Appraisals have always been a large part of the normal real estate transaction:
while a sales price is negotiated between the seller and the buyer, the bank has its say: they will lend to the buyer a percentage of the lower of the two figures: negotiated sales price, or appraised value.
If they do not think that the property is worth the negotiated price, they will lend less. But the thing is that real estate is not an exact science, and if you have 2 appraisals done on a property by two different appraisers, they will come up with 2 different values. With the crisis the way it has unfolded, appraisals have become very stringent, very conservative. Let's just say that the banks are a lot more careful with how they lend money.
It is apparently a big problems for builders too:
one out of three builders reported losing signed sales contracts during the preceding six months because appraisals on their homes were less than the contract sales price, according to a survey by the National Association of Home Builders (NAHB).
Builders claim that due to faulty appraisal practices, brand new homes with upgrades get compared to distressed properties that have been sitting vacant and in disrepair. The result, in many cases, has been that the new house gets appraised at less than the cost of construction.
According to the NAHB survey, 60 % of respondents reported they were experiencing appraisals coming in below their contract sales price. Of those reporting that they had encountered this problem, 53 % said the appraisal amount was actually less than the cost of building the home.
This has some very real consequences:
In normal times, housing accounts for more than 17 % of the nation’s GDP. Constructing 100 new homes generates more than 300 full-time jobs and $8.9 million in local, state and federal tax revenue that supports local schools and communities across the land.
More than half of the single-family builders and developers surveyed by NAHB indicated they had decided to put any new construction or land activity on hold until the financing climate improves.
One last word to buyers and sellers alike: unless the property sold is very desirable, and the buyer does not need a loan, this appraisal question may influence the outcome of the real estate transaction.
Francis Rolland
