It comes to mind that one of the major hiccups that we encountered during our purchase was the appraisal process. Generally this is no big deal and merely a formality provided the purchase is an arms length transaction and the buyer has done their due diligence. The bank is concerned that the buyer could be overpaying for the property and in the event the buyer defaults on the loan the bank will sell the property for as much as the market will bear. Hopefully there is enough from the sale for the bank to cover the outstanding mortgage and any remaining proceeds from the sale will be returned to the buyer less selling expenses. The bank is primarily concerned with protecting its asset and thus the appraiser was born.
Prior to the recession, the bank would have a bevy of appraisers at its disposal. It would frequently work with the same appraisers, many of whom intimately knew the property values of the local market in which they were working. While this seems incredibly logical, it also was one of the factors that led to the real estate bubble. Home values were often inflated so that borrowers could borrow more money and lenders could make bigger loans. When an appraisal came in low, both the lender and sometimes the real estate brokers, in a process that was common in the boom days before the housing bubble burst, would ask the appraiser to redo or adjust the valuation to make the loan happen. No one knows exactly how much of a role inflated appraisals played in the mortgage meltdown. However, the reforms that were put in place are ones that we all deal with today, as the lender and the real estate brokers are discouraged from influencing the process.
Fast forward to our purchase in Bedford-Stuyvesant — we ran into a major snafu because of these reforms. There is little doubt that in some neighborhoods, Brooklyn property prices can move quickly. Very quickly. As a result of the reforms, appraisers are trying to act as an independent third party in an arms length transaction, protecting the underwriting of the bank and ensuring the buyer pays fair market value. Unfortunately our appraiser came from Nassau county and had no idea what he was doing. He undervalued our property by over 10% and almost killed the deal. Needless to say we did not sleep that night.
The truth is that nobody knows the value of a property more than the person who is willing to risk all of their beaver pelts and ducats to secure a piece of real estate! Trust me, if you are willing to plunk down all that coin, you know what the property is worth.
Our lender informed us that in all of his years of writing loans that neither he nor anyone in his division had ever seen an appraisal adjusted for more than $10,000. It is very rare that an appraiser will adjust his valuation because it is tantamount to admitting a giant mistake and having to wipe egg off the ole face. If the appraiser admits he flubbed it or mailed it in, what are the chances the bank will call him to do the next appraisal. We didn’t sleep that night either.
Did I mention that I am 1/4 Irish and stubborn like a donkey. I knew what that building was worth as I had been to over 300 open houses in the last 4.5 months and there was no way that i was going to let an incompetent appraiser wreck my deal. I knew I was paying fair market value and that I had a willing seller. I just had to prove it. So, using my architecture skillz I set to writing a 25 page report justifying our purchase. If if was going down, I wasn’t going down without a fight.
For reference, appraisers will either use the sales comparison method, the cost approach, or the gross income multiplier. This is good information to know. Our appraiser was using the sales comparison method. The chink in the armor was the fact that the appraiser was using comparable properties that were almost 10 months old and thus undervalued our property.
In order to torpedo the appraiser’s report I found other more recent comps within the radius described by the appraiser’s properties. I had over 20 comparable properties within the described radius that had closed within the last 6 months that easily justified the value of our property. These were all put into a clear elegant report with easy to understand graphics that any lay person could read and understand. I went in with overwhelming force and struck a death blow.
The appraiser adjusted the value by over 10%. Whew. What a stress ball that was. In the end I won and the icing on the cake was the fact that the lender was considering implementing my report as a template for further appraisal disputes. Booyah.
Although the truth is, it prolly took a month or two off the ole life expectancy.
