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Appraising High-End Homes

As home sales pick up in the million-dollar-plus market, deals are being complicated by unexpectedly low appraisal values.

With borrowing rates low, even cash-rich buyers are likely to finance part of their purchase, thereby prompting an appraisal by the lender. ”Unfortunately,” said Pamela Pagnani, a real estate lawyer in Greenwich, Conn., ”the properties are not appraising for what the parties agreed to.”

As a senior mortgage loan originator for the Luxury Mortgage Corporation in Stamford, Peter Grabel sees homes in contract for up to $1.5 million appraising for the purchase price. ”But where I get nervous,” he said, ”is when we get over $2 million. There are not enough good comps, and appraisals are coming in lower.”

The problem is less serious in New York City. ”The higher end of the market has performed better there over the last several years,” said Jonathan J. Miller, the president of the appraisal firm Miller Samuel, ”so there’s a larger volume of data.”

Appraisers looking for recent sales of comparable homes in the suburbs may face a dearth of transactions in the multimillion-dollar range. The sales they do find may be a drag on current values in a housing market on its way back up.

”When prices start to move up, for the first two or three months, appraisals will come in low, because the comparable sales were in that lower market,” said Melissa Cohn, the executive vice president of the Manhattan division of Guaranteed Rate.

Most lenders of ”jumbo” mortgages above $625,500 require two appraisals on properties in excess of $2 million, Ms. Cohn said. When the values come in far apart, the lender may ask the appraisers to comment on each other’s results, or simply take the lower of the two values, she said.

In any case, a low appraisal is more likely a result of an appraiser’s ignorance about a market than of scarce comparable sales, Mr. Miller said. The appraisal management companies widely used by the big banks may send in an appraiser who lives several hours away. A homeowner may challenge a disappointing appraisal but, Ms. Cohn said, ”lenders hardly ever change their mind.”

A lower appraisal will affect how much a buyer can borrow on the jumbo market. Mr. Grabel used the example of a mortgage with a maximum loan-to-value ratio of 70 percent. For a $3 million property, the loan amount would be $2.1 million. If the appraisal came in at $2.7 million, however, the lender would be guided by that lower value and drop the loan maximum to $1.89 million.

But a sharply lower appraisal can derail a deal if it keeps the buyer and seller from reaching agreement on a price. Ms. Pagnani advises buyers in this situation to have a frank talk with the sellers: ”You tell them, ‘You’re going to have the same problem with whatever buyer comes along, unless it’s all cash. So let’s negotiate it now.’ ”

Nicole Steel, an agent with Barbara Cleary’s Realty Guild in New Canaan, Conn., agreed. ”I have to explain to my sellers that very few buyers in this market are cash buyers,” she said.