Every so often a real estate transaction can be a bit like Alice In Wonderland - especially when it comes to real estate appraisals. You see, in order for a buyer to get a mortgage his/ her lender has to appraise the property to ensure that it will provide adequate collateral for the mortgage. The only problem is that a lot of these real estate appraisers and their resulting appraisals are not very good and if they come in too low (they can also come in high but that's not a problem) the buyer can't get a mortgage for the agreed upon purchase price with the anticipated down payment. And since appraisers are randomly assigned to your transaction it's a bit of a crap shoot (with an emphasis on crap) as to whether or not you are going to have a problem. And if you have a problem your options are pretty limited for dealing with it.
The problems begin with where the appraisers come from and what area they normally work in. If an appraiser normally works in the southern suburbs and is asked to parachute in to do an appraisal downtown you better watch out. There are all sorts of nuances they won't be familiar with such as the value of various amenities, the differences between one side of a street and another, the differences between the 10th floor and the 40th floor of a building, the value of a corner unit, the differences between buildings, and the value of a balcony. And that's just for starters.
The next problem arises with the procedure they follow for doing the appraisal. It's a bit formulaic. Sure there is plenty of opportunity for them to insert judgment if they are so inclined but a bad appraiser is just going to plop some numbers into their template and pop out a number without questioning it. Often the appraisal is influenced way too much by square footage without sufficient consideration for the condition of the property. So a highly updated property can end up appraised close to the value of an outdated property. Or a home with 1/3 of it's livable space in a nicely finished basement might actually get very little premium relative to a home with an unfinished basement.
I don't know if it's my imagination but it sure seems like we're running into more appraisal problems these days. And all that a listing agent can do is make sure they show up for the appraisal (you'd be surprised how many don't) armed with their own comps in an attempt to educate the appraiser. And the appraiser is under no obligation to listen to anything the listing agent has to say.
Let me share with you just how absurd it can get.
Appraisals In Pilsen
Given the strange mix of housing options in Pilsen it's a ripe area for appraisal problems. Many of the homes there are in terrible shape - falling apart, poorly constructed, and rehab jobs gone awry. If you are buying or selling a home that is in good condition there you're basically screwed because it just won't appraise and you can argue with the appraisers until you are blue in the face and they won't care. We've run into this a number of times there. We had one house that was clearly worth around $200,000 (that's what 2 buyers were willing to pay) and the first appraisal came in at $135,000. The buyer freaked out so the deal fell apart and we had to find another buyer. The appraisal for the second buyer came in at $185,000. The buyer and seller ultimately agreed upon a revised purchase price of $190,000, with the buyer having to put an additional $5,000 down.
We were representing a buyer in the Joffrey Tower and we had a contract for $264,500 on a very nice unit with a killer view of the lake. The appraiser came in and started to compare the unit to units in less desirable buildings and units on much lower floors with no view and came up with a value of $252,000. Although we took the position that the appraisal was valid (remember we were representing the buyer in this case) the listing agent insisted on a rebuttal. Those never go anywhere and neither did this one. Ultimately, the buyer and seller agreed upon a reduced price of$258,250, with the buyer having to make a slightly larger down payment.
The Appraisal From Hell
Most recently we had a 26th floor 1 bed/ 1 bath updated corner unit with parking under contract at 2 E Erie for one of our buyers at $367,500. It was undoubtedly a good price as the identical unit on the 38th floor without the updates sold for $377,000 after the first appraisal was done. But without this data point available the appraiser (who ironically worked for a company called Accurate Appraisals) came in at $340,000. Unfortunately, this appraisal was such a travesty that there was no leg to stand on in making the case for a lower purchase price (believe me I tried). Just for the benefit of the loan officer I went through the appraisal and identified the following glaring flaws:
- He comped the unit to smaller units and then did not adjust for the size. That was almost a $40,000 error given that units in the building sold for just under $400/ SF.
- In looking at an under contract unit in the building he left out the parking so he understated the list price by around $25,000.
- He used the list price of the 38th floor unit as a comp but made no adjustment for the fact that our unit had 10s of thousands of dollars worth of updates in it. In fact he did not make this adjustment for several other comps either.
- He made no adjustment for the fact that our unit was a corner unit
- He used a measured square footage for our unit, which does not include the balcony, and then compared it to stated square footage numbers for other units that did include the balcony.
- He routinely got the square footage numbers of the comps wrong, showing different numbers for the same floor plan on different floors.
- He compared us to units without balconies and then only applied a $2500 adjustment for the balcony. Think a balcony on the 26th floor is worth more than $2500?
We disputed the appraisal and I actually had the opportunity to talk to the appraiser about some of the major issues (I later found out that he wasn't supposed to be talking to me). The most glaring problem was the $40,000 error for not adjusting for square footage differences. He said that the appraisal standards recommend not adjusting for square footage differences less than 100 sq ft. Our difference was just under 100 sq ft but at $400/ SF it was almost a $40,000 error.
The appraiser basically told me that what it comes down to is taking a conservative approach so that no one ever comes after him for over valuing a property if the loan goes bad. In other words he was covering his ass.
Eventually, after jumping through many hoops, we managed to get another appraisal that came out fine and the deal closed, but with a considerable delay.
How Does A Good Agent Handle Bad Real Estate Appraisals?
As you can gather from the foregoing, the first rule is for the listing agent to be present and armed with data when the appraiser visits the property. You attempt to head off the bad appraisal before it happens, but as I said earlier, the appraiser is under no obligation to listen to the listing agent. Then, once you get a bad appraisal, if you are the listing agent you push for a dispute or a second appraisal.
If you are the buyer's agent you throw your hands up in the air and claim your buyer is overpaying for the property and the price needs to come down! However, a good listing agent won't let you get away with that - but it's worth a try. Once that option is off the table it's time to roll up your sleeves and help get that dispute going or a second appraisal.
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