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How to Navigate Appraisals Amid Volatile Building Material Prices

Building Materials

How to Navigate Appraisals Amid Volatile Building Material Prices

February 24, 2021
Real estate appraisal checklist
Photo: Andrey Popov

From softwood lumber to gypsum, builders are facing new highs in building material prices and new delays in shipments. Lumber prices reached new record highs this month, bringing the average cost of a single-family home up by $24,386, according to estimates by the National Association of Home Builders. Once construction ends, appraisal standards make it difficult to understand the price jumps in building materials, leaving appraisers to stick to market value and builders with low quotes. NAHB wants builders to understand the three approaches appraisers take to determine the value of a new-home: sales comparison, cost, and income methods.

“The appraisers use market value, so if we sold a house three months ago and just completed a new build with higher material costs, they only give a market value of the house that sold three months ago,” explained James Blyth, an affordable housing spec builder in North Carolina. “In our situation the appraisal came in $10,000 lower than our asking price. Our price increase was to cover cost increases. It forced the buyers to come up with an additional $10,000 out of pocket to cover our cost increases.

“We have 10 houses under construction right now that will be ready for early spring and summer occupancy,” he added. “Normally we would start marketing once the foundation is in the ground. I will not quote a price until we have all of our costs in.”

Under the cost approach, the appraiser estimates what it would cost to rebuild or construct an equivalent structure. Because this component of property valuation considers the costs of materials used to construct the property, it is often very helpful in analyzing the value of a newly constructed home.

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