The return of the low appraisal

A post-recession reality is back, but this time because the market is rising

A curse that residential brokers thought was in their past has returned to plague deals once again: low appraisals.

The aftermath of the recession saw a flurry of low appraisals, largely reflecting stringent new federal regulations aimed at avoiding conflicts of interest that were written in the aftermath of the housing meltdown. After stabilizing for a few years, those problematic low valuations are now back, but for a very different, though related, reason.

Sources say that the inexperienced, often out-of-town, appraisers who were tapped to handle New York City appraisals a few years back got the hang of valuations for a while. But they’re now running into new problems because of the rising market.

One issue, according to Elizabeth Ann Stribling-Kivlan, the president of Stribling & Associates, is that the large number of new development units currently under contract has created a dearth of closed comparable units for appraisers to draw on in calculating values. And those new construction units tend to stay in contract for longer than resales.

“There are some really high-priced apartments in contract, but those aren’t going to be closing for another six months” or in some cases until early 2016, Stribling-Kivlan said.

“Obviously, appraisers [have to] work with closed data, not hearsay,” she added.

But the increase in new units hitting the market isn’t the only problem. Brokers say that appraisers are often just not keeping up with rising market prices in general.

Mary Lou Currier, a salesperson at Bond New York, has closed two co-op deals in the last few months where the appraisals came back $125,000 to $150,000 below the agreed upon price — the first a pre-war, one-bedroom in Carnegie Hill that was in contract for $675,000; the second a prewar two-bedroom in Soho for which the buyers agreed to pay $1.2 million.

Both of her buyers waived their mortgage contingencies and were forced to put additional cash down to make their purchases.

“They were unhappy. They weren’t expecting to have to put another $50,000 to $60,000 down,” Currier said.

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Part of the problem, sources say, is that despite the fact that the appraisers who were tapped post-recession now have a few years of experience in New York, they still don’t have the institutional knowledge to deal with market changes. In addition, they sometimes still are not adept at assigning value to key features, like a terrace, which New Yorkers tend to place a disproportionate value on.

“Essentially, the collective knowledge from experienced appraisers has been effectively wiped clean as the result of financial reform,” said Jonathan Miller, president and CEO of appraisal firm, Miller Samuel.

Miller, who noted that his firm has done very little retail bank work since the recession, said low appraisals were par for the course in the wake of the economy’s collapse. That’s because the government cracked down on allowing brokers to handpick appraisers, citing a blatant conflict of interest. Instead, as has been widely reported, banks began using “appraisal management companies,” which served as intermediaries that selected appraisers for the banks.

Once the market stabilized, so did the frequency of undervalued appraisals. Now, however, those low appraisals are becoming commonplace again. Miller said the only thing that has really changed is the market.

“It’s no coincidence,” he said. “Manhattan has been remarkably stable in the past four years. The problem doesn’t really become apparent until conditions start changing.”

Terry Francisco, a spokesperson for Bank of America Home Loans, suggested that because appraisers are required to follow such strict regulations, a volatile market can throw things off.

“Sometimes in hot markets, appraisal values may trail. If certain homes in certain price ranges in certain regions are in higher demand, appraisal values will take a little while” to follow the market higher, he said.

Stribling-Kivlan noted, however, that as new development contracts close, appraisal values should get back on track.

“I’ve seen a lot of things that went into contract in the beginning of the year start to close, and that’s provided a lot more justifiable data. It makes a big difference.”