It’s all smiles because the work is done. You’ve expertly guided a client through the long and winding home-buying process to the point where they’ve found what they want and made an offer that was accepted. They’re happy, the seller’s happy, and you’re happy. All that remains are the usual mundane details. What could go wrong now?
Not a whole lot, actually. Maybe there might be a bit of haggling once the inspection report comes in, and just the appraisal remains to satisfy the lender—but that’s usually a rubber-stamp procedure. Until it isn’t.
“Appraisals can be a cause of anxiety for everyone involved in a real estate transaction, especially buyers,” admits Jeffrey Decatur, a longtime broker associate with REMAX Capital in upstate New York. “It is always best to manage your clients’ expectations and explain how an appraisal works, potential pitfalls and that it is there to protect them and the bank from paying over market value. That reassurance can help put a buyer’s mind at ease. A bank isn’t going to loan someone money if it is not a safe bet. No one can predict the market, but it surely solidifies what the market was when they bought. If it doesn’t appraise, well, then there is some renegotiating going on.
Decatur explains that since the loan reform of the early 2000s, agents don’t have much control over which appraiser is chosen. He tells buyers that it’s like a slot machine: when an appraisal order goes in, someone pulls a lever and the appraiser pops up and gets assigned.
Suzy Minken is a real estate agent with Compass, working in the New Jersey and Virginia markets. She relates how what looked like a win-win almost turned into a lose-lose.
“My clients recently purchased a luxury home in New Jersey,” she says. “It was a new construction home that they absolutely loved and wanted to make an offer the same day they saw it, which was a Saturday open house. Wanting to ‘close down’ the Sunday open house, we discussed that their offer would need to be so irresistible to the seller.
“Not only was the offer price very compelling ($1.6 million for the house listed at $1.5 million), but the terms were also very favorable for the seller. The buyers wanted to make the process as smooth as possible for the seller, especially since there was another potential offer. Because their offer was well above list, the buyers wanted the sellers to not be concerned about whether or not the house appraised at the offer price.”
The buyers made the decision to waive the appraisal contingency, submitting proof of funds to show they could make up the difference between the list price and the offer price, which was $100k.
“Getting a verbal offer accepted is highly unusual,” admits Minken. “We got the written offer to the listing by noon the following day. It’s unusual to have a Sunday open house canceled less than 24 hours before it is scheduled to begin.”
It is not unusual in the home-buying process for buyers to want to renegotiate an offer price in the event a home appraises below it. Minken’s clients were willing to risk the possibility that their dream home might not appraise. It was originally custom built for the builder to live in, with numerous upgrades and special features.
“What happened next was a bit of a nail-biter,” admits Minken. “The appraiser spent approximately an hour there. The seller was planning to install a white fence in the back because it looked out at a school parking lot. The appraiser was told that the neighborhood was in transition and that new construction homes were gradually becoming more prevalent in this particular area. Information for a number of comparable properties that had recently sold in the town were provided.”
Although there were other comparable homes selling above the list price, the appraiser was unable to get the house to appraise to the offer price. The buyers were surprised when their lender said he had spoken to the appraiser about his assessment, and that the buyers would need to come to the closing with additional funds.
“As their agent, I challenged the comparable properties that were used,” says Minken. “The value of the home at the price my buyers offered was clearly justified. We had seen all the new construction homes at this price point in the town, as well as surrounding areas. The market simply hadn’t caught up yet.
“We were able to get the appraiser to return to the house about two weeks later. The new fence had been installed, which made a huge difference in the evaluation. Apparently living near a school was a negative from an appraisal perspective. And something else also happened. Another new construction home sold at a similar price as my client’s dream home. The appraiser was able to update his information, and the result was an appraised value equal to the offer price.”
Minken acknowledges that it is not an easy process to overturn an appraisal, and that the best agents are the ones who can pivot quickly to overcome any issues that may arise, helping both buyers and sellers meet their goals. Having the right local contacts can be a critical factor when time is of the essence.
“Timing is everything in real estate, and we had a small window for the appraisal to be reexamined before it became final,” she says. “Who you choose to be on your team when making a home purchase is crucial. I had an excellent relationship with the listing agent who accepted our verbal offer on Saturday evening and agreed to close down the Sunday open house.
“My buyers were using a mortgage lender who many of my clients have worked with over the years and had a great experience with. The lender was familiar with the appraiser from past sales and was able to get an early phone call alerting him that the home did not look like it would appraise. This multi-person collaboration resulted in a positive outcome for my buyers. They felt great about the home they were purchasing and did not need to use additional cash to finance the purchase.”
Ups and downs
Other appraisal debacles were provided by real estate pros with Coldwell Banker Warburg, in New York City, who usually, but not always, work with co-ops and condos.
“The appraisal process here varies depending on the lender, property location and property type,” says agent Nikita Idiri. “All appraisers are selected at random to limit bias or lender/broker pressure when determining the appraised value of a subject unit. Types of appraisals can vary from the gold-standard, which includes a comprehensive walk-through of the interior/exterior of the home and visually confirms their findings, to desktop appraisals, in which the appraiser relies more heavily on public records, data and photos, with no physical inspection.
“In some (freestanding house) cases, a hybrid (or drive-by) appraisal is conducted, in which the appraiser relies solely on exterior visual inspections and interior photos. The latter two are typically used in lower-risk scenarios, such as a refinance or a home equity line of credit.”
Idiri believes that over the years appraisers tend to be somewhat behind the times in respect to value, given how quickly the marketplace (location-specific) has changed post-pandemic. In several booming markets, such as Long Island and Westchester neighborhoods, home values have consistently reached new heights, creating a gap between true and perceived value.
“In some cases where an appraisal fell short, I’ve had to push back on the report, submitting supporting evidence to explain why I believe there was an incorrect shortfall in the appraisal, simultaneously poking holes in any inaccuracies or misrepresentations in the initial report,” he says. “One example is a purchase I represented buyers on in Westhampton. The appraisal came in roughly $500,000 below the sale price, which was shocking to say the least.
“The appraiser used a nearby neighborhood for the bulk of the comps, given the subject home’s proximity to that town. That said, there is a perceived value to living in the Hamptons versus living in a town near the Hamptons, which inevitably skews value. Once the second appraisal was ordered, with the caveat included that they should not use other towns as comparables despite their proximity, the appraisal figure came back roughly $100,000 above the contract price.”
Idiri provided another example of an illogical appraisal for a property on the Upper West Side. There was a significant shortfall between the contractual price and the appraised value, which naturally led to buyer concerns. Upon reviewing the appraisal, he noticed that the comps provided were all for two-bed/two-bath apartments in the neighborhood. While the subject unit was technically sold as a two-bath, it was generously sized, and was often converted into a legal three-bedroom space.
“In fact, most of the units in the building in the same line had already undergone the three-bedroom conversion, which would naturally skew the comps,” he says. “Had the subject unit already converted to a three-bedroom, the appraisal would have come in significantly higher. After pointing out that most of the same-line units in the building were being comped as three bedrooms, we were able to justify a second appraisal, at which point the figure came much closer to the contract price.”
Sean Adu-Gyamfi, a broker at Coldwell Banker Warburg, had a similar tale to tell.
“It was a very unusual situation during an appraisal while representing the seller,” he begins. “I was expected to be contacted by the appraiser to schedule access to the unit, but after two weeks, I hadn’t received any communication. I was surprised to receive a message from the buyer’s agent stating that the appraisal had been completed and that they were waiting on the report’s results.
“As it turned out, the appraiser completed a ‘drive-by appraisal,’ which is almost unheard of in NYC. In a market like this one, where two units in the same line and building can vary dramatically, a drive-by appraisal is, to say the least, inappropriate. Unfortunately, the unit appraised below the purchase price because the appraiser used a comparable unit in the same line and building. However, it needs a full-gut renovation, whereas my seller’s unit was recently renovated and turnkey. I pushed back and encouraged the buyer to use another lender and/or to order a new appraisal, but they would not budge. The deal didn’t close. Appraisals in NYC are not a ‘one-size-fits-all’ scenario. Buyers need to understand that appraisals need to align with the reality of circumstances, not just the market.”
