In 2013, Congress passed a $50.5 billion disaster assistance package for areas impacted by Hurricane Sandy.
$680 million were used to establish the New York Rising Buyout and Acquisition program. The program funds are used to purchase properties from homeowners that were damaged or destroyed by Hurricane Sandy. These properties are then converted into a natural buffer or redeveloped with storm-resistant features.
The amount of each buy-out is based on fair market values appraised before the storm (or after the storm if the property was outside the 100-year floodplain). The state relied on contractors to perform the appraisals.
Property appraising is not an exact science. The appraiser typically relies on the values of comparison properties to make their evaluation. But because two properties are rarely exactly the same, adjustments are made based on several factors – such as livable space, timing of sale, and other valuations.
A recent report found that these appraisals were woefully inaccurate and worked to boost the payout for properties by large margins.
The Department of Housing and Urban Development (HUD) Office of Inspector General (IG) examined 14 of the 956 properties that were bought out under the program for a total of $5.9 million.
In these 14 properties alone, the OIG found more than 400 deficiencies in the appraisals, including ones that impact the value determination.
The IG found four cases where the appraiser based its appraisal on properties that were larger than the house being appraised. The most egregious example occurred when an appraiser accidentally swapped the year the house was built (1948) for the square footage (528) – thus leading to an appraisal rate that was based on a house that was nearly quadruple the size of the house in question.

Appraisers also included the value of below-grade basement areas in the living area space – which is against regulations and served to boost the property value and thus payout.
In addition to these errors that inflate the square footage, the IG found that the appraisers were using a methodology that systemically inflated the property value of all the properties being bought out. Appraisers used a time adjustment calculation to account for inflation in housing values in the area. For example, if the comparable property sold 5 days before the storm – then the appraiser would add $9000 to its value and if it sold 4 months before the storm than it would add $40,400 to its value.
However, the IG reviewed the data and found that these time adjustments could not be supported. In fact, they found that the market for one of the properties was flat during the period. A third party found that these time adjustments were inappropriate.
Yet, these time adjustments were the basis for 34 adjustments that averaged more than $20,400 each in the 12 properties analyzed. Overall, this time adjustment methodology was used for 422 of the 956 properties bought out through the program.
The IG also found that the appraisers were making adjustments that were out of line with industry regulations:
National Mortgage Association’s Selling Guide and HUD Handbook 4150.2, paragraph 4-6(B), adjustments to comparable properties should not exceed 10 percent of their sales price for individual line items, 25 percent for gross adjustments, and 15 percent for net adjustments without additional supporting documentation in the appraisal report or appraiser’s work file.
Yet, in 12 of 12 appraisals the IG examined, gross adjustments exceeded 25 percent, in 11 of 12 appraisals examined, net adjustments exceeded 15 percent, and in 10 of 12 appraisals examined, line adjustments exceeded 10 percent.
In 4 of the 12 appraisals, the net adjustments exceed 100 percent of the comparable property sales price!
In total, the 12 appraisals contained a total of $9.5 million in adjustments to the 67 comparable properties used to make the market evaluation. There were no evidence or justification provided for any of these adjustments.
The New York State office that was charged with overseeing this program did not identify a single deficiency in these appraisals.
The housing buyouts were not the only items that got inflated in this process. The appraisers on this project were paid $3.4 million. The contractors charged between $990 to $4,950 per appraisal. This is far higher than other contracts for similar work. For example, the state has a contract for disaster recovery work that pays $500 per appraisal and the city has a contract that pays no more than $450 per appraisal. The IG contacted local appraisals and found that appraisal prices typically run $350 to $450 each.
The state also ran up a $98,650 tab for sales brochures that were “were not fully credible and should not have been relied upon by the State or its appraisers.”
They also paid $50,700 for an economic land analysis that is not typically done for residential properties and that the appraisers did not even use.
In total, the IG determined that HUD and New York “did not have assurance that the $361.5 million paid for the other 942 properties that were purchased was supported.” There is $93.4 million remaining in the fund that the IG said could be put to better use if the State and HUD tighten up their controls.
There was obviously egregious problems going on with this program. Moreover, it’s difficult to have a fair market evaluation when one of the parties to the transaction is using federal funds.
But it’s absolutely critical to get this right. These types of buy-out programs are actually useful to remove properties from high-risk areas and are more effective than Congress continually subsidizing the redevelopment of flood-prone property through the National Flood Insurance Program.
Overall, the federal government has paid $5 billion to buyout properties in flood zones. In order for this to be an effective program, oversight and controls are desperately needed to avoid the kind of abuse this report exposed.