One of my favorite movie scenes is from “Anchorman,” featuring Will Farrell.  Rival news teams suddenly are embroiled in a massive gang battle, with crazy weapons and over-the-top violence, all done with a smirk.

“Well, that escalated quickly,” Farrell’s character, as they contemplate the medieval weapons that had just stopped being hurled (over a cold beer from the news station).

To a degree, it feels like we just exited the battle of the last six months, in the real estate market, and the 16+ month battle with COVID.  While we take a breather from both, we are in the midst of closing $100mm plus of deals we put together in the first half of the year- and we’re seeing some surprises of our own.

In our case, what we didn’t see coming were the issues with appraisals.

First, you need to know that many deals are being put together with mortgage contingencies. While not de rigeur in most deals prior to the Great Recession of 2008, they have been pretty commonplace in many deals since.  And in what I would seem typical cooperatives and standard situations, asking for a mortgage contingency when putting 20% down on a purchase is not a crazy ask.

However.

Imagine that you just got past a year of almost no deals and even fewer sales that compare with what you’re about to buy.  The purchase price is $1.25mm.  You competed and won a bidding war to get that price to happen.   There was one very low sale in the building, but plenty of things in contract nearby that help get you comfortable with buying this renovated property at this price.  In face, you couldn’t be happier!  Low mortgage rates!  No renovation needed!  Even a washer/dryer, low maintenance AND central a/c!  I mean, heaven for a little slice of the pie.  Onward!

Except.

Except the appraiser comes in from wherever and decides that the lowest of the low prices that had happened during COVID lows were relevant to your sale.  And when the appraisal comes in just over $1mm (don’t forget, that’s about 20% below your contract price), it’s a DISASTER.  You can’t get a loan for more than $850,000, when you planned to finance about $1mm.

You’re $150,000 short.  Because an appraiser isn’t taking into consideration the MASSIVE CHANGE IN THE MARKET in the past six months.

And your deal dies, on the vine.  And now, you have to go back to the drawing board, into a MORE competitive market, and two months down the line and more and more prices help appraisers do their (awful) jobs much better.

If lenders are looking to make a job done in the way appraisers are doing it, there is NO need for humans to do it.  If all they are doing is basing on past sales with no nuance or human ability to discern a market- then why are they having humans do it at all?  They should DEFINITELY have AI Robots take over.  But sadly, they’re also losing business because appraisers are following instructions, and then, when these moronic situations occur, they aren’t allowing for buyers to dispute the low appraisals!!  Shame on them.

Now.

Some banks, like Wells Fargo, are going to step in and win this business, and save the day with patient buyer and sellers, who are just as happy to let a buyer regroup and put together a different lender deal.  However, we already have enough gunk in the system- Delta Variants, scared coop boards, slow managing agents, extra slow lenders, overwhelmed attorneys, agents on vacation…why do we need another gust of headwinds!  Jeez, that escalated in a hurry…

The issue is that this crazy situation is happening all over the place in Manhattan.  Buyers are paying what is a price similar to 2019 or even 2018, while appraisers are living in the trough of 2020 COVID pricing.  There is a massive mismatch of valuations by appraisers and buyers, and there’s just no breaking lenders out of their normal protocols about what valuations should be based on, even if it is obviously wrong, with the most simplistic glance at the current model.

The Takeaway.

If you’re a buyer, be VERY careful who your lender is.  I can help steer you in the right direction so you don’t lose the apartment you love because of a bonehead bank or appraiser.  -Scott