The appraisal of a new home is clearly an important event for a home builder as it plays such a vital role in the builder or homebuyer being able to acquire the necessary financing. For an appraiser handling the assignment, it’s their job to measure market acceptance and develop support for the value of the property. As I discussed in a recent Housing Developments podcast with the National Association of Home Builders, for a number of reasons, these assignments can present challenges for an appraiser.

Why Are New Construction Appraisals Challenging?

New home packages typically include pricing for additional features or amenities that may not have been widely seen in a particular market yet. This can lead to builders introducing new inventory at price points that make it difficult for an appraiser to find supporting closed transactions – and this has only been compounded by rising lumber and building materials costs seen recently in many markets nationwide. The refrain of the house didn’t “appraise” is being heard more and more.

How Can Builders Help Address This?

To get in front of this, many builders are adopting best practices that promote open engagement and sharing of information with appraisers through “appraisal packets”. As an appraiser, I think this approach should be applauded and encouraged. This information can be very helpful as an appraiser develops market support for actual costs. That said, with industry concerns around undue influence and pressure on appraisers, there can be a good deal of confusion around what information a builder is able to share.

To help overcome appraisal challenges, many builders are adopting best practices that promote open engagement and sharing of information with appraisers through “appraisal packets”. As an appraiser, I think this approach should be applauded and encouraged.

Since the development of an appraisal is all about collecting and analyzing information, the good news is that short of outright pressure, the landscape is really wide open with respect to what and how much information is appropriate for a builder to share.

A quality, helpful builder appraisal packet can include the following:

  • Information from any market study the builder has completed (or pre-appraisal).
  • Copy of the sales contract or the custom home contract.
  • Comprehensive list of the cost of the amenities and finishes for the home.
  • Two or three local and recent comparable sales, if available.
  • Breakout of the monetary difference of recent major material cost increases vs their typical cost.
  • Copies of all prepaid change orders showing the amenities.
  • Any additional added costs to the price of the home.

Additionally, many builders also share the actual cost breakdown for the home, including their margin. If this is the case, I can’t stress enough how important it is that appraisers realize the sensitivity of this information and ensure it is treated with the utmost confidence.

What if the Appraisal Can’t Justify the Price?

Even with all of this active engagement, there will be times where an appraiser cannot support a certain sales price (or construction costs). When this happens, a builder might request a face-to-face meeting with the appraiser to review and better understand the analysis. This doesn’t need to be a contentious event. Indeed, a productive conversation can help both the builder and appraiser – and not just as it relates to that specific assignment. It can also go a long way in strengthening their interpersonal relationship.

The current environment of rising costs and limited inventory – during a global pandemic nonetheless – are creating market challenges across the board. It’s my opinion that the best way to navigate the challenges presented by this environment is for builders and appraisers to continue to talk and collaborate – to better manage current assignments and lay the groundwork for positive relationships in the future.