During the boom, property appraisers were saddled with the pressure of delivering through-the-roof price estimates, but now they face a new kind of stress. With so few sales on both the residential and commercial sides of the market in New York, appraisers have very few places to turn to come up with a price estimate.
In this month’s Q & A, appraisers told The Real Deal that their most challenging period is at the beginning of a downturn because of the lack of deals.
On the residential side, the hunt for more information can include looking at other contracts for comparable properties and even talking to brokers about how much traffic they are getting at open houses. On the commercial side, it might mean interviewing investors to figure out their investment parameters. But the burden ultimately falls on the appraisers’ shoulders.
Appraisers who work in the outer boroughs and the suburbs said distressed sales and foreclosures are often depressing values throughout neighborhoods. They noted that because there have been so few deals, they are also being forced to expand their definition of “comparable.” For example, one suburban appraiser said he is now going outside the recommended 1-mile radius that’s been standard in the past and is also measuring homes against properties that are of different sizes and styles.
Some say that while there are plenty of ethical appraisers who never gave into the pressure to “hit the number” when the market was booming, there is still an inherent conflict of interest in the business. And there was no clear consensus among those we’ve interviewed as to whether that pressure has subsided. But many did say that they are seeing more work from individuals who are concerned about overpaying — a client base that was virtually non-existent during the boom. For more on how appraisers are adjusting to the new marketplace we turn to our panel of experts:
Sam Heskel founder, HMS Associates
What are the biggest challenges you’re dealing with in this down market?
Determining the fair market value when there are limited sales, especially in areas with high rates of foreclosures and distressed sales.
Exactly how are distressed sales making appraisals harder?
When there are foreclosures and distressed sales it throws everything off. You might see a lot of low sales in a neighborhood but they are not true sales, they are distressed sales. Also, when there are a lot of foreclosed properties on one block or a couple of blocks, a buyer might think, why should I pay full price for a property on this block? It has a direct impact on the neighborhood. Plus, if a block has a couple of abandoned homes, it distresses the whole neighborhood. It kills the market.
Are you employing any new strategies to figure out the exact value of a property because of the lack of deals?
One thing is to go back to the history of properties. I go back now to the last five years in a neighborhood where I’m doing an appraisal and see what the price was at the peak, say 2006, and see what the properties are selling for now and how much they have declined. We just have to work backward. It’s different from what you do in a regular market when you can look up deals and comparables in the area.
There was obviously a lot of pressure on appraisers during the boom to overvalue properties. Is there more or less pressure to ‘hit the number’ now?
Things have changed with regard to that problem. The lenders have learned their lesson, seeing the consequences of what happens when you put wrongful pressure on appraisers for a certain price. They have become more realistic, which is better. Now, based on the Home Valuation Code of Conduct, there is a firewall between loan officers and appraisers that’s going to decrease the pressure even more. And it’s important to realize that a lot of the people who were acting unethically, very aggressively, a lot of them were fly-by-night sales people trying to make a fast buck in a hot economy. Once the mortgage market declined, they were gone, moving on to the next industry. The established, respected mortgage people are still in the business.
What is business like for you compared to three months ago, six months ago and a year ago?
It’s busier now than it was a year ago and six months ago because the interest rates are so low people are trying to get in or refinance. Between now and three months ago, it’s about the same.
Are there any silver linings to the down market for the appraisal industry?
There actually is a silver lining for the appraisal industry. A guy wanting to buy a house now knows the market is declining, so he wants to make sure he’s not overpaying and will order an independent appraisal to make sure. People who were in contract one year ago and have not closed will order an appraisal to see if the value is still there.
Jonathan Miller president, Miller Samuel
We all know brokers are having a hard time valuing properties because of the lack of comparables. How difficult is it as an appraiser to figure out how much a property is worth in this market?
How about very difficult? The most difficult period for an appraiser to value properties is the beginning of a down cycle because that’s the point where there is a very limited level of activity. What we’re finding is that we have to drill down into submarkets and find [comparable] transactions, contracts and closings, and listen to the discussion among brokers that may have been involved in the transaction, [and find out] whether there were back-up offers, what the traffic was when viewing the property and how it was received.
There was obviously a lot of pressure on appraisers during the boom to overvalue properties. Is there more or less pressure to ‘hit the number’ now?
[During the boom] every party involved in the transaction had a vested interest in the appraisal. You had two types of appraisers: those who played ball and those who didn’t. Our industry went from a majority of competent, ethical types to the minority because the mentality of more volume was highly rewarded with more volume. In addition, during that process, a growing share of business [went to] mortgage brokers. And one of the reasons why this Fannie Mae-Cuomo deal got a lot of people upset is that starting May 1, mortgage brokers can no longer order appraisals directly if the bank that they are providing the loan to is going to try to sell it to Fannie or Freddie. There are certainly good ethical mortgage brokers, but there is an inherent conflict in this model — you have somebody who gets a commission off a sale, which is based on whether the value is high enough. As of right now, nothing has changed. The only reason you can argue that there is less pressure on appraisers right now to hit the numbers is that there is just a lot less activity.
What is business like for you compared to three months ago, six months ago and a year ago?
The same — it’s just really busy. A lot of work that we’re doing now is litigation, estate trusts, divorce, pre-foreclosure, workouts, non-sale type transactions.
Does it look like it will get better after the stimulus?
I’m confident that what has been introduced will have a positive impact going forward, but not tomorrow. This is a multi-year recovery and we’re not in recovery yet. We have a number of years to go through this deleveraging, improving the credit situation and banks getting their arms around underwriting. The requirement that banks had for borrowers two years ago was simply that they had to have a pulse or, as someone pointed out to me, they had to be able to fog a mirror. Now the requirements include an arm and a leg. As an appraiser, I definitely don’t want to revert back to the situation we were in before.
Marilyn Weitzman president, the Weitzman Group
How difficult is it for an appraiser to figure out how much a commercial property is worth in this market?
It is very difficult to value most types of real estate in the absence of recent comparable sales. It’s critical for an appraiser to interview institutional investors, local brokers and pension funds to ascertain their investment parameters or opinions and then the rest is the appraiser’s judgment.
What are the biggest challenges you’re dealing with in this down market?
Selecting capitalization rates and yield rates, as there are few, if any, transactions from which to derive rates.
Is there more or less pressure to ‘hit the number’ than during the boom market?
Most pension funds and institutional investors recognize that there has been a significant decline in real estate values, and they also recognize that there is no one number to hit, so overall, I believe there is less pressure.
Is it more difficult to appraise any one specific sector of the market?
It’s most difficult to appraise unsold condominium units, in particular, to estimate the appropriate pricing and absorption.
As an appraiser, what can you tell us that market reports do not yet reflect?
Market reports nationwide still do not fully reflect the results of the meteoric decline in retail sales, which will soon result in very significant increases in retail center vacancies.
Are there any silver linings to the down market for the appraisal industry?
Appraisers are usually busiest when there are transactions. The only silver lining is the potential increase in valuations, which will be needed for bankruptcy work.
Daniel Sciannameo president, Albert Valuation Group New York
How difficult is it in this market as an appraiser to figure out how much a property is worth?
It’s certainly very difficult on the commercial end because there is an absence of transactions. The real dividing line in the market [came] after the fall of Lehman Brothers, when it became Armageddon. In conducting an appraisal after that date, it’s very important to look for data representing transactions contracted after that date, or at minimum, that closed after that date. I specialize in valuing Manhattan developable land, and there really have been no relevant sales. They just went away. Developable land, especially in the city, is usually the first type of property transaction that disappears in a declining market and the last to start up again. Also, everyone is looking at 1540 Broadway, which closed a couple of weeks ago. It was sold to CBRE Investors and the sale reflected an approximate 60 percent decline from its prior purchase price. Typically, the first property purchases in these kinds of distressed environments reflect the biggest discounts, and then, as more people have confidence to enter the market, prices start to go up very slowly.
Are you employing any new strategies to figure out the exact value of a property because of the lack of deals? If so, what are they?
Absent sufficient sales data, appraisers are going back to building cap rates and applying them to realistic levels of income. Lenders are underwriting based on current income and not future estimated levels that may not be achievable. During the peak of the market … many bought apartment buildings at prices where the current rent rolls [could not] support the debt service — consider the recent situation of Tishman Speyer with Stuyvesant Town and Peter Cooper Village.
As an appraiser, what can you tell us that market reports do not yet reflect?
There have been no relevant sales of Manhattan land subject to the current economic climate. Recently, the Republic of Korea paid $366 per developable foot for a vacant land parcel at 122 East 32nd Street to build a Korean cultural center. But no one knows whether this sale is indicative of market value.
Is the appraisal industry consolidating in New York City? If so, which appraisers are leaving the profession?
There’s clearly less appraisal work, and we may see some people leave the industry, but it is too early to tell if we’ll see a reduction in the ranks as we did in the prior recession, when there was consolidation of the banks, many of which had appraisal departments.
Don Fabrizio-Garcia appraiser, Nationwide Realty
How difficult is it to figure out how much a property is worth in this market?
Given the limited number of sales, along with the limited number of true like sales, choosing the right comparables can be tricky. Most lenders want the comparables to be within a 1-mile radius of the home. However, here in [Connecticut], we have been exceeding that recommended radius in order to utilize the most applicable comparable properties … We occasionally also have to utilize homes that are quite different in size, [some] more than a 20 percent difference in square footage, or homes of different styles.
What do you think would surprise brokers, developers and ordinary New Yorkers about the appraisal industry in this market?
People see an appraiser in their home for about 20 minutes, where they appear to just walk around, take some pictures and measure the house. They are shocked that they have to pay for such a quick process. What they do not realize is the amount of work appraisers do behind the scene. It is not a fast process and is often performed under tight deadlines.
Is it more difficult to appraise any one specific sector of the residential market today, such as the luxury market or the lower-end market? If so, which one and why?
In today’s market, the entry-level homes are competing with short sales and foreclosure properties. For each appraisal, we have to determine if the subject property’s value is being influenced by these distressed sales, and whether or not short-sale and foreclosure properties are appropriate comparables. For the luxury market, we typically have much less comparable sales to work from, and often have to resort to looking at home sales in neighboring towns.
Can you give us an example of a recent deal that you’ve worked on or know about that illustrates what’s happening in the appraisal industry today?
In the Danbury, Conn., multi-family market we have seen a dramatic decrease in values over the past two or three years. Many of these properties that we now evaluate are distressed sales and are selling for approximately 40 to 50 percent less than they were purchased for just a few years ago.
What is business like for you compared to three months ago, six months ago and a year ago?
Lately, we are seeing an uptick in the number of refinance appraisals, as current owners who are not underwater on their properties are refinancing to [get] today’s lower interest rates.
Michael Vargas president, Vanderbilt Appraisal Company
What are the biggest challenges you’re dealing with in this down market?
Assessing the rate of price declines in such a short period of time. Usually, the residential market is not swayed by large percentages, up or down, in a matter of days or weeks. But that is exactly what we experienced after the collapse of Lehman Brothers.
Is it more difficult to appraise any one specific sector of the residential market today, such as the luxury market or the lower-end market? If so, which one and why?
The rate of closed sales is higher in the lower-priced tiers — less than $2 million or so — which provides us with sufficient evidence to render credible results. When you get to the price segment of say, $5 million and up, there have been far fewer transactions so it becomes more important to be prepared to employ the proper time adjustments.
Steven Knobel president, Mitchell, Maxwell & Jackson
What do you think would surprise brokers, developers and ordinary New Yorkers about the appraisal industry in this market?
I do not think anyone will be surprised to know that appraisers are taking a beating. It seems that killing the messenger is still in fashion.
Is it more difficult to appraise any one specific sector of the residential market today?
The high end and low end is always a struggle. The high end, in many ways, is like appraising art: prestige factors, provenance and other complex amenities. It is hard to explain to the typical reviewer that the terrace on a $20 million apartment is worth millions of dollars, or that a fireplace is worth hundreds of thousands.
As an appraiser, what can you tell us that market reports do not yet reflect?
The market data hasn’t yet shown how devastated the sales volume really is.
Is the appraisal industry consolidating in New York City? If so which appraisers are leaving the profession?
Hopefully the dishonest ones, but don’t hold your breath. I’m amazed that some of the conflicts of interests remain in my industry. Some readers might be surprised that some brokerage firms still own appraisal firms that do work on deals being sold by the same brokerage firm. Appraiser independence? Hmmm. Enough said.