For more than two years, home builders have struggled with appraisals that do not accurately reflect the value of new homes.
Primarily due to the large number of foreclosures and short sales, these inappropriate appraisals have derailed countless new-home sales. About 25 percent of the home builders who were polled in one NAHB survey said they had lost sales due to inaccurate appraisals, and some reported appraisals that were less than the actual cost of construction.
Solving the problem of inaccurate appraisals is one of the NAHB’s highest priorities. In particular, the NAHB has sought appraisal guidance that provides transparency in the appraisal process and sufficient flexibility to address the unique aspects of valuing new homes.
That’s why the Federal Reserve’s new interim rule on appraisals, issued in mid-October, is a welcome step in clarifying the home valuation process. It makes it clear that home builders and others can ask an appraiser to consider additional information about a property, including information about additional comparable properties. That is critical to our members because in far too many cases we’re seeing appraisals based on inappropriate comparables.
Many appraisers do not understand the impact of new code requirements, new green building practices, and other aspects of new construction that add value to a home, so it is particularly important that home builders be allowed to provide appraisers with information to assist in appraising new construction.
Accurate appraisals are essential because flawed appraisals can jeopardize sound projects. In this economic climate, it is already difficult to find financing for AD&C. One appraisal that doesn’t represent the true value of a property can start a chain of events that can put a builder out of business. For example, an inaccurate appraisal could prompt a lender to demand increased equity from a home builder on a loan even though the project is financially sound and the builder’s payments are current. Likewise, flawed appraisals could prevent lenders from investing in viable projects.
The Federal Reserve’s rule also includes conflict-of-interest guidance, which prohibits loan officers and mortgage brokers from selecting appraisers.
The rule also requires that appraisers be paid at a rate that reflects the difficulty of the assignment and is reasonable and customary in the geographic market where the property is located. This measure is particularly important because compensation standards should be appropriate to the expertise needed for complex appraisal assignments, such as those involving new construction.
Builders, developers, lenders, appraisers, and other stakeholders need a better understanding of what they can and cannot do in the effort to ensure that appraisals better reflect the value of new homes. This interim rule offers much needed clarity.
The rule will take effect 60 days after publication in the Federal Register. The Fed will accept comments on the interim rule during that period, and compliance will be voluntary until April 1, 2011 when it becomes mandatory.
The NAHB will be offering comments in an effort to make sure the final rule provides guidance that recognizes all of the issues involved in appraisals of new homes and helps restore confidence in the appraisal process.