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The Appraisal Isn’t MY Fault…Who Takes the Hit in New York?

February 13th, 2008 category: East End LI Foreclosures, Real Estate News

Just when things seem to be settling into an uneasy downswing, with buyers and sellers viewing the market with a studied eye, another kink in the system awaits.

You’ve received the contract on your house; you’re happy, your buyer is happy. As a seller, you priced it correctly; as a buyer, the house has mentally become your “home”. All is well, until…the appraisal comes back. It can happen to anyone.

In order to prevent lending money to home buyers that begin home-ownership in a declining market, Fannie Mae and Freddie Mac have designated Nassau and Suffolk counties as “declining markets.” In a nutshell, this designation allows for room in the appraisal to lower the value in order to protect the lender from an overinflated loan instrument.

In the event that a property value that comes in below the purchase price (the math on this is very gray, without specifics) the buyer/seller will have to negotiate for this possibility. While the sales price might fall right in line with previous comparables, appraisers now have the responsibility of determining the short term continued fall of pricing- and the commensurate house “value” that results from market conditions months from now.

SELLERS: Be prepared to re-negotiate the purchase price (which will impact your net);

BUYERS: Be prepared, in the absence of sellers reducing the price to the appraised value, to come up with additional funds to close, or be prepared to walk from the purchase.

With respect to contracts, your attorney should address this, either by providing an “out” to the buyer whose property of interest did not appraise; offering language that spells out the contributions (should the appraisal come in low) by both parties; or by making known to the buyer that the seller will not be reducing the price, and as a result, the buyer may need additional funds to close (to make up the price differential).

In order to disclose this issue, it is incumbent upon real estate agents to forewarn (and forearm) both buyers and sellers by determining in advance who will take the “hit”, should it present itself. While a function of this odd market, it’s another relatively new development. Failing to address it prior to an offer can result in disappointment for both buyers and sellers, should a low appraisal come as a shock without forethought.

For further information about the “declining market” status of Nassau and Suffolk counties in New York, contact your lender for further explanation- it’s important to both sides. We’re happy to provide lenders that are able to discuss this unusual measure, and will offer all that we know. Be prepared for a bump, and solve it before your home gets an offer by determining what, as a seller, you are willing to work with.

As a buyer, the same theory applies- don’t have your purchase fall apart due to an issue that is present, but may not present itself until after you’ve fallen in love with the house. In the absence of a seller willing to negotiate, your key to the house may cost a bit more out of pocket.

If you are considering buying or selling a home on the North Fork of Long Island, New York, we’re happy to answer any questions that you may have.

2 Responses to “The Appraisal Isn’t MY Fault…Who Takes the Hit in New York?”

Joshua Dorkin @ BiggerPockets Says:
February 24th, 2008 at 7:51 pm
Wow! I had not actually heard of areas being designated “declining markets” for appraisal purposes in an effort to protect lenders. Once again, I’m amazed!
laurie mindnich Says:
February 24th, 2008 at 8:03 pm
I nearly fell off of my chair- this was shared at a recent class sponsored by the NAR. The info came from a lender attending the class, and was confirmed before the blog was posted (see references).
Something new every day, these days.