Low bank appraisals holding market down.

While our company is reporting signs of a healthier market and our third quarter gross sales of Manhattan properties are up 39.52 percent over the same period last year, there is one key factor preventing the consummation of many deals.

It is a classic Catch-22 affecting bank-financed purchases, which constitute the vast majority of sales. Because we lack |comparables' high enough for today's market, bank appraisals are frequently coming in under the contract prices. Not only does this affect present deals, which are often canceled as a result, but future ones too. Unless properties close at prices that buyers are actually prepared to pay today, there will be no record on which to base new values and tomorrow's deals. Some sellers will be left holding their properties, and certain sectors of the market could remain in stalemate.

Who Determines Market Value?

In past markets, if a buyer and a seller went to contract, there was rarely the question of whether a bank would finance the deal at the agreed upon price. Traditionally, the market has always been defined as what a buyer was prepared to pay for a given property. Today, a splinter definition of market value is emerging as the price at which a bank is prepared to finance a given property. In fact, we are warning our sellers that many buyers are using under-market appraisals as a tool to renegotiate the price long after it has been agreed upon and signed into contract.

Even when a bank appraisal comes in at the agreed upon value, there remains an additional obstacle to overcome. In the case of 90 percent financing, lenders require buyers to insure 10 percent of the purchase price. This assures the bank that it has 20 percent equity in the property, should the buyer default. Such insurance is taken out through private mortgage insurance (PMI) companies. Sometimes, if a PMI company is not satisfied with a particular appraisal, it may be unwilling to underwrite the amount, thereby creating another hurdle for buyer and seller to jump.

The Legacy of Boom and Bust 

Many of today's difficulties are a result of the banks' liberal lending policies in the mid-80's. Many properties wpye appraised at an unrealistically high value, and the ensuing bad loans helped precipitate a banking crisis largely - though not exclusively - with savings and loans institutions. When the market started to decline and comparable values were higher than actual sales prices, "Negative Time Adjustment" was a tool that came into use. In order to allow for declined value, appraisers deduct 1 percent per month off the comparable sale price, between the present and the previous sale. Although the market has stabilized, some appraisers continue to use this technique, which leaves little chance of a property appraising at today's true market value.

Because many banks sell loan packages on the secondary market, they have imposed a number of other policies that have further hurt sales. For example, many will not finance a unit in a building where they already hold a loan. Other banks will not finance an individual unit in a co-op if they are also holding the building's underlying mortgage. In addition, many banks are not financing studios, top-floor walk-ups, apartments under 500 square feet, or units in buildings that are less than 65 percent sold and owner occupied.

Suggested Solutions

to the Impasse

Until there is a radical change in the method of appraising properties, we are suggesting a number of measures to overcome the problem. In the case of an unexpectedly low appraisal, we strongly suggest getting a second opinion. For example, a broker at our Downtown office had a buyer and seller in contract at $1.5 million for a Greenwich Village townhouse. Tbe appraisal came back at $1.2 million. Our broker suggested that the buyer attain a second appraisal which came it at $1.4 million thereby allowing the sale to proceed.

Similarly, when a PMI company does not accept a bank's appraisal of a given property, we suggest trying another PMI company. Clearly, if appraisers can differ in opinion on the value of a given property, so can PMI companies.

Another partial solution is making sure that banks use appraisers from the neighborhood. We feel this is essential because local professionals are far more familiar with the area, use, architecture, and structure of the homes up for appraisal. An example of the difference this makes is cited by two agents in our Brooklyn Heights office. Each had a buyer for a single property at the same price. The first buyer was seeking financing through a swiss bank, which used a Long Island company for its appraisal. The appraisal came in too low, and the deal therefore fell through. The second buyer went to a local bank which appraised the property at the full contract price, allowing the deal to close.

According to a recently passed law, buyers are entitled to a written copy of any bank appraisal they have paid for, and an understanding of how the value was determined can often suggest how it may be challenged. However, because low bank appraisals often disavow broker expertise on real estate values, another solution is for sellers to get their appraisal done prior to putting their property on the market. This way, the initial asking price can be consistent with a value that appraisers and their banks have already determined. This preempts not only the financing hurdle, but any question of conflict of interest that arises if a broker, working in good faith, values a property below what the seller thinks it is worth.

Finally, we'd like to see a set of appraisal guidelines that might avoid the degree of subjectivity so common at this time. Radical measures such as a standardized price per square foot of improved or unimproved property (which could also take into account condition, materials, historical detail and the like), and an index value based on a neighborhood's |primeness' may be as much of a problem as a solution, but they narrow down the subjective element.

However, recent sales |comps' which are the appraiser's most valuable tool, are clearly insufficient, especially in today's environment. Appraisers do not have access to the properties that are used as comparables. It is therefore virtually impossible for them to take into account present condition, improvements, historical detail, and a myriad of other features affecting the value of the property at hand.