Low appraisals sabotage more deals

Editor's note: Reposted with permission from TheRealDeal.com. Click here to view original post.

By CANDACE TAYLOR

Edward Milton Cisneros, a real estate agent at New York Living Solutions, was surprised recently to receive a panicked phone call from a family he is representing in the purchase of a Long Island City new construction condo. The buyers said the appraisal for their new home -- a two-bedroom and studio they planned to combine into one unit -- had come in far below the agreed-upon purchase price.

"I got an alarmed phone call from my buyer," Cisneros recalled. "The bank was questioning why they were paying so much."

The low appraisal threatened to kill the sale, he said. The bank would now lend only up to the appraised value, and there was no telling whether the buyers would be willing or able to cough up the extra cash needed to close the gap between the appraisal and the agreed-upon price.

Luckily, the developer was anxious to close and the two sides hammered out a last-minute deal, with the buyers paying a lower purchase price but higher closing costs.

"It stalled the closing for a few days while they tried to work that out," said Cisneros, who noted that he has encountered several tough appraisals recently. "It's a very difficult time to determine value right now."

That's truer than Cisneros may realize.

Real estate brokers all over the New York City area say that more and more appraisals are coming in unexpectedly low, disrupting sales that they expected to close seamlessly. The problem has spread rapidly in recent months, due in part to new guidelines known as the Home Valuation Code of Conduct (HVCC), which went into effect May 1. HVCC is intended to prevent appraisal fraud by requiring appraisers to be selected by third parties who have no stake in the sale, but brokers say the code has unintended side effects that make it harder to get deals done.

Thanks to the new rules, an increasing number of appraisals are being conducted by out-of-towners unfamiliar with the complex and idiosyncratic New York City market, they say, leading to appraisals that come in up to 35 to 40 percent below the contract price and torpedoing deals in the process.

"It's a nightmare," said Melissa Cohn, president of Manhattan Mortgage. "We have people coming from the far reaches of the tri-state area to appraise a co-op."

Cohn estimated that HVCC guidelines, which affect mortgages backed by Fannie Mae and Freddie Mac, impact some 50 percent of real estate sales in the city.

Federal legislators have introduced a bill in Congress asking for an 18-month moratorium on HVCC, and Steven Spinola, president of the Real Estate Board of New York, said his organization is supporting the measure. ...CONTINUED

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