In the competitive New York City real estate market, where apartment prices often reach new highs, it’s not unusual for appraisals to fall short of the agreed sales price. Appraisals are typically conducted weeks after the contract has been signed, which can leave buyers in a tricky spot. To better grasp what happens when an appraisal value comes in below the purchase price, let’s first examine the role of appraisals in condominium and co-op transactions and their intended purpose.

The Importance of Property Appraisals

When someone wants to buy an apartment and needs a loan, they usually provide mortgage pre-approvals with their offer. After both the buyer and the seller agree on a price, they create a sale contract that New York City real estate lawyers review. Once everyone signs the contract, they send the property address and contract details to the lender handling the buyer’s loan.

One of the initial steps a lender takes is to order an appraisal. This is crucial when borrowing money for an apartment because the property serves as collateral. If the buyer fails to repay the mortgage and the bank forecloses, the lender needs to ensure the apartment is worth the amount paid. The appraisal confirms that the property’s value matches the loan amount.

Having an appraiser assess the property helps reduce the lender’s risk. Lenders decide whether to approve a loan based not only on the buyer’s credit, income, and assets but also on whether the appraised value meets or exceeds the purchase price. Following the 2008 housing crisis, lenders can no longer use their own appraisers. Instead, appraisers are now independent third parties. This change promotes fair lending practices and helps prevent fraud and excessive borrowing on properties worth less than the loan amounts.

The Art of Appraising Apartments

Appraisals are more of an art than a science. Each New York City apartment has its own unique qualities, and appraisers consider various factors when determining its value. They look at:

• Apartment Location: The neighborhood and its desirability.
• Apartment Size: The total square footage and layout.
• Apartment Finishes: The quality of materials and design.
• Views: Whether the apartment offers city or park views.
• Floor Level: The floor on which the apartment is situated.
• Building Amenities: Features like a gym, pool, or doorman.
• Condo or Co-Op: The type of ownership structure.
• Neighborhood: The overall vibe and amenities of the area.
• Comps: Prices of similar apartments that have recently sold.

Comparables, or “comps,” are a key tool for appraisers to form their expert opinions and create their reports. However, comps may not always capture the full picture.

Appraisals involve both objective data and subjective judgment. If a buyer applies for a mortgage with two different lenders, each will order an independent appraisal. It’s common for these appraisals to have slightly different values, reflecting the inherent subjectivity in the process. Each appraiser brings their own perspective, which can lead to variations in the final appraisal reports.

Factors That Can Lower an Appraised Value

Ideally, an appraisal should match or exceed the purchase price of an apartment. However, this isn’t always the case. Several factors can contribute to a lower-than-expected appraisal value, including:

Impact of Appraisers Not Knowing the Neighborhood

When an appraiser isn’t familiar with the neighborhood, it can affect the accuracy of their valuation. For example, an appraiser from Westchester County assessing a property in Williamsburg, Brooklyn might face challenges due to a lack of local knowledge. This disconnect can lead to a less accurate appraisal. Managing this situation involves ensuring that appraisers have adequate familiarity with the area or providing them with detailed neighborhood insights to support their evaluation.

The Importance of Understanding Comparable Units

When appraisers assess a property, having a clear understanding of comparable units is essential for an accurate valuation. For example, if an appraiser encounters comps with lower sale prices, it’s important to recognize any differences in finishes. If the subject property boasts modern renovations like updated kitchens and bathrooms, while the comparables do not, this could impact its value positively. By thoroughly understanding these distinctions, appraisers can ensure their valuations reflect the true value of the property and its unique features.

Valuing Properties in Gentrifying Neighborhoods

In gentrifying neighborhoods, property values often rise significantly over time. This means that apartments may have been worth much less in the past. Additionally, the neighborhood may not have had condominiums or co-ops to use as comparables in earlier years. As these areas develop and improve, appraisers need to account for these changes to provide an accurate and up-to-date valuation. Understanding the ongoing transformation and its impact on property values helps ensure that appraisals reflect the current market conditions.

Challenges with Appraising New Developments

When new developments offer significantly higher valuations compared to neighboring properties, appraisers might face challenges. Buyers are often willing to pay a premium for newly developed condos. However, if there are no prior closed transactions for similar properties, the appraisal might come back lower than expected. Even if properties are under contract at higher prices, these won’t be considered comparables until they officially close. Appraisers need to carefully navigate these situations to ensure valuations accurately reflect the market dynamics and the premium value of new developments.

Handling Fire Sale Transactions in Appraisals

When appraisers encounter fire sale transactions as comparables, it’s important to understand their context. These sales often occur under challenging circumstances, such as a property being sold quickly due to personal hardship. As a result, the sale price may be lower than typical market values. Recognizing these unique situations helps appraisers adjust their valuation approach, ensuring that such transactions do not unfairly influence the appraisal and that the final value accurately reflects the property’s true market worth.

When buyers see that the appraised value of their apartment is lower than the purchase price, it’s natural to worry they may have overpaid. However, this isn’t necessarily the case. Appraisals can be influenced by various factors and anomalies, such as unique property features or market conditions. Understanding that appraised values can differ from purchase prices helps buyers keep things in perspective and recognize that the appraisal is just one aspect of the property’s overall value.

What to Do If Your Appraisal Comes in Too Low

When an appraisal falls short, the buyer has several steps to consider.

Request a New Appraisal

The lender might permit the buyer to order a second appraisal. Sometimes, buyers might already be in the process with another lender but delayed paying for a second appraisal to see the outcome of the first one. Now is a good time to contact the second lender and arrange for a new appraisal. In new developments, another strategy is to wait a few weeks for additional property sales to occur. This can boost the value of comparable properties (comps), which could be sold through traditional loans or even cash buyers.

Request an Exception

Did the appraiser overlook important details like interior finishes or building amenities? If the listing broker or buyer’s broker can pinpoint these oversights, the buyer may be able to request an exception. While this process might take a week and doesn’t guarantee success, it offers a potential solution to address the appraisal shortfall.

Increase Your Down Payment

If the buyer can cover the gap between the appraised value and the purchase price with additional cash, this can be a straightforward solution. It allows both parties to move forward with the transaction without complications.

Renegotiate the Agreement

If increasing your down payment isn’t feasible and the lender won’t budge on the appraisal value, renegotiating the deal might be the only option. To restructure the agreement, consider these strategies:

• Ask the Seller for a Price Reduction: Request that the seller lower the apartment price to match the appraised value.
• Combine Increased Down Payment with a Price Cut: Offer a larger down payment while asking the seller to reduce the asking price to bridge the financing gap effectively.
• Seller Financing: Propose that the seller finance the difference between the appraised value and the purchase price. However, this could complicate the deal and may not be acceptable to the primary lender.

Walk Away from the Deal

If all other options have been exhausted, the final step might be to cancel the apartment transaction. This should be done with the guidance of both the buyer’s and seller’s real estate attorneys. Ensure that the contract includes a financing contingency, which allows the buyer to cancel the deal if financing cannot be secured. Without this contingency, the buyer might lose their earnest money (down payment).

Conclusion

When facing a situation where an apartment’s appraisal value falls short of the contract price, it’s crucial to navigate the scenario with a clear understanding and a strategic approach. In New York City’s competitive real estate market, such discrepancies can be common, but they do not spell the end of the deal. Knowing how to handle a low appraisal can save you from potential financial strain and ensure a smooth transaction.

First, it’s important to understand that appraisals are both an art and a science, influenced by various factors such as location, apartment size, and unique features. These valuations are meant to protect lenders by ensuring the property’s value aligns with the loan amount. However, appraisals can vary due to subjective judgments and market conditions, such as gentrification or new developments. If an appraisal comes in lower than expected, it’s essential to assess the situation calmly and consider your options.

You can request a new appraisal, especially if you believe the initial one missed critical details or if the neighborhood’s value has recently changed. Another approach is to negotiate with the seller to adjust the contract price or increase your down payment to cover the gap. If these solutions are unfeasible, renegotiating the deal or, as a last resort, walking away might be necessary. Ensuring that your contract includes a financing contingency can protect you from losing your earnest money if the deal falls through.

For an accurate and insightful appraisal that reflects your property’s true value, consider working with Block Appraisals. Our certified property appraisal experts, born and raised in the heart of NYC, provide detailed insights into your home’s past or present value. Contact us today to get a comprehensive appraisal that supports your real estate decisions.