Builders need to talk to appraisers and lenders to ensure that they receive an accurate valuation of the new homes they are selling, according to panelists participating in an NAHB webinar on Aug. 4.
The lines of communication have been down for a considerable period of time, largely as the result of difficulties in interpreting the meaning of the Home Valuation Code of Conduct that was put in place by Fannie Mae and Freddie Mac to prevent builders from having an inappropriate influence on the appraisal process.
Unfortunately, with insufficient information from builders about specific homes and the local marketplace, in a downwardly spiraling marketplace appraisers began relying excessively on short sales and foreclosures, properties that often are not comparable to newly constructed homes because they have been neglected and are run-down.
New policies from Fannie Mae and Freddie Mac attempt to correct this shortcoming as well as other problems that have emerged in the appraisal process. In addition to providing clarification on communication and the use of distressed home sales as comparables, the guidance also bars lenders from changing appraisal reports and emphasizes the importance of selecting appraisers with appropriate knowledge and experience to undertake various assignments. (For a related story in the July 12 edition of NBN, click here.)
The NAHB presentation on what builders need to know about appraisals was developed jointly by NAHB’s Housing Finance and Business Management & Information Technology committees and sponsored by Builder Partnerships.
Communicate, Communicate, Communicate
Builders should meet with the appraiser on the site of where the home has been or will be built and provide direct support with whatever relevant information they can, advised Martin Mitchell, vice CEO and vice president of land and business development at Mitchell & Best in Rockville, Md.
“It can’t be said enough: communicate, communicate, communicate,” Mitchell said, noting that “last year we were 180 degrees from here and told we couldn’t communicate. Go out and find the comps yourself; look at the multiple listing service and pull what you can from that to assist in comps.”
“Good information that builders should provide,” said Allen Gardiner, vice president of residential for Jackson Claborn Inc., an appraisal and real estate consulting firm in the Dallas-Fort Worth area, “includes traffic, absorption rates and the sales you are making so that the appraiser can know what the demand is.”
“One of the biggest mistakes builders make is they hide data,” Gardiner said. “Provide all the relevant data, present a low-priced sale if there is one out there and let them know why the sale is low, and show how it is related to higher-priced sales.”
Looking at construction specifications, “make sure the appraiser knows the materials in the property and why they were chosen,” said Gardiner. “The more the appraiser understands, the better.”
Mitchell also cited the importance of communicating with lenders on appraisal issues arising during loan workouts. “A builder needs to understand he’s not a bystander in this process. He’s got to be an active participant if working through an acquisition, development or construction loan that’s a problem.”
“Start by helping your lender, who hasn’t seen a down market,” Mitchell suggested. “The builder knows the project better than the lender and should take the position that they are the expert on the project.”
Also, “builders should understand their lender’s health. Are they strong? Do they have capital? An unhealthy bank without reserves may not have the flexibility to work with you.”
To improve negotiations, “tailor a plan that the lender can support,” Mitchell said. This includes explaining how the marketing plan will be improved, by lowering prices and other means, and convincing the bank that there is big financial advantage to building out the project instead of liquidating at today’s extremely low values.
And of primary importance, “request the lender to get an appraiser who is experienced in your area, who understands new construction and green building values.”
Finding the Most Suitable Appraiser
The use of inexperienced or under-qualified appraisers by lenders has been “one of the biggest issues,” said Gardiner. Banks have been relying upon appraisal management companies (AMCs) to select the appraiser. Too often this can be a matter of finding the appraiser who charges the best fee but doesn’t provide the best quality, and an inadequate amount of time is provided to complete the evaluation, making it difficult to adequately conduct proper research.
Appraiser selection criteria are based solely on lender guidelines, Gardiner said. “Builders should demand that lenders use qualified, designated appraisers. Your first concern should be the lender and their process of selecting appraisers.”
Most lenders require one sale from the builder, one from a competing builder and/or a re-sale from the subject’s neighborhood. The lender can require having two to three sales within 90 days in addition to one pending sale and one listing, he said. However, he emphasized that the bottom line is that the appraiser is responsible for coming up with the most accurate valuation possible.
Gardiner noted that lenders are not required to use AMCs. “They can use local and regional appraisers” who have more experience in the local market, he said, and will apply less restrictive guidelines than an AMC.
“Find out how lenders are choosing their appraisers,” he said. “Many are managing appraisals in house” and picking appraisers who will provide the best service for a particular project.
“Make sure how the lender selects the appraiser is the best process for you,” said Gardiner. For example, making selections on a rotating basis is not likely to yield the best results.
Lenders can order a second appraisal if they believe the first one is flawed.
To avoid having to challenge an appraisal for the inappropriate use of comparables, “what you do up-front is your best defense,” he said. “Make sure the information is in the appraiser’s hand,” including information on the best and all relevant sales. “If the appraiser doesn’t use that information, you can tell the lender he needs to find out why.” For this purpose, “keep a record of the data you give to the appraiser.”
In addition, “understand the appraiser’s challenges,” said Gardiner. “If the appraiser is coming into a market where there are no sales, recognize that fact and talk about value. Build a relationship with the appraiser. Develop your own relationship and don’t rely on the lender’s relationship with the appraiser. Be willing to engage the appraiser to assist you in your efforts.”
The builder may have to sign a release form, but Mitchell said it is a good idea to request a copy of the appraisal. “Look it over detail by detail to make sure everything is included,” he said.
To access a recording of the program, “Builders Guide to Appraisals,” click here.
For more information, e-mail Steve Linville at NAHB – email@example.com, or call him at 800-368-5242 x8597.