When a co-op, condo or brownstone is appraised for less than the buyer has agreed to pay, that's a problem. It can not only spook buyers, but also upset the loan-to-value ratio required by a mortgage lender...meaning either a buyer must cough up more cash or the seller must cut the price for the deal to move forward.
In a rising market like the one we've been in lately, low appraisals are a particularly pesky problem. It takes a few months for transactions to close and sales prices to become public, which makes it tough for appraisers to find good, current comparable sales to base their numbers on.
So what can you do about it? If you're the buyer, nothing. If you're the seller, keep reading.
First off, here's what an appraiser does
“The appraiser is an independent, third-party advisor who gets paid a flat fee [to appraise a property] regardless of what the value of a property is,” says Ken Chitester of the Appraisal Institute, the nation’s largest professional association of real estate appraisers. “Think of them as the referee in the game.”
Lenders and appraisal management companies are required by law to follow strict rules when it comes to conducting appraisals. Even then, the margin for error is still high. You also won’t have any say in who does the appraisal because it raises potential conflict of interest issues.
Do your homework
Just because you can’t call the shots doesn’t mean you have to sit on the sidelines, counsels real estate broker Mindy Diane Feldman of Halstead Property. It can help to have the seller and seller's broker be proactively involved in the appraisal process.
“You can help the appraiser do their job by readily providing all of the information that will be useful or necessary in order to complete the appraisal as quickly and efficiently as possible,” Feldman says. Among other things, Feldman suggests researching what your building and neighborhood’s comparable sales are, as well as offering any relevant financials and floor plans.
Similarly, says Vanderbilt Appraisal Company managing partner David Fisch, “I would also explain any idiosyncrasies in either your building or other individual apartments if they’ve been negatively affecting sales. For instance, let’s say yours is on the same line as one that sold for less because it was in bad condition or had limited showings. Things like that where you can point to specific examples can make all the difference.”
You may want to have your broker present instead of you during the appraisal.
“Part of our job as agents is to educate the appraiser and proactively bring them up to speed,” says Barbara Fox of Fox Residential. “That’s really the bottom line, so we try to educate them on what the market is like, spend time with them and even take them out and show them similar properties so they have a better sense of what’s selling, what isn’t and why.”
Find out how well the appraiser knows the neighborhood
Even with a good broker in the mix, your appraiser may not be familiar with buildings in your neighborhood – or even specialize in New York City for that matter.
“When the appraiser calls to make an appointment, politely interview them and ask where they’re from, how long they’ve been in the business and how experienced they are in working with apartments like yours,” recommends Fisch.
He also suggests requesting your lender send a local appraiser. And if they won’t--or the answers to the above questions raise alarm bells, "make sure your lender or broker informs the appraiser about any improvements such as new restaurants, museums and stores in the neighborhood or recent renovations to the building so they’re aware of them,” Fisch says.
Make sure everything looks (and smells) nice
While we’re on the subject of renovations, installing a brand new kitchen or bathroom to enhance the value for an appraisal isn’t necessary.
That said, "curb appeal and first impressions really matter" to appraisers as well as buyers, says the Appraisal Institute’s Chitester.
"Any minor improvements--like a fresh coat of paint, polishing the floors and other small repairs such as removing stains and making sure all the fixtures are in working order--are extremely important,” says the Appraisal Institute’s Chitester.
He notes also that “additional items like caulking and spackling can make a huge difference."
And no matter what you do, be prepared to “prove it,” says Halstead Property’s Feldman.
She advises clients to prepare an itemized list of any improvements regardless of how small, including before-and-after pictures and invoices, so that appraisers have documentation on what differentiates your apartment from other similar units in the building or neighborhood.
“You want to show the apartment to accentuate the positives, so if you get really good sunlight in the morning, try to schedule the appointment for earlier in the day," advises Vanderbilt Appraisal’s Fisch.
Likewise, if you smoke, be sure invest in some candles or a can of Fabreze before the appraiser shows up. Ditto when it comes to getting rid of cooking or pet odors.
Keep in mind, too, that an appraiser looks at practically everything and many say that 50% of apartments aren’t clean when they arrive. Vacuum, make the beds, put the dishes away – do anything it takes to avoid creating a negative reaction.
It may sound obvious, but this also holds true with personal items.
“Get anything embarrassing out of there,” says Fisch. “Assume an appraiser is going to look everywhere and move whatever you can that you don’t want them to see.”
Along the same lines, if you have a dog or a cat, it might be a good idea to make alternate arrangements while the appraiser is there just in case there’s a problem.
In addition to giving the appraiser a packet of information about the apartment (including the floor plan, the financials of the building, information on sales in your building and your impressions of those sales and any improvements in the apartment and the neighborhood), quickly point out any positive changes that have been made to increase the value of the space, like renovating the bathroom or adding central air.
Then leave the appraiser alone.
As New York City appraiser Jonathan Miller of Miller Samuel once explained to BrickUnderground, “If the owner is six inches from me, what does that telegraph? I’m thinking, ‘There’s a problem.'"
Read the appraisal, and make sure it's all accurate
Once the appraisal is completed, carefully review the paperwork thoroughly to make sure everything is correct.
“If it’s not,” the Appraisal Institute’s Chitester says, “You do have the option to appeal, which is known as a reconsideration of value. Most lenders have this type of process in place, so if you need it, use it. You can also ask your lender to order a second appraisal, particularly if they sent you somebody who might have been from another market and isn’t qualified.”
Even then, however, brokers say results can be mixed.
“It definitely depends on the financial intuition, but most financial institutions will be at least somewhat responsive if you can show them that there were material discrepancies or problems with the initial appraisal, such as using inappropriate comparables, not accounting for differences in apartment conditions, and other nuances such as which floor the apartment is located on and the view, says Halstead’s Feldman.
All in all, says real estate agent Harriet Norris of Douglas Elliman, "appeals are so difficult and time consuming, you are better off trying to negotiate the difference, or finding other ways to increase the cash down payment."