If you’re a homebuilder in La Plata or Archuleta County, here are three little words you don’t like to hear: it didn’t appraise. Unfortunately, in the fast-moving Four Corners housing market, it’s not too unusual to for the ultimate selling price of a home to outstrip the appraisal figure, sometimes throwing a wrench into a buyer’s or client’s financing process.
Let’s explore three reasons behind this, then take a look at what Southwest Colorado home builders can do about it.
Three Factors Driving the Differences
First, as you probably know, it’s partly in the nature of a hot real estate market for appraisals to lag a bit behind real estate contract prices. Mike Alcott, an appraiser in several counties in the Four Corners area, explains that “while real estate listings and contract prices are not necessarily reliant upon prior sales data, appraisers rely heavily on historical information to develop credible appraisals.” In any type of market, even one as competitive as ours, Mike says, past sales prices are key to developing an independent valuation of a property.
Another factor in a newly constructed home, according to lender Freddie Mac, is that new residential developments and custom built homes may incorporate leading edge technology or amenities not widely-available yet. This can drive up a home price beyond what an appraiser can support.
Finally, there’s the pain point the entire industry is feeling: the skyrocketing price of building materials. The National Association of Home Builders highlights prices for a wide variety of materials rising at alarming rates. Lumber prices continue to be volatile, landing at a 52% increase over the last 12 months after wide swings up and down—mostly up. Steel is up even more: 55.6% year-over-year. Gypsum and concrete prices have risen too. This instability adds to the possibility that a completed home won’t ultimately appraise for a price that makes sense for the builder.
What Four Corners Home Builders Can Do
An appraisal officer at Freddie Mac has a suggestion: builders can share information with appraisers through “appraisal packets.” If you’re an Archuleta or La Plata County home builder with a valuation coming up, you might ask if the appraiser would be open to receiving such a packet (and would treat it with sensitivity if it offers private information).
The material could include:
- Any pre-build information that’s relevant, such as market studies the appraiser might not have and pre-appraisals of the home
- Comprehensive information on materials costs, including recent changes and comparisons to recent or typical costs
- A detailed list of amenities—particularly new technology—and finishes for the home
- Any change orders, additional costs, or other influences on the build that might affect the price
Freddie Mac notes that even with lines of communication wide open, there will be times when an appraiser just can’t support a price for a home that reflects current market conditions or (even covers construction costs, in some cases). If you see that as a possibility when you’re building a custom home in Southwest Colorado, it’s probably a good idea to have a frank discussion with your client about it. The fewer surprises down the road, the better.
In any situation in which a home doesn’t appraise in line with market prices, Freddie Mac recommends that builders meet with the appraiser. The purpose would not be to change his or her mind; instead the objective is to understand the analysis. Builders who do this are then equipped to convey information to their clients, move forward with more knowledge about the appraisal process, and develop positive industry relationships based on mutual respect.