Homeowners seeking to sell their property or refinance mortgages are seeing their plans derailed when appraisals come in unexpectedly low.
Once accused of helping to inflate the housing bubble, appraisers for mortgage lenders are now taking heat for undercutting agreed-upon sales terms. When that happens, in some cases the seller drops the price. In others, the buyer puts down more cash, because the bank will not offer a large enough loan. Or, the deal falls apart.
Some brokers worry that low appraisals are one factor standing in the way of real estate's recovery.
"It's a major, major problem," said Jamie Winkler, owner of the brokerage Winkler Real Estate in West Islip. A low appraisal can pull down the ultimate sales price, which then sets a lower standard for other homes in the area, she said. "It's like a vicious cycle."
Appraisers maintain they simply determine a home's market value. "Appraisers don't get paid to kill deals," said Kevin Matheson, president of Appraisal Reports, Inc. in Bay Shore and former president of the Long Island chapter of the Appraisal Institute, a trade association. "The idea of an appraisal is to make sure the property that's being held as collateral for the loan is worth it, that's all."
In a recent National Association of Realtors survey, 13 percent of real estate agents said low appraisals led to price drops, 10 percent said they led to contract cancellations and 9 percent said they caused delays.
The Federal Reserve found that 30 percent of loan officers said "difficulty in completing timely and accurate appraisals” was interfering with their ability to originate or purchase home loans.
The way appraisals get conducted has changed dramatically since the housing crash. During the long run-up in home prices, mortgage brokers and lenders were accused of pressuring appraisers to go along with supersized prices. "The appraiser was the deal-enabler, that was their role," said Jonathan Miller, chief executive of Miller Samuel, a Manhattan appraisal firm.
Now, under rules that took effect in 2009, mortgage lenders can no longer hire appraisers directly. Instead, they must go through third parties. However, the third parties often pay appraisers roughly half the fees they used to earn on their own; local appraisers say the third parties often hire lower-paid out-of-towners who do not understand the distinctions between neighboring school districts or towns.
Plus, some brokers and homeowners fear that skittish lenders want appraisers to be overly cautious. "It's like they just went from one extreme to another," said Barbara Drucker, a broker with Prudential Douglas Elliman in Syosset.
In some cases, they do kill deals, or at least endanger them. Nancy Malinowski feared she would need to drop the price on her Seaford home when it was appraised at $385,000 earlier this year, after a buyer agreed to pay $398,000. "I thought we were going to lose the whole sale," she said. Ultimately, she said, the buyer paid the full contract amount, although the Malinowskis agreed to give back a portion of the $13,000 price gap.
Appraisers say there are good reasons their valuations sometimes come in lower than contract prices. For instance, a naive buyer might fall in love with a home, or a buyer might be so motivated to acquire a particular property that he doesn't mind paying a premium.
The responsibility of a seller's broker is to get the highest price for their client; by contrast, the appraiser's job is to come up with "the most probable price” reached by a well-informed buyer and seller, Matheson said.
"We actually are not supposed to come in at the same price, as far as I'm concerned," Matheson said.
Low sales volume makes the job even harder. In some areas, so few homes are changing hands that appraisers cannot find recent sales to use for comparison. In June, 907 homes were sold on Long Island, according to the Multiple Listing Service of Long Island. That's a 44 percent drop from June 2010.
Plus, banks want appraisers to rely mainly on public information about closed sales for comparisons, which means some of the sales closed up to three months before, said Michael Grassi, a senior appraiser with Miller Samuel. "That hurts in a market where all of a sudden you might have a slight uptick," he said.
Seller concessions are another factor, said Gerard O'Connor, owner of Apex Appraisal Service in Lindenhurst. In such cases, the seller and buyer agree to increase the contract price, and the seller gives the additional funds to the buyer at the closing, to be used for the down payment or repairs. Such agreements can artificially boost the publicly reported sales prices, appraisers said.
Low appraisals can also block homeowners from refinancing high-interest-rate mortgages.
Baiting Hollow resident Peggy Drowns sought three refinances in the last year. The first two appraisals of her condominium came in at $340,000 and $310,000 in August and September -- too low to qualify for a refinance, since they would leave the family with less than 20 percent equity in the home. A dearth of recent sales in Drowns' complex meant the appraisers compared her home to units in a neighboring complex, where Drowns said prices are lower.
Not long after, a condo in Drowns' complex sold for $399,000. After that, a third appraisal came in at $370,000, Drowns said. But that appraisal was for a lender whose closing costs were too high, she said.
After spending some $1,200 on the three appraisals, Drowns finally gave up. The family has cut expenses to the bone, but it has become impossible to keep saving for her 13-year-old son's college fund, she said. "It's distressing," said Drowns, a program director at a nonprofit group in Manhattan who also teaches at a local college. "I'd hate to see him stuck with a big loan."
Not everyone is unhappy about low appraisals. Computer analyst Nipun Dahra, 30, signed a contract in May to pay $455,000 for a five-bedroom home in Levittown. But then the appraisal came in at $435,000.
Dahra and his wife asked for a $20,000 price cut. The owners said they would put the house back on the market. "I'm like, 'Sure, go ahead,' " Dahra recalled. But the sellers ultimately dropped the price by $15,000, he said: "We were really excited about it."
Do a background check. Make sure the appraiser is certified by the State of New York and has experience in your area.
Clean house. Tidy up your home, inside and out.
Research your home. Tell the appraiser about upgrades to your home, and have your broker research comparable sales. Information about the town and school district can be helpful if the appraiser is from out of town.
Keep a record. Request a copy of the finished report.