Yes. New homes are too often unfairly compared with distressed inventory.
Among many challenges facing the housing industry is a crisis caused by inaccurate appraisals, particularly the use of foreclosed or other distressed sales as comparables in appraising newly built single-family homes. A recent NAHB survey of builders found nearly two-thirds that reported an appraisal that was below the contract sales price for a house. One-third of the respondents indicated they had lost a sale because of a flawed appraisal.
New homes are built to meet or exceed current codes, are often significantly more energy efficient than older homes, and include a range of amenities and design elements that buyers value and will pay a premium for.
Distressed properties often have damage from theft and vandalism. Almost always, they have deteriorated as a result of neglect and deferred maintenance. And all of them suffer from a perception that these conditions may have diminished their value. A distressed property should not be compared to a new home. When such homes must be used for comparables, then the appraiser needs to have the training and experience required to understand the difference in value.
The appraisal industry is doing a good job of providing training for appraisers on issues such as the value of green building and new-home construction. But some appraisers who lack the experience or time to do an effective valuation can skew the numbers. Taking a cost approach in making appraisals might better recognize the value of new-home features and reduce volatility in home valuations. Inaccurate appraisals contribute to a continuing downward spiral in home values and forestall economic recovery. We need to fix this problem.
No. Don't shoot the messenger; Appraisers aren't the causes of real estate woes.
Many in the real estate industry have tried to blame the market’s distressed condition on appraisers, saying that appraisers are at fault for producing opinions of value that don’t match a home’s contract or sales price. But appraisers don’t set the market; they reflect what’s happening in the market. Appraisals completed for mortgage transactions are not provided to confirm a sales price; they are used to assist lenders in making lending decisions. And in this depressed market, an owner’s home often isn’t worth what he or she thinks it is—or what the real estate agent wants it to be worth.
It’s troubling that some buyers and sellers (not to mention some real estate agents) assume that an appraisal is somehow “wrong” if it doesn’t match the listing or contract price. This is simply not the case. There’s no reason to assume the contract price is the “correct” price because it is higher than the appraisal.
Appraisers are particularly valuable because they are an objective and unbiased source of real estate information. The appraiser is a third-party independent consultant who is hired by the lender to provide verifiable research and expert analysis.
Contrary to some accusations, using distressed sales as comparables isn’t preventing the market’s recovery. Qualified, competent appraisers are capable of using their experience and education to determine when and how to use distressed sales as comparables. They know what adjustments to make, if any, when using distressed sales as comps.
Especially in a distressed market, geographically competent and capable appraisers—such as designated members of the Appraisal Institute—should be hired for difficult assignments.
Learn more about markets featured in this article: Chicago, IL.