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The Hangover
How lowball appraisals are wrecking sales in neighborhoods just rebounding from the housing slump.

Illustration by Leslie Herman

Last June, Shorewest Realtor Kate Fritsch had what looked like a brisk sale lined up: $153,000 for a two-bedroom, two-bath condo in Whitefish Bay. The seller had already moved out. The buyer, expecting to pay some $15,000 below assessed value, was ready to bring in the moving vans. Everything looked great. Only one big hurdle remained: An appraiser, hired by the buyer’s bank, had to affirm that the condo was worth the price – and the resulting mortgage.

And that’s when the deal ran aground. The appraisal came in at a mere $124,000, shocking Fritsch, the buyer and the seller. The appraiser had relied on “comparables” (recent sales of similar properties) from Shorewood and Fox Point, markets that some say are struggling to recover from the housing slump. Fritsch provided new data for sales in Whitefish Bay, but the appraiser refused to consider the info. Associated Bank declined to mortgage the condo unless another appraisal came closer to $153,000 or the seller agreed to a lower price.

What saved the sale was a second appraisal of $157,000 authorized by the bank. It assuaged Associated’s concerns, and the deal finally closed in late August, a happy ending to a predicament that often wrecks sales, local agents say. In neighborhoods rebounding vigorously from the housing slump, prior sales often include short sales, foreclosures or other transactions occurring well below market value, and well below what buyers are currently willing to pay.

“It’s really, really put a burden on the whole process for buyers and sellers,” says Tammy Maddente, executive vice president of First Weber Group’s North Shore office. “There has to be a little leeway here. Appraisers have to be in tune with what’s happening and have got to come back to the middle.”

Low appraisals have essentially gummed up the local market by spooking banks, according to Mike Ruzicka, president of the Greater Milwaukee Association of Realtors. “Appraisers come in and, especially in areas that are still emerging from the recession, say, ‘Well, the surrounding houses aren’t valued at the same as the house that’s for sale.’ So they might give it a lower assessment than the buyer and seller agreed on.”

An option may still exist, he says, of the buyer ponying up part of the home’s price in cash, lessening the size of the mortgage. But not all buyers can afford such a large down payment.

In other cases, contingency clauses written into purchase offers give buyers the option to back out if the bank’s appraisal comes in low, an arrangement that’s tearing many potential deals asunder before a second appraisal, as in Fritsch’s August sale, can put them back together. Broker Andy Reid of Coldwell Banker HomeSale Realty’s Wauwatosa office lost a recent commission on a single-family home in Menomonee Falls thanks to such a snafu.

“The problem with low appraisals right now is that it’s very difficult to argue them,” he says.

But Ted Dentice, vice president and general sales manager for 22 Shorewest Realtors offices, advises agents to keep trying and to get aggressive in providing alternative sales data. “It’s a real estate agent’s responsibility to provide as much market data as they can,” he says, “by looking at comparable market sales in that neighborhood.”

Further input or meddling is out of bounds, which means selling points that agents often use to market houses – such as a stylish kitchen or bathroom – are harder to emphasize. Although real estate agents account for these emotional and aesthetic factors when setting asking prices, appraisers are bound by guidelines that are less subjective.

“We’re working for the lender, which means we’re operating under their guidelines,” says Bill Druck, managing director of Chudnow Druck Valuation on Milwaukee’s North Side.

He’s also limited by recent sales, just as agents say they are. “The appraiser is held hostage to the comparables that were available,” he says. “We can’t make up data or use a comparable that’s 2 years old.”

Druck says the problem of lowball appraisals isn’t endemic, but it’s still hurting buyers and sellers, and causing the odd sale to fall through, much to the disappointment of some.

“If it happens to be your particular deal,” he says, “that truly sucks.”

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