house’s value BEFORE we did our renovation!
So, since appraisal rules are now so strict that neither the owner nor the mortgage originator can have any influence, we waited a few months and got another appraisal. By then it was summer, and the garden looked beautiful. We made sure to be there, and we walked the appraiser through what we had done: the new plumbing and heating, the quality of the materials and finishes. We had explained all these items to the earlier appraiser, but actually showing them was different. This appraisal used redone antique houses as comps, and came in 50% higher than the first one. We got our refinance, and I got a big lesson in the new world of post-Lehmann appraising.
Here’s what I learned: as agents we need to be more proactive than ever in the appraisal process. We must ALWAYS be there when the appraiser evaluates the property. We must arrive at every appraisal appointment with our own research, including the most suitable comps. Especially in a rising market, we need to bring signed contract info which supports a higher price than the closed comps, which are often several months old. We must discuss with the appraisers how they adjust for condition, outdoor space, location, level of service, and all the other variables which have such impact on the properties we sell. And we must prepare our buyers and sellers for the possibility that the market may dictate a different price for a property than the price an appraiser can justify. The market moves fast, and closed prices (from deals actually struck several months before) can lag the market by as much as 5%. This is particularly true when the property has been the subject of multiple bids.
Like square footages, appraisals appear to be scientific but are really a combination of fact and conjecture the accuracy of which depends entirely on the local knowledge and expertise of the practitioner. But they form an integral part of our purchase and sale process, so, like brokers, they are here to stay.