Appraisal Nightmares

Current estimates show that sales prices of nearly one in 10 new-home sales are "adjusted" prior to closing because appraisals are falling short of contracted sale prices.

While problems with appraisals are nothing new to the home building industry, since the the Home Valuation Code of Conduct (HVCC) went into effect May 1 for all conventional loans to be sold to Fannie Mae or Freddie Mac, the issue has grown from a minor distraction to a major tsunami. Millions of dollars in profits and costs are being forfeited by builders due to a program that has unintended consequences that have left home builders, real-estate agents, mortgage bankers, mortgage brokers, and even the appraisers themselves, complaining.

Remember that low-bid or random appraisers do not make good appraisers "evil;" they simply allow lazy appraisers or those with limited knowledge of a market to become the final arbiter of fair price.

Low-bid or random appraisers allow lazy appraisers or those with limited knowledge of a market to become the final arbiter of fair price.

Overcome this by making it as easy as possible for an appraiser to have the best information possible. While good appraisers will look to various sources of recent transactions such as MLS, tax records and contracted builder sales, a quick appraisal process may miss several important comparables.

Place all of your sales in MLS as a central clearing house to show fair value. Developing a "mock appraisal" at the time of contact acceptance will not only help justify your price if you're asked by an appraiser for help, it will allow the builder to understand if there are underlying appraisal issues needing attention prior to starting a home.

The HVCC process also undermines values on homes with high-cost options. To limit potential appraisal issues, cap the monetary value of options for all home buyers with minimal down payments. A good rule of thumb is no more than 5 percent of the purchase price for upgrades and options on entry-level homes and no more than 10 percent for move-up homes. For buyers who insist on a higher level of upgrades and options, require additional down payments or even open a post-closing renovation company to assist in upgrades after the closing.

Finally, assign one employee to work exclusively on appraisals. Having an experienced professional who is schooled in the requirements or HVCC and can provide a ready list of comparables at a moment's notice is the best way to make a compelling argument for your sales price.

Rymer's Rules

1. Place All Sales in MLS

Lazy appraisers often look no farther than MLS to develop comps, so any recent builder sales that are omitted from MLS will be absent for comparison.

2. Limit Upgrades

Bad appraisals are often due to upgrades' and options' being ignored or understated when adjusting to comparables. Rule of thumb is to limit options to 5 percent on first-time homes and no more than 10 percent on move-up homes.

3. Assign Specialists to Deal With Appraisers

Have one exclusive contact for appraisers. Untrained sales professionals or other employees can inadvertently be counterproductive.

John Rymer is the founder of New Home Knowledge, which offers sales training for home builders and real-estate professionals. You can reach him at [email protected].