Appraisal expert Joan Trice, who helped produce NAHB's Appraisal Primer, answers a frequently-asked question about low appraisals.
Q: How is it possible that appraisals for the homes we build are coming in below the cost to construct them? Where are they getting these numbers?
A: Everywhere you turn these days there is an article about low appraisals, talking heads on morning talk shows exclaiming that appraisers are incompetent — or worse, you hear a personal war story.
There are only two possible answers to the question: the appraiser is right or the appraiser is wrong.
And the appraiser could be right. Market conditions do exist in some parts of the country that would indicate that the market cannot support the cost of a home's construction.Those markets have low demand and excess supply.
When the appraiser is wrong, you may oftentimes have an inexperienced or geographically incompetent appraiser. If the appraiser fails to analyze inventory, he or she will not recognize a market that has stabilized, or that is at the starting point of an upward slope. Appraisers must carefully verify terms of sale and the condition of comparable sales and competing properties.
So…how does a builder effectively manage this problem? Don’t wait until there is a problem. Order your own appraisal before you ever break ground. Leverage the appraisal process as a consulting assignment. Don’t build what will not yield maximum profits. While it’s easy to make the mistake of building features whose market values are less than cost, the sweet spot is to build homes that have exponentially greater profit margins. It can be done, especially where land values have contracted and the builder has the opportunity to enjoy the benefits of buying smart.
That pre-construction appraisal will give the buyer confidence in the transaction. The borrower cannot use that appraisal for loan application purposes, but if the lender will accept that same appraiser, the appraisal that will be ordered at the time of application can be done with that same appraiser.
Remember that it is the borrower, not the lender or broker, who pays for and receives a copy of the appraisal. You can guide your customer as to how to examine the credentials of the appraiser at time of engagement. If the appraiser is not experienced in new construction, or is not geographically competent, these potential pitfalls should be addressed early in the process. If you have these legitimate arguments, demand a new appraiser — before, not after, you receive a flawed appraisal.
If you are in receipt of a low appraisal you may legitimately challenge it only if you believe the appraiser has made a substantial error. You must be able to prove either that the appraiser made a mistake in reporting the facts — such as the square footage, for example — or has ignored more comparable sales, or has chosen inappropriate comparable sales.
Keep in mind that it is always best to avoid problems than to mitigate them. It is best to address the appraisal early in the process rather than after you have received bad news.
Joan N. Trice is the editor and publisher of Appraisal Buzz, an email publication circulated to 72,000 subscribers. In addition to the Buzz, Joan hosts the annual Valuation Expo, the largest conference for the valuation community that attracts the thought leaders as keynotes and speakers.
Trice also hosts the Collateral Risk Network of lenders, government agencies, Wall Street, vendor management companies and appraisers.
Trice Appraisal, Inc., a company she founded in 1986 and owned with her brother was the largest appraisal firm in the Mid Atlantic region.
Clearbox® is her most recent venture.
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