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I have a bone to pick with the appraisal process for Co-op units in NYC. That bone is that this process does not generally take into account the financial health of the co-op corporation.
Let's face it, Co-ops are a hybrid: half real estate(ish) and half corporate investment. From my limited perspective, appraisers take a look at the real estate side of the transaction but rarely have I seen them take into account the comprehensive financial health of the co-op organization.
Not all co-op corporations are created equal. While mortgage information is often listed on appraisals (and often incorrectly I might add), I have never seen the corporation's cash and reserves listed.
There is a positive value attributable to each share for each dollar in working capital (cash), capital and operating reserves, escrows & self-escrows, pre-paid expenses and valid receivables. I have never seen these amounts taken into account on an appraisal however they can significantly impact the value per share.
For example, a unit within a 100 unit co-op with $10k in cash & reserves is not as valuable as a similar unit in a co-op with $1 million in cash and reserves. Assuming that each unit has equal shares for the sake of simplicity and each building has an equal mortgage, then each unit would have a potential value adjustment of $100 or $10,000 based on the above example, respectively.
In the era when making informed real estate decisions is very important, I believe that increased disclosure can only help the sellers/buyers make informed decisions.
Is there any support out there to ask the NYC Council make it mandatory for appraisers to make this information available on appraisals performed within the City of New York for Co-op valuations?
Keep in mind that generally the appraised value of a co-op comes from recent sales comparables in your building or similar buildings. If buyers are making informed decisions when purchasing an apartment, they have carefully reviewed the finances of any building they are considering and will take them into account when they make their decision. Consequently they will pay more for one that is financially healthy and subsequent appraisals will be higher because their market value will be reflected in sales comparables used in future appraisals.
So while I have had my owns bones to pick with appraisals on occasion, in this case I have to defend them. Appraisals are performed for a number of reasons and the value is calculated using a number of different methods; however in general appraisals reflect market value and market value is determined by how much the consumer is willing to pay. Appraised values merely reflect the market, they do not determine the market.
Dear Board Prez,
I have read your posting a couple of times now. In addition to a buyer, owners and sellers may also get appraisals done. Owners may have one done for insurance and re-finance purposes. Sellers may have one done in order to assist in setting an initial purchase price.
Would you response remain the same while taking these additional populations into account? I still believe that it is very difficult to compare two similar units in separate co-ops and I am hoping that more disclosure will assist users to making an informed decision.
I would appreciate your further thoughts.
Steve, I agree that it is difficult to compare two units in different buildings; however yes my response would remain the same.
There are various purposes for an appraisal, which may use different methods for determining the "value". Appraisals done in preparation for a sale or by a bank for a refinance are primarily concerned with market value and would use "sales comparison approach" to determine value. Appraisals done for insurance purposes are more concerned with replacement costs and may therefore use a "cost approach" or a combination of approaches for determining value.
Market value is considered the amount that a ready, willing and able buyer would normally pay for a property in an arms length transaction and must be distinguished from the price that may be paid. If a building is in outstanding financial condition, that will reflect positively on prices that sellers receive and improve subsequent market value appraisals in comparison to an otherwise similar building with poor finances.
Steve--
I'm active with ESHC [East Side Housing Coalition], think your idea has merit, & would like to discuss w/you offline. Please contact me at condocoop@gmail.com
Thanks--Larry
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You are correct. In your example each apartment should be valued very differently, but likely is not. This is a major flaw in appraisals as well as potential purchasers evaluation.
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