Between the waves of distressed sales in the market and the evolving execution of new rules for home appraisals, getting a fair appraisal for a new home has become a seemingly impossible task for many builders.
“I always thought that the value [of a new home] was the price determined by a willing and capable buyer and seller,” observed Maryland builder Martin J. Mitchell during a joint NAHB/Builder Partnerships webinar on appraisals last month. But as Mitchell and others noted during the online session, such conventions simply no longer apply in today’s housing market, where staggeringly low valuations and their consequences—cancelled contracts, lost financing—have become unpleasantly commonplace for builders. (The NAHB continues to collect information on appraisal problems; builders can send their experiences or questions to email@example.com.)
The reasons are myriad, according to Mitchell, vice-CEO of Rockville, Md.-based Mitchell & Best Homes. In some areas, the housing market has come to a standstill, generating little if any data for appraisers to consider; other markets (can anyone say “Las Vegas”?) are dominated by foreclosures and short sales, resulting in a database filled with depressed-value comps. New rules governing appraisals have led many lenders to avoid experienced local appraisers for fear of conflict of interest and hire appraisal management companies instead, which many builders argue has resulted in appraisals being done by less locally-knowledgeable professionals. Concerns about capital and other banking issues have also contributed to some banks and lenders looking for lower appraised values on financed homes “so they can have increased equity contributions to protect their position,” Mitchell noted.
Yet, despite these very real obstacles, there are steps that builders can take to significantly improve their chances of getting a fair and accurate valuation for their new homes and their customers. “What a builder needs to do is understand right from the start is that he is not a bystander in this process,” Mitchell stressed. “He’s got to be an active participant.”
Here are 10 strategies intended to help builders do just that. (Looking for more information? NAHB members may listen to the full webinar at www.nahb.org/appraisalsprogram; a login is required. Builder Partnerships members may also access it at www.builderpartnerships.com/Home/News/782.)
1. Don’t be afraid to talk to the appraiser. “Communicate, communicate, communicate,” Mitchell asserted. “Last year, at this time, we were 180 degrees from here. We were told not to communicate, not to have any contact” under the new rules, but that has changed as the guidelines have been implemented. Builders “can’t ask for certain numbers to be targeted [in the appraisal], but they can communicate in a lot of different ways” with an appraiser.
2. Supply all potentially relevant data. “Basically, you can provide almost anything that you can think of that is going to support the value of the house,” Mitchell said. This can include information on the market and absorptions as well as property specifications, home plans, and product details for the home or project in question. You may also want to give the appraiser copies of recent HUD-1 statements if they aren’t in the land records yet or examples of recently executed contracts. Allen W. Gardiner, who provided the appraiser perspective on the NAHB/Builder Partnerships webinar, agreed. “One of the biggest mistakes I find is that builders hide data,” said Gardiner, who is vice president of residential at Jackson Claborn, a Plano, Texas-based real estate consulting and appraisal firm. “I would encourage you to provide all relevant data. If it was a low sale, let [the appraiser] know and explain how it is different from the others.”
3. Make note of all communication (written or spoken) with an appraiser. “Contact the lender immediately” if you have concerns about an appraiser’s experience or expertise, according to Gardiner.
4. Be realistic about distressed sales being used as comps. “If an entire market is made up of short sales and foreclosures and all the listings out there are also short sales and foreclosures, that may be representative of what the market is today,” Gardiner said. “On the flip side, if you are in a market that is improving or stabilizing and there are still some short sales out there, that doesn’t necessarily mean [distressed sales are] what is driving the market.”
5. Warn buyers that extreme options may not appraise at their value and protect your interests accordingly. “If you’ve got someone stepping out of the norm, then you absolutely as a builders should have concerns about that,” said Mitchell, who advises warning a customer that such upgrades may result in a problematic appraisal. If the buyer insists, then Mitchell’s firm will do so—with a condition. “If you still want those items in the house, then we have to have an addendum to the contract that says you acknowledge that this house will likely not appraise for what the cost of this house is that we have contracted [to build for you] and that [a low appraisal] is not a valid reason for [the buyer] to void the contract or ask to have the price reduced.”
6. Request a copy of appraisal. You’ll need to request this from the lender, but “usually a good lender will release that appraisal for you,” Mitchell said. Once you receive it, review the document for errors and accuracy. Ask for the criteria and comps used in determining the value, which can vary from lender to lender. For example, a bank may want comps located within a certain distance of the property or comps from certain number of sales within the past 90 days, a competing builder, or even a listing or a pending sale, according to Gardiner.
7. If getting an appraisal on a green home, provide the appraiser with the net present value of the savings projected due to the energy-efficient features in the house. The NAHB says its members have been successful at getting those values incorporated into some new-home appraisals. But green builders—and their buyers--should probably brace themselves for some unpleasant surprises. “I think you’re really limited in today’s market to those things that create savings on the energy bill,” Mitchell said in response to a questioner. “Unfortunately, I don’t know of any way to value sustainability. That is a much more difficult process.” Gardiner agreed. Despite the growing interest in green building and energy efficiency among many consumers, “we don’t see much of a premium for those items” in the resale home market, he said.
8. Adjust your expectations for the appraisal based on the lender involved. “A national bank using an appraisal management company is going to be way more restrictive than a local bank in terms of its guideline for its appraisals,” Gardiner warns.
9. Be prepared to encounter worst-case scenarios. “We’ve heard about lenders requesting liquidation value [on appraisals]—not allowing for buildout value or ‘highest and best use’ value,” Mitchell warned. If you do, let NAHB know by emailing the organization at firstname.lastname@example.org.
10. If you’re doing a workout, find out everything you can about the health of your lender and whether they have flexibility to work with you. Tell them your cost of capital. Find out how they plan to classify the loan so you can provide appropriate data to lenders and appraisers. Detail how you will handle the project so that the buildout value will be greater than the liquidation value. “All of these things will help you create a workout plan that works for the lender” and improve your chances of getting the deal done, Mitchell said.
Alison Rice is senior editor, online, at BUILDER magazine.
Learn more about markets featured in this article: Dallas, TX.