When it comes to getting an accurate appraisal for a high-performance home, it’s easier and more practical to take the right steps up front than to try to get a low appraisal revised after the fact.
Appraisal expert Sandra Adromatis, a featured speaker at the High Performance Building Zone during the recent International Builders’ Show, offered advice for securing an accurate appraisal of a high-performance home.
First and most important is documentation, especially of features behind the walls and other items that aren’t immediately obvious.
A good place to start is by taking a close look at the Appraisal Institute’s Residential Green and Energy Efficient Addendum. This is particularly important if the home is built to a nationally recognized program like theICC-700 National Green Building Standard or includes additional high-performance features that should be documented within the appraisal.
Filling out the addendum and providing it to the appraiser will help ensure that the house’s important features are noted and valued appropriately. In a move that will further facilitate the process, the Home Innovation Research Labs, which certifies homes to the National Green Building Standard, recently announced that it will provide a copy of the addendum noting some pertinent features of the property with green certifications.
In broad terms, the addendum addresses insulation, the home’s envelope, water efficiency, windows, daylighting, appliances, the HVAC system and the home’s energy rating.
The form also allows appraisers to document indoor air quality measures, projected utility costs, the home’s HERS rating, solar capabilities, the walk score, access to public transportation, orientation on the site and landscaping.
Providing detailed information to the appraiser about any of these features will go a long way toward securing an accurate appraisal. Even more helpful will be any comparison you can provide between your product and building the same house to the prevailing local code, especially regarding energy use and costs.
To ensure an accurate appraisal, it’s equally important that the appraiser be experienced in evaluating green and energy-efficient homes. Again, the Appraisal Institute is a good place to start. If you navigate to the left side of its Find an Appraiser page, you can search for someone in your area who has passed the courses necessary to be listed on the institute’s professional development program registry for the valuation of sustainable residential buildings.
That’s good information to share with the lender, who will ultimately be responsible for hiring the appraiser.
Remember also to select a lender well-versed in high-performance construction. Also consider adding a contract clause to require the lender to hire an appraiser qualified to evaluate green homes.
Another option: Establish relationships with lenders who understand the value of green and are committed to ensuring appropriate appraisals on such properties.
The best place to start when looking for such a lender? Put the networking power of your HBA to work and ask other members for recommendations.
Click here for more information on contract language.
Six federal financial regulatory agencies today issued a final rule that creates exemptions from certain appraisal requirements for a subset of higher-priced mortgage loans. The exemptions are intended to save borrowers time and money while still ensuring that the loans are financially sound.
The appraisal requirements for higher-priced mortgages were established by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Under the Dodd-Frank Act, closed-end mortgage loans are considered to be higher-priced if they are secured by a consumer’s home and have interest rates above a certain threshold. The Dodd-Frank Act requires creditors to obtain a written appraisal based on a physical visit of the home’s interior before making these loans.
The final rule provides that loans of $25,000 or less and certain “streamlined” refinancings are exempt from the Dodd-Frank Act appraisal requirements, which go into effect on January 18, 2014.
In addition, the final rule contains special provisions for manufactured homes, which can present unique issues in determining the appropriate valuation method. To ensure that access to affordable housing options is not hindered while creditors make the necessary adjustments, the requirements for manufactured home loans will not become effective for 18 months. Starting on July 18, 2015, loans secured by an existing manufactured home and land will be subject to the Dodd-Frank Act’s appraisal requirements. Loans secured by a new manufactured home and land will be exempt only from the requirement that the appraiser visit the home’s interior. For loans secured by manufactured homes without land, creditors will be allowed to use other valuation methods without an appraisal, such as using third-party valuation services or “book values.”
In January 2013, a final rule implementing the new Dodd-Frank Act appraisal requirements was issued by the Federal Reserve Board, the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the National Credit Union Administration, and the Office of the Comptroller of the Currency. Compliance with the January 2013 final rule will become mandatory on January 18, 2014. These same agencies are jointly issuing today’s final rule to provide additional exemptions in response to public comments.
Although stabilizing home values and modest price increases across much of the land are fueling a housing upturn, the recovery still remains tenuous in part because a flawed appraisal process continues to thwart accurate valuations on new homes.
Your Home Builders Association has made it a priority to enact major reforms so that appraisals reflect accurate home values and do not needlessly kill home sales.
Too often, due to faulty appraisal practices, home sales have come in below a contract sales price and brand-new homes with state-of-the art appliances and interior upgrades have been compared to distressed properties. In some cases, this has led to a new home getting appraised at less than the construction cost.
So how can builders fight back against low appraisals and win back sales?
Builder-members who have successfully navigated through the appraisal process offer the following suggestions:
Share data with the appraiser. Builders should provide all relevant data to appraisers, including plans and specifications of the property, information on how their product differs from their competitors, a list of energy-efficiency features in the home, details on materials that were chosen, and the buyers’ reaction to products selected. Builders cannot talk about the specific value of the home, but they can give the appraiser factual information that is verifiable.
Insist on a qualified appraiser. Use lending institutions that hire competent appraisers. If an appraisal assignment goes to an appraiser who you know is unfamiliar with your geographic area, insist that the lender switch to an appraiser who knows the area.
Request an appraiser who is familiar with new construction and/or energy-efficient construction.
Keep a detailed record of data provided to the appraiser (email, notes in calendar, etc.).
Engage with the lender and provide the facts. Nothing prevents a lender from ordering a second appraisal if the first appraisal appears flawed.
Be present during the appraisal. A builder can answer any questions the appraiser has during appraisal of the property and also point out added features, amenities and products that make the house stand out from others in the market.
Stage the property. Just like a buyer looking at an open house, an appraiser is likely to look more favorably on a home that exhibits curb appeal and is clean, clutter-free and move-in ready.
Employ the Tidewater Initiative. This little-known rule at the Department of Veterans Affairs states that if the appraiser determines that the value will come in lower than the sales price, he is required to halt the appraisal before it is completed and make the lender aware of the value coming in below the sales price. This allows any party to the transaction, including the builder, to provide additional information in support of the sales price. Since this is done at the VA, a builder can ask any lender to consider this policy without violating current regulations.
Valuing Green Homes for What They are Worth
Too many appraisals of homes with green features are being conducted by appraisers who simply aren’t trained to recognize the features and adjust valuations accordingly.
One builder and remodeler, Matt Belcher of Hibbs Homes in Wildwood, Mo., came up with a simple solution when he ran into this problem.
Belcher (who certifies his projects to the ICC 700 National Green Building Standard and other sustainability programs) developed relationships with several local lenders who all agreed to require that any appraiser assigned to his projects had undergone training, such as that offered by the Appraisal Institute, to become qualified to appraise high-performance homes.
Belcher also developed a sales contract clause for situations where the buyers prefer to select different lenders. The language, which has been reviewed and enhanced by the Appraisal Institute, states:
“This Home is being built/renovated/updated to nationally recognized standards above prevailing code. It is designed and constructed with unique features and materials and with high-efficient equipment and in accordance with high-efficiency standards. The Lender shall choose an Appraiser educated and knowledgeable in this type of valuation of these specialized Homes, preferably an appraiser who holds a professional appraisal designation that requires advanced education on such issues as the valuation of sustainable buildings (e.g., MAI or SRA designations from the Appraisal Institute). The appraiser shall provide verification of green valuation education of 14 hours or more from a qualified educational provider and knowledge to be permitted to conduct the appraisal for this project.”
The requirement seems to be working. After one recent episode in which Belcher thought the project was undervalued, he used the clause to request another appraisal from the lender, this time to be done by a person whose qualifications he could verify. The second appraisal came back reflecting a value that was much more appropriate.
Builders and remodelers who face green appraisal challenges are encouraged to refer to the NAHBGreen Toolbox: Overcoming Appraisal Challenges for additional ideas.
Your HBA Leads the Way
Your Home Builders Association has taken a leadership role on appraisal issues by bringing industry stakeholders and regulators to the table at five summit meetings that it has conducted at the National Housing Center in Washington, D.C.
Your Home Builders Association has also adopted policy on appraisals that calls for:
- Strengthening education, training and experience requirements for appraisers of new construction.
- Improving the quantity and quality of data for new construction.
- Developing new appraisal standards and best practices for conducting appraisals in distressed markets.
- Developing a process for expedited appeals of inaccurate or faulty appraisals.
- Strengthening oversight of appraisal activities.
Moreover, your HBA has developed an appraisal white paper, “A Comprehensive Blueprint for Residential Appraisal Reform,” that the association uses in its advocacy efforts with Congress, regulators, appraisers, lenders and other relevant stakeholders. The white paper calls for reforms and recommendations that will:
- Streamline and coordinate the current regulatory framework and devote adequate resources to ensuring effective oversight and enforcement.
- Create a real estate data “superhighway” with a national real property registry and supporting networks.
- Reaffirm and streamline key appraisal principles contained in the Uniform Standards of Professional Appraisal Practice.
- Establish uniform credentialing standards specific to each area of appraisal practice.
- Enact a consistent set of rules and guidelines for appraisals.
- Consider all three valuation approaches – cost, income and sales comparison.
- Develop a dispute resolution process for expedited appeals of inaccurate or faulty appraisals.
- Establish a standard and a process to get the best appraisers for each assignment.
Resources for Home Builders
Your Home Builders Association has also developed excellent resources to help its members successfully navigate the appraisal process. These include:
- A two-page summary for members on how to build stronger and more productive relationships with appraisers.
- A “Builders Guide to Appraisals” webinar, which is available here. The webinar features a panel of home builder and appraisal practitioners who discuss appraisal rules and provide advice to help builders improve the accuracy of their home valuations.
- An Appraisal Primer that provides a detailed overview to help NAHB members better understand the appraiser’s role in the financing of new homes.
To learn more, go to nahb.org/appraisals.
Builder Review continues its highlight of the more than 100 initiatives by your HBA that have saved HBA members during the last year. Below is another way your HBA is saving our members money.
Taking the Lead to Ensure that Appraisals Accurately Reflect Market Values. Acting aggressively to identify solutions to improve the accuracy of appraisals, NAHB’s Appraisal Working Group is focusing on changes in the areas of regulation and oversight, appraisal practices and standards, appraiser education and experience requirements, and data and technology. Meanwhile, NAHB is calling on Congress and regulators to strengthen appraiser qualifications, develop new appraisal standards and oversight, and create an expedited appeals process.
NAHB has developed tools to help members secure accurate appraisals and continues to hammer home the message to lawmakers, regulators, banks and the appraisal industry that distressed properties should not be compared to new homes. Builders should not be losing sales to an appraisal process gone awry. NAHB continues to make progress with regulators and members of the appraisal industry to correct these major flaws in the appraisal process, ensure that appraisals accurately reflect
true market values and prevent builders from losing sales due to faulty appraisals. For more information, go to www.nahb.org/appraisals.
NAHB this week publicly released a “Comprehensive Blueprint for Residential Appraisal Reform” that sets forth our association’s recommendations for addressing serious problems in the residential appraisal process.
This landmark white paper, completion which was first announced to association members right after the 2013 International Builders’ Show, notes that — because appraisals are governed by multiple public and private entities and ultimately by states — standards and requirements can vary greatly, resulting in a system that is inconsistent, confusing and does not serve consumers well.
To address these problems, a special Appraisal Working Group was established last year to develop formal recommendations for comprehensive residential appraisal reform. Members of the working group included home builders as well as representatives from the financial and appraisal sectors, and input was sought from representatives of every stakeholder group.
Praising the efforts of Appraisal Working Group, co-Chairs Barry Rutenberg and Joe Robson, 2013 NAHB Chairman Rick Judson noted that, “Even as the residential construction industry shows signs of recovery, housing activity is thwarted by an appraisal system that remains dysfunctional and is a major impediment to a stable housing finance framework. Until we see meaningful appraisal reform, the U.S. housing finance system will be operating under unprecedented uncertainty.”
The white paper offers specific recommendations for changes to all aspects of the appraisal system, and will form the basis of our outreach to policymakers as we encourage them to move forward on its proposals. To access the report, visitwww.nahb.org/appraisalwhitepaper.