With builders around the nation continuing to grapple with faulty appraisals that jeopardize sales of their new homes, NAHB is adding an “Appraisal Primer” to its collection of resources aimed at helping association members strive for the best possible outcome from today’s less-than-perfect appraisal process.

The newly published primer from NAHB discusses in detail the appraiser’s role in the financing of new homes.

“There is a lot behind the scenes that affects the way appraisers must conduct their business,” writes Joan Trice, an appraiser and author of the primer; editor and publisher of Appraisal Buzz, an email publication; and the host of the Alterra Group’s Valuation Expo, which is the largest annual conference for the appraisal community.

Trice is also consulting with NAHB on the association's efforts to resolve appraisal problems.

“Understanding the regulations, methodologies and task of the real estate appraiser will provide home builders with the necessary knowledge to discuss valuation issues with appraisers before they become valuation problems,” Trice says.

Beginning in 2009, NAHB has held a series of four appraisal summits at the National Housing Center in Washington, D.C., attended by representatives of federal banking regulators, the appraisal industry, the housing finance industry, the real estate and housing sectors and others for discussions of deficiencies in the current system of evaluating homes and how to address them.

While much more needs to be done to reform the system — which is expected to be a long-term undertaking stretching far into the housing recovery now beginning to materialize in specific markets across the country — NAHB has made substantial headway on key appraisal issues.

Covered in detail in the Nov. 7, 2011, issue of Nation’s Building News — which was devoted to what NAHB has been doing to fix the broken new-home appraisal system — builders have seen progress on such key concerns as their ability to communicate with the appraiser and the right to have their homes appraised by individuals who are qualified to do the job.

In conjunction with the release of the “Appraisal Primer,” NAHB has updated its “Appraisal Guidance for Builders,” which summarizes information on the selection of appropriate appraisers, the use of comparable sales in determining the value of new homes, what builders can and should do to ensure accurate appraisals and actions they should take if an appraisal was conducted improperly or contains errors.

In a FAQ section at the end of the new primer, Trice answers some specific concerns that builders have been voicing over appraisals.

Among the questions she addresses:

• What should an appraiser do to determine the value of a new home with options and upgrades that do not appear in other homes recently sold in the local area?
  
  Noting that features of homes that exceed local market standards can result in a loss when they are valued at less than their cost, Trice says that the appraiser should perform a cost approach, which includes all options and improvements in the estimated costs.
  
  “The cost approach should accurately reflect the value of these items,” she says, “and can be very useful on unique properties” that are undervalued when a market approach is taken.
  
  She adds that appraisers should research the market area for comparables and look for other properties of similar caliber with similar options — even if they are not brand-new homes.
  
  “If the property is exceptionally unique,” she says, “appraisers can find other new homes with similar options and make adjustments for differences in location as well.”
  
  
• Will the appraised value support the additional costs of expensive geothermal heating and other green options?
  
  “Green construction is a fairly recent phenomenon,” Trice writes. “As a result there are few resales of homes constructed with these green components. Appraisers have a difficult time extracting proper adjustments for these features from the marketplace.”
  
  Calculations can be made on how much the owners will save in utility costs over the period they are expected to live in the home compared to those costs in a standard home, she says, but those calculations are “difficult to support based on the lack of hard data on maintenance and efficiency.”
  
  However, builders should at least expect to see the additional costs of the green amenities included in the value of the home.
  
  
• What are some of the problems that builders can encounter when appraisers are selected by national appraisal management companies (AMCs), which may be looking for appraisers who charge the lowest fees so they realize the highest margin on the referral?
  
  “AMCs have been accused of using appraisers with the lowest fees even if they are located far away from the subject property they are appraising,” Trice says.
  
  Appraisers who are coming from a long distance away are perceived as not being geographically competent in the local market. “Is it really possible for an appraiser from 100 miles away to understand the nuances of a local market segment?”
  
  To competently perform their job, appraisers need to investigate the market area and visit it many times to understand it, she says.
  
  Though it may not occur that commonly, “if an appraiser comes from a long distance they should be challenged to demonstrate their competence in the local market,” she advises.
  
  One test to determine if the appraiser knows the local market is to see if they have access to local conventional data sources.
  
  An appraiser who doesn’t “very likely is not the best choice. Lenders should be called and queried about appraisers that travel from well outside the local market.”
  
  
• Is it true that under the Dodd-Frank bill builders cannot communicate with appraisers?
  
  Trice answers with an emphatic “no,” and says “it is essential that builders communicate with appraisers.”
  
  Communication intended to coerce or inappropriately influence the appraiser is not allowed, she says, but the legislation requires appraisers to be prepared to make corrections, answer inquiries and review information.
  
  “Certainly, parties to the transaction can communicate with appraisers about the logistics of the assignment and may even dispute the results,” she says.
  
  “Some lenders have instituted policies that restrict the flow of communication,” she says. In an effort to comply with the legislation, “they have created untenable working relationships. This is unfortunate.”

The various informational materials on appraisals collected on NAHB's website will continue to evolve as new challenges arise.

Those attending the upcoming NAHB International Builders’ Show in Orlando will have the opportunity to see Joan Trice.

She will be a panelist at an educational panel — “Builders Guide to Appraisals: Obtaining Accurate Valuations on New Homes” — on Thursday, Feb. 9, 1:30-3:00 p.m. in West 306.

In a related story in this issue of NBN, the Government Accountability Office reports that the regulation of appraisers is being inadequately monitored.

For more information, email Steve Linville at NAHB, or call him at 800-368-5242 x8597.