Flawed Appraisals Preventing Home Sales

One out of three builders are reporting losing signed sales contracts during the preceding six months because appraisals on their homes are less than the contract sales price, according to a recent nationwide survey conducted by the National Association of Home Builders (NAHB). 

It is too common, due to faulty appraisal practices, for brand new homes with appliances and interior upgrades to be compared to distressed properties that have been sitting vacant and in disrepair. The result, in many cases has been that the new house is appraised at less than the cost of construction.

The NAHB survey data confirm this, where a full 60 percent of respondents reported they were experiencing appraisals coming in below their contract sales price.

Of those reporting that they had encountered this problem, 53 percent said the appraisal amount was actually less than the cost of building the home.

These appraisal practices are a major contributing factor to the current acquisition, development and construction (AD&C) lending crisis that has choked off credit for home builders and threatens to prolong the current housing downturn.

Falling appraised values for land and subdivisions under development have led some financial institutions to stop lending to developers and builders, to demand additional equity and even to call performing loans.

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0 replies

  1. That is because it is too expensive for home owners to update their houses due to Philly regulations. The permit process is painful and expensive.

  2. Wow. It only took the NAHB four years to figure this out! This started in 2007 when the first foreclosures hit the market. I had three homes that lost 20-25% of their value in 3 months as a result of changes made to the way appraisers are required to assess properties values. Prior to that point, appraisers were not required to use distressed properties as “comps”. All of a sudden a home which had a construction cost of $1.2MM was being compared to a foreclosure that a bank dumped on the market for $850K. In the end, we could not retail our homes for anywhere near the cost of construction. As a result they went back to the bank, who sold them for 50 cents on the dollar!!!! In turn, this killed all of the other new construction in the area. This is a slippery slope that has been around for at least 4 years and until it is fixed home prices will continue to drop.

    • MJ –

      NAHB has been tracking and working the faulty appraisal issue throughout the housing crisis. This post only covers the most recent survey results, which are consistent with your experience.

  3. If you want to point a finger, point it at Cuomo and HVCC. The overeation to the crash – in all aspects of the purchasing process – is killing any revival. The industry was part of, not the entire problem.

    I’m appraising 25 years, specializing in FNMA foreclosure work. Appraisers are required to use distressed comps IF they are comparable. They are also required to provide an overview of the local market trends – which will include the impact of distressed properties. That’s underwriting requirements, not appraiser choice.

    Everyone is adjusting to this “new” market – which is the market we will have moving forward. Builders had a nice a run, as everyone did, but now it’s time for them to adjust or move on. Profit is down everywhere – including with the hands in appraiser pockets. If you can’t make a living building, then look at something else…many have.

    The whining about “bad appraisals” really needs to stop now, the crap piled on this industry is nonsensical. Target the guns on Washington, not appraisers.

    • A lowball appraisal can come from comparing brand-new homes with appliances and interior upgrades with distressed properties in disrepair. The result, in many cases has been that the new house is appraised at less than the cost of construction.

      Furthermore, appraisers are being hired who are not familiar with local areas.

      In our case, the appraiser used comps that differed substantially from our home and that were from ghetto neighborhoods unlike our nice, higher-end area.

      It came in 40K below selling price on a 240K house.

      Dumb. Incompetent. Lazy.


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