Overvalued Appraisals Leads to Overleveraging

You might remember a few weeks ago we wrote a blog post about appraisers. Well, we haven’t dropped the issue, and we are continuing to think about appraisal standards and how they impact foreclosures, tenants, and predatory equity. Banks determine how much they will lend on a property based on an appraisal completed by a third-party appraiser. The appraiser uses factors such as size of the building or location but, as we are learning more and more, the report generally leaves out the building conditions and repair needs. According to an article published last Tuesday in the New York Times,

In general, appraisals overvalued the properties, the study found. Of the 2,076 properties it examined, 64 percent were appraised at values that exceeded the sale price, by a total of $1.4 billion, while 35.5 percent were appraised at less than the sale price, by a total of $661 million.

This means that when banks receive an appraisal–depending on how responsible the bank, the appraiser, and the incoming borrower are—the building is overleveraged and an unsustainable loan is slapped on. This situation often paves the road to future financial problems for both the property owner and the bank. Most importantly to us is the fact that tenants end up being the innocent victims of this process. When a borrower has trouble paying back the bank, conditions in a building tend to worsen and tenants suffer.

The article concludes with this statement:

As for the appraisal industry, “there needs to be some systematic way for appraisers to do their number crunching, but for the significance of the appraisal to be understood for what it is worth,” Mr. Neveloff said. “Appraisals give you a framework, and some level of comfort, but other market factors, like input from brokers, should also be incorporated when considering the overall value of a piece of real estate.”

To us organizers at UHAB, it is vital for the conditions and repair needs in distressed buildings be taken into account when judging how much money a building should be sold for. Responsible property owners and banks should determine the price for making real, sustainable repairs to bring buildings up to a quality standard. Without factoring repairs into the asking price of a distressed property, a property is destined for continued distress and financial instability.

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