HTA Update - 10/29/2008 (Plain Text Version)
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E-mail Our Editor In this issue: Builders Cite Appraisal Problems in Declining Housing MarketsAt a time of rising foreclosures, low-ball appraisals have emerged as a significant stumbling block in lining up credit for the construction and sale of new homes, builders attending NAHB’S fall board of directors meeting in San Diego complained to representatives from the Appraisal Institute. In a special presentation convened and moderated by NAHB Chairman Sandy Dunn on Sept. 24, two appraisers — Jim Amorin, vice president of Atrium Real Estate Services in Austin, Texas and the incoming 2009 president of the institute; and Robert Caringella, a principal of Jones, Roach & Caringella, Inc. in San Diego — said they have been seeing some systemic problems in today’s appraisals of residential properties, but they also made several suggestions about what builders should be doing to make the best of a less than perfect situation. “The financial markets are in such disarray, it’s making it hard for us to do our job,” said Amorin. Home prices nationwide have continued to decline at a rapid rate, “going lower and lower,” he said, but then there are local markets — such as his home town of Austin — that are doing much better than the norm. Complicating the picture, homes are being sold at bargain basement prices that are increasingly below their replacement cost. According to the National Bureau of Economic Research, construction costs last year were higher than home prices in 33 out of the 79 metro areas studied. “Because foreclosures and short sales are accounting for about one-third of transactions, there is a downward pull to the national median price,” he said. Accurate and competent appraisals are needed “now more than ever,” Amorin said, but that task has become difficult in declining markets, where knowledge of local conditions is particularly important. Other factors, such as sales concessions, are also coming into play and may provide an explanation for an appraisal coming in lower than anticipated. “Your appraiser needs to have local knowledge,” said Caringella, “and needs to be putting an ear to the ground and finding out what’s really happening.” In San Diego, for instance, which has been hammered by foreclosures and where residential building permits are down 80% from historic levels, home values in “micro-neighborhoods” along the coast or in good school districts have been “holding up nicely,” Caringella said. He cited the case of one local builder/developer, a former appraiser himself, who was able to get good results because “he knew to give them the same information the builder had that convinced him to go forward. Give them the facts; drag in sales people, engineers; walk the appraiser through the analysis,” he said. Even though it is something that the lender should be able to give the appraiser, builders can ensure the appraiser is knowledgeable about the property by providing a complete pro-forma that packages the budget, costs and fees, finish levels of the house, pricing support and real information on concessions, said Caringella. One builder attending the presentation complained that the low assessment of a home he was selling was based on the price of a distressed sale by an appraiser who ignored five comparable properties that were close in price to the home being sold. “If the appraiser didn’t know it was a distressed property, he wasn’t doing a competent job,” Amorin responded. “Very seldom do I run into a lender saying they need a lower value,” Amorin said, “but it takes place in some instances.” One way to determine if a low-priced home should be used as a comp in the appraisal, he said, is to ask whether that home is “in the universe of properties that the buyer would consider buying.” A custom builder in the audience said that when his houses appraised low two weeks earlier, his lender stopped draws on all of them in the middle of the night. Fortunately, he was able to work things out by showing why the appraisals on the properties were too low. “Good lenders will try to make the deal work, not pull the rug out from under the builder,” said Amorin. Another member of the audience said that banks are no longer satisfied with comps that have been made within the past six months, and are seeking them on sales that have been made within three months; finding those can be a difficult prospect in markets where sales have slowed to a trickle. Also, he said, following bank consolidations, most lenders in his area now go to a selection wheel from which they can choose appraisers who “might be located 30, 40 miles away and don’t have a clue about the local market.” Finally, appraisers are required to contact the bank if the Realtor® has contacted them and resign. Amorin responded that the requirement for comparable properties to be located within one-half mile of the home being appraised can also pose problems. He added that appraisers value the opportunity to obtain information on the home from the builder, and there is no legal prohibition against communications between a builder and an appraiser. “The more information we have about the deal, the better we can do our job,” Amorin said. Caringella suggested that a good time for the builder to introduce himself is when the appraiser looks at the property. “Is there anything you need to know from me?” is an appropriate question to ask the appraiser. The builder should also fill the appraiser in on anything that may not be apparent. “Do this work before the appraiser reaches a conclusion,” he advised. Amorin noted that his organization has been working with NAHB on appraisal issues, an effort that includes educating members of the Appraisal Institute on how to appraise “green” homes and appraising in declining markets. For more information, e-mail Bill Renner at NAHB, or call him at 800-368-5242 x8597. 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