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In seeking accurate valuations on new homes, builders around the country still find themselves in a battle zone despite incremental progress that has been made in the past couple of years in improving the appraisal process, according to participants in a June 1 “Builders Guide to Appraisals” webinar sponsored by NAHB’s Housing Finance Committee.
Joe Robson, NAHB’s 2009 chairman and the founder and president of The Robson Companies in Tulsa, Okla., noted that NAHB has made significant headway on the appraisal issue in three summits it has conducted at the National Housing Center in Washington, D.C., that have “put everyone under the tent who has anything to do with appraisals.”
A fourth appraisal summit is being planned for the coming fall.
“But there’s no silver bullet we can use that will change the system overnight,” Robson said.
With sales of distressed properties continuing to far exceed new home sales in many key markets, finding suitable comparables for new homes can be a difficult proposition.
Lowball appraisals have also been cited as a factor behind faltering existing home sales this spring.
Also generating adversity in today’s marketplace are many big appraisal management companies (AMCs) that, tending to be fixated on the bottom line, promote the use of appraisers who are willing to work for the lowest fees rather than the appraisers who are the most knowledgeable.
In the meantime, the best strategy for builders is to find out as much as they can about the process and insist that their homes are reviewed by individuals who are the best qualified to assess their worth.
Opening up communications with lenders and appraisals is also key for builders who want the true value of their homes recognized, panelists said.
New policies and clarification from Fannie Mae and Freddie Mac last year have helped to correct the misperception that builders are not allowed to be in touch with appraisers to provide them information they need to perform their job.
Looking for a Few Good Comps
It only makes common sense that the market value of a home should be determined by “what a willing buyer and seller agree on,” said Martin Mitchell, vice CEO and vice president of land and business development for Mitchell & Best in the Washington, D.C., and Baltimore metro area.
“Unfortunately,” he said, “even when you have a contract in place and it has been signed by the purchaser,” the comps that can be found often don’t support that price and the valuation can be “ultra-conservative.”
“Most lenders require one sale from the builder, one from a competing builder and/or a re-sale from the neighborhood,” typically within 90 days, said Allen Gardiner, vice president, residential for Jackson Claborn, Inc., an appraisal and real estate consulting firm in the Dallas-Fort Worth area.
While foreclosures and short sales may be appropriate as comps in certain markets where nothing else is available, said Mitchell, they should not generally be used because “most people going through foreclosures are not willing sellers.”
And when foreclosed homes are used as comps, their interiors should be inspected to ensure that they are in good condition, he said.
Also, “houses in the same community are not always comparable,” Mitchell counseled.
In his company’s developments, where various price points are set for houses to maximize their absorption, “two houses that look the same might not be directly comparable,” he said.
Mitchell also warned builders to “be on the lookout” for lenders that are pushing “unilateral reductions in appraised value,” which is not allowed.
Deploring the general lack of knowledge about new construction among appraisers, including the cutting-edge techniques and products being employed to construct high-performance homes, Mitchell extolled continuing education and the educational efforts of such groups as the Appraisal Institute.
“But when the appraiser just doesn’t understand the nuances of new construction, you have to get in there and give them that information, letting them know why your new home is different from the 25-year-old resale down the street,” Mitchell said.
“You may have to sit down with the appraiser in a face-to-face meeting and educate them all the way from the foundation through the roof about what you have done differently.”
Finding the Best Appraisers
When going to the lender, which sets the criteria for choosing an appraiser, “home builders should demand an experienced and highly qualified appraiser,” said Gardiner.
In an impromptu poll of builders listening in on the webinar, a lopsided majority reported that they were experiencing problems with appraisal management companies.
Where that is the case, Gardiner suggested “it may be good to seek out” the many local and regional bankers that are managing the appraisal function in-house.
He said that AMCs can act as a third-party buffer, impeding the flow of information when a lender relies upon them excessively.
Communication between the builder and appraiser is allowed, Gardiner pointed out, “as long as you aren’t being coercive and infringe on the independence of the appraiser.”
Builders should provide market and absorption information,” he said. “Let them know how many people are coming through your door.”
And one of the biggest mistakes builders make is hiding some of their relevant data on sales. Information on just two or three previous sales “can help the value,” he said.
Also, “provide the appraiser with specifications on the property, details of why materials were chosen” and what sort of reception those products are receiving from prospective home buyers. “Put together a long checklist of what makes your home different from others in the area.”
Knowing the Guidelines
On another polling question for members of the webinar audience, it was found that builders by and large are not as familiar as they should be with appraisal guidelines coming from such sources as Fannie Mae and Freddie Mac, the Federal Reserve and the states.
Conceding that “there are a lot of them out there,” Robson said that “it is important to know what the guidelines are so that you can call an appraiser or lender when they are hiding behind them.”
There are also “a lot of appraisers that may need to be better informed on the guidelines,” said Gardiner.
Builders can often run into appraisers who simply don’t understand their job, Gardiner said.
“People can get into certain habits,” he said. “Good old Joe told them this is the way it is supposed to be, and they continue to do it that way.”
If an appraisal comes back and it has been conducted improperly or contains errors, “there is nothing that prohibits the lender from ordering a second appraisal,” Gardiner said.
“Keep an accurate record of what you have provided the appraiser,” he advised, so you can go back to the lender and say, “‘I gave them these comps and they weren’t used’; ask the lender to get with the appraiser and find out why.”
“Contact the lender with concerns, be specific on what’s factually wrong or has been left out so they can relate that to the appraiser,” he said.
Also, “if you don’t agree” with an appraisal, he said, “pick up the phone and call the appraiser. The appraiser is open to hearing reasonable feedback from the builder.”
Or “engage an appraiser of your own,” Gardiner said. “Find an appraiser who is willing to listen and use comparables that are the best for that property.”
More information on appraisals is available from NAHB at: www.nahb.org/appraisals.
For further information, email Steve Linville at NAHB, or call him at 800-368-5242 x8597.