What does this mean for a typical builder?
Just ask Marty Mitchell, a home builder from Rockville, Md.
“I’ve lost home sales because poor appraisals have come in below a contract sales price,” he said. “Other times I have seen my profits wiped out when my brand new homes with top-of the-line appliances and interior upgrades have been compared to distressed properties. Even worse, I’ve seen instances where some residential developments have been appraised below the prices needed to cover their construction costs and banks arbitrarily reject reasonable appraisals, causing sales to fall through.
“Such practices hurt home buyers, destabilize home values and not only undermine the health of my business, but countless home builders across the land,” he added. “That is why I am thankful that NAHB is working so tirelessly on behalf of the housing industry to enact major reforms in appraisal practices so that appraisals reflect accurate home values and don’t needlessly kill home sales.”
To show the extent of this problem, NAHB conducted a nationwide survey of builders last fall and found that 60% were experiencing appraisals coming in below their contract sales price. Further, one-third of the respondents indicated they had lost a sale because of a low appraisal.
In leading the charge to improve the residential appraisal process to stabilize housing markets, boost economic growth and ensure that faulty appraisals don’t contribute to price volatility, NAHB is making significant progress on many fronts.
Appraisal Summit Makes Progress on Fixing Broken Appraisal Process
On Oct. 24, representatives of federal banking regulators, the appraisal industry, the housing finance industry, and the real estate and residential construction sectors attended the fifth Appraisal Summit held by NAHB at the National Housing Center, NAHB’s headquarters in Washington, D.C., to seek solutions to inaccurate appraisals that remain a major impediment to the housing recovery. The event was hosted by NAHB Chairman Barry Rutenberg and Chairman-elect Rick Judson.
By bringing together and working with the major stakeholders involved in this issue, NAHB has scored considerable progress in seeking remedies for what seriously ails the appraisal system.
Discussions centered on the need to:
- Ensure appraisers of new homes have sufficient education and experience
- Develop an easy-to-use appraisal report for all parties involved in real estate transactions
- Define a complaint process to challenge and correct factual errors in an appraisal report
- Build a real estate data superhighway with a national real property registry and supporting networks
- Establish uniform credentialing standards that would be applied across all jurisdictions
- Consider all three approaches to value – cost, income and sales comparison – in assessing the value of a residential property
NAHB is also taking its case to Congress, calling on lawmakers and regulators to strengthen appraiser qualifications, develop new appraisal standards and oversight and create an expedited appeals process.
In written testimony submitted to the House Insurance, Housing and Community Opportunity Subcommittee during a hearing this summer on appraisal oversight, NAHB stated that “appraisal standards are not clear, best practices have not been well communicated, and enforcement is not occurring in a consistent manner. NAHB is not advocating that appraisals should be higher than the real market. Rather, our goal is to establish an appraisal system that produces accurate values through all phases of the housing cycle.”
NAHB identified the following key areas to improve current appraisal requirements and practices:
- Strengthen education, training and experience requirements for appraisers of new home construction.
- Improve the quantity and quality of data for new construction.
- Develop new appraisal standards and best practices for conducting appraisals in distressed markets.
- Develop processes for expedited appeals of inaccurate or faulty appraisals.
- Strengthen oversight of appraisal activities.
Since the beginning of the year, NAHB has met with representatives from the Association of Appraisal Regulatory Officials to discuss enforcement and the need for a timely appraisal appeals process. Appraisal issues have also been discussed with the Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency. NAHB has also sent comment letters to the Appraisal Foundation on residential appraising in declining markets, uniform standards of professional appraisal practice and adjusting comparable sales for seller concessions.
In response to increasing calls and conversations with members about appraisal problems, NAHB established an Appraisal Working Group to come up with new methods of helping builders deal with the appraisal issue. Acting aggressively to identify solutions to improve the accuracy of appraisals, the group is working to identify solutions to improve the accuracy of appraisals with a focus for changes in the areas of regulation and oversight, appraisal practices and standards, appraiser education and experience requirements, and data and technology.
The bottom line: Builders should not be losing sales as a result of a broken new-home appraisal system. NAHB continues to make progress with regulators and members of the appraisal industry to correct major flaws in the appraisal process, ensure that appraisals accurately reflect true market values and prevent builders from losing sales due to faulty appraisals.
To learn more, go to www.nahb.org/appraisals.
Resources for Home Builders
NAHB has developed excellent resources to help its members successfully navigate through the appraisal process. These include:
- A two-page summary for members on how to build stronger and more productive relationships with appraisers. Builder communication with lenders and appraisers should include: market and absorption information, sales information, all relevant data, specifications of the property, details on the materials that were chosen and buyers’ reactions to the products selected.
- A replay of the May 16 “Builders Guide to Appraisals” webinar, which is available at www.nahb.org/appraisalwebinar. The webinar features a panel of home builder and appraisal practitioners who discuss appraisal rules and provide advice to help builders improve the accuracy of their home valuations.
- An Appraisal Primer that provides a detailed overview to help NAHB members better understand the appraiser’s role in the financing of new homes, as well as Frequently Asked Questions as well as answers about the appraisal process.