Reverse

Appraising: The Gap

Written by Charles Gress, as originally published in The Reverse Review.

For the appraisal industry, 2012 was one of the busiest and most profitable years. With sweeping regulation changes and record-low interest rates, fees are up and volume is way up. For appraisers, this is the perfect recipe for success. Now, as we are crawling out of the ashes of the biggest boom and bust in our country’s financial history, the market is clawing back and trying to stabilize.

One challenge for appraisers in this current market climate is new construction. It seems that more and more appraisal orders are coming through for this type of transaction and appraisers everywhere are having a very hard time finding comparable market data for new construction sales. Consequently, appraisals for new construction are not only very difficult to put together, but also very difficult to support because of a lack of similar properties with values equal to the contract price. Just open a newspaper and somewhere somebody is calling appraisers “deal killers” or claiming that they are “not making value.”

Now, this is nothing new to a seasoned appraiser, as I am always being told I am too high, too low, or both by different parties involved in a transaction. But what’s troubling to me is that media outlets are placing blame on the appraiser. This could not be further from the truth. I have been saying for years that we appraisers don’t make the news; we just report it. Unfortunately, since 2008, the news just hasn’t been very good. Massive declines in value, record numbers of foreclosures and a litany of distressed sales have given rise to one of the most challenging times in my 18-year career in the appraisal industry.

As we face the challenges of appraising new construction in these difficult times, there are a few observations that I would like to share. First, let’s acknowledge that most new construction transactions are “lot and contract price,” meaning that the borrower owns a property and hires a builder to construct a house. This is by far the most common situation in my market, and also the No. 1 reason why new construction appraisals are so difficult to complete.

When this type of situation occurs in loans overseen by Fannie, Freddie, HUD and Veterans Affairs, it would not be considered a comparable sale. These departments have specific language that prohibits an appraiser from using the contract and lot price to equate a sales price on a comparable sales report. No can do. So, with a significant amount of new construction loan transactions set up in this way, the appraiser is left without any new construction comps to report.

So what’s an appraiser supposed to do with no comps? He must use the best alternatives available. But with a market still trying to recover from a massive drop in home prices and, in many cases, an oversupply of “used” homes, a noticeable gap has arisen between the market value of existing homes and the appraised value of new structures. You see, in a down real estate market, new construction is increasingly considered a premium and most borrowers are accepting the fact that if they want to build new, they will most likely not be able to finance the total cost and may even have to bring cash to closing.

I would advise an appraiser to ask if the builder has any other contracts to build in that neighborhood. The Uniform Standards of Professional Appraisal Practice require appraisers to analyze all relevant sales and contracts for sales and properties in the market area. Even though the appraiser is unable to utilize the contract as a comp, he is still able to use them to analyze and possibly support age or condition adjustments. I think ultimately sharing information and working together to solve our problems is the best course for parties involved in the mortgage finance industry.

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