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.