The Appraisal Nightmare

In the last 10 days, I've become aware of 4 deals here where the bank-ordered appraisal for mortgage underwriting came in well below the agreed-upon sale price. In 3 of the cases, the appraisal was 9 to 14%. (In the 4th case, the house is very unique and presents somewhat different appraisal issues). A lot of people in the industry have laid the blame for this real estate and mortgage mess at the feet of the lenders, particularly with their lax standards, who were seemingly lending endless amounts of money on almost anything attached to a piece of dirt. There's been a widespread call for tighter lending standards, and that's just what the lenders are doing. One result is that appraisal standards are much tighter, and to underwrite a loan a lender is looking for rock-solid demonstrated value.

A lot more appraisals are coming up short compared to a year ago. During the go-go years, on those occasions when an appraisal came up short, a buyer was often willing to put in some additional cash to make up some or even all of the appraisal gap. After all, with the market surging ahead at 15% or more a year, you'd make up 5% or 10% in a few months. Today that's absolutely not the case. I'm hearing that even among buyers who have the extra cash, they're unwilling to pay anything above the appraised value.

More surprising, though, in this slowing market, is the unwillingness of many sellers to accept the reality of the appraised value. Some sellers, facing low appraisals, have made token reductions but are coming nowhere near to the appraised price (which is what the financing is based on.) One comment I heard 3rd hand was that the seller said, "Look, if they (the buyers) don't want to come up with extra cash, we'll just put the house back on the market and wait for someone who can afford it."

In my mind, that might have been a reasonable strategy a year ago, but it frankly seems foolish --- from a seller's perspective --- today. But it just hasn't sunk in with sellers yet that we're in a different market, and that the price expectations they may have had 6 or 12 months ago may not apply today.

Comments

[Mary Ellen]

Oh boy. This is gonna be fun.

I'm selling half my place, (120 acres)with 2 houses, a beautiful barn and 10 acre lake for a fairly hefty sum. My buyer is getting an appraiser to look the place over. I hope we don't come to blows, maybe just insults.

Hey, it's my Tara.

ME

[JM]

I think land is 50% overpriced in Sullivan county MLS
Homes tend to be 30% overpriced at least.

My home in Bayside, NY is worth double of 1987 price, Not 6-10 fold like in Sullivan co.
Major correction over the next few years once people 'need to sell'.

"once you buy upstate, you buy forever" mentality is returning.

[Dan F]

Why is this so surprising ? Put yourself in a lenders shoes ! Would you lend at a given value just because the "seller" says thats what it worth ? IMO anything's worth is really determined by what someone is willing to pay for it. I think buyers are just more wary now that the frenzy is gone. Sellers have the right to ask whatever they want for their property. Doesn't mean someone is willing to pay for it. In the meantime, they can sit on it and enjoy it and write that check to the taxman and their own bank. At the end of the day, a seller has to figure out if his cost of carry (mortgage, taxes, upkeep, opportunity cost) is worth waiting for a buyer who may or may not come along. In a market of declining prices which this is, whether or not one wishes to admit it, perhaps a bid in hand today is worth 2 in the bush tomorrow....

[Chuck]

or, as Will Rogers said - 'sometimes the return of your money is more important than a return on your money."

[Steve]

The cost to carry property in the Catskills is peanuts. I just received my annual tax receipt. It was less than my monthly maintenance cost in New York City (which is extremely low by NYC standards).

Sometimes it's not worth dicking around prices with people when it's not necessary to sell.

[DSS]

I wish I had the historical perspective. How long ago did the Borscht Belt Catskills die -- 40 years ago? At that point, my impression is that Sullivan County more or less languished for four decades as a near-Appalachian sort of backwater until the mini-boom of '03-'06. That brief bubble did not create the critical mass sufficient to put the county on par with more established second-home areas east of the Hudson and in the Berkshires. With the end of the "boom," who's to say it wasn't the equivalent of a 100-year flood -- a moment unlikely to be repeated, in which case the grand "transformation" of Sullivan County has come and gone. I'd like to believe all the talk about Sullivan County's time having finally arrived, but with the ever so fleeting real estate boom over, what's the rationale for continuing to believe? Yes, I know -- "only two hours from New York City." But that's been true since the Dutch bought Manhattan, and it's never been enough to make a permanent difference in the county's competitive position.

[Marcel Proust Remembers]

I wish I had the historical perspective.
You do.
How long ago did the Borscht Belt Catskills die -- 40 years ago?
Correct.
At that point, my impression is that Sullivan County more or less languished for four decades
Languished? This implies it was unable to transform itself into something better. That’s an inaccurate depiction since the locals resisted change contrary to what you may have heard.
as a near-Appalachian sort of backwater
Nahhh. Poverty wasn’t on the screen then. Poverty was imported when the funny island across the Hudson decided to use it as a dumping grounds.
until the mini-boom of '03-'06.
No. The boom started with McKean taking over Black Lake after the original developer(Oxford Estates) was forced to sell. McKean had the luck of the draw time-wise. This was shortly after the 1980’s recession.
That brief bubble did not create the critical mass sufficient to put the county on par with more established second-home areas east of the Hudson and in the Berkshires.
Correct. Keep in mind also that the area has never been friendly to outsiders.
With the end of the "boom," who's to say it wasn't the equivalent of a 100-year flood -- a moment unlikely to be repeated, in which case the grand "transformation" of Sullivan County has come and gone.
I wouldn’t be that severe. If Manhattan continues to boom, Sullivan County will absorb its outflows.
I'd like to believe all the talk about Sullivan County's time having finally arrived, but with the ever so fleeting real estate boom over, what's the rationale for continuing to believe?
If you are the lastest Russian arrival why think otherwise?
Yes, I know -- "only two hours from New York City."
Only if you are in a bus. People live with this myth.
But that's been true since the Dutch bought Manhattan, and it's never been enough to make a permanent difference in the county's competitive position.
Competitive position? Try not to believe all the copy being pitched at you. A sauna and a tearoom selling $8 sandwiches doesn’t make for a sustainable economy. Also---perhaps there are people who would rather not be around Hassidic Jews, gays, and newly arrived Russians…. Let us say Sullivan county is an acquired taste and not everyone is willing to drink wine from Chile.