As lumber prices continue to rise, home builders face challenges selling homes that accurately reflect the increased costs of construction. This applies not only to lumber, but appliances and other key components as well due to supply constraints. Because these increased costs are not recognized during the appraisal process, the builder or home buyer is often left scrambling to secure extra funds to cover the difference between the appraised value and the actual cost of the home.
NAHB notes that home builders can mitigate this issue by preparing an “appraisal binder,” which will provide a cost breakdown of the materials used to construct the home. Providing this binder to the appraiser upon his or her arrival to inspect the home will help encourage the appraiser to apply the cost-approach method during the appraisal process, thereby reflecting the cost of materials used to construct the home.
“As an appraiser, I think this approach should be applauded and encouraged,” Scott Reuter, single-family chief appraisal officer at Freddie Mac, shared in a recent Freddie Mac blog post. “This information can be very helpful as an appraiser develops market support for actual costs.”
Reuter shared his perspectives on the appraisal process earlier this year on NAHB’s Housing Developments podcast, noting the tools available to appraisers to help indicate what's occurring in the market.
“It's really evident that while rising lumber and building materials costs are putting tremendous pressure on home builders, but by extension — and I know this group know that — it’s also creating tremendous challenges for appraisers,” Reuter noted to NAHB CEO Jerry Howard and Chief Lobbyist Jim Tobin. “A lot of these cost increases are likely not yet seen in closed-market transactions. So the segregated cost breakdown, the per-unit cost breakdown, some comparable sales — that’s tremendously helpful.”
Reuter encourages builders to share information such as:
- Any market study or pre-appraisal the builder has completed
- Copy of the sales contract or the custom home contract
- Comprehensive list of the cost of the amenities and finishes for the home
- Breakout of the monetary difference of recent major material cost increases versus their typical costs
“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,” he concluded.
A full version of the post, and additional resources, can be found on Freddie Mac’s website.