For What it’s Worth
Appraisals are a good idea in concept. A disinterested third-party researches a property’s intrinsic value and figures out where it stands in comparison to comparable places in the same vicinity.
They are eminently subject to honest t goodness human error, and, of course, mischief.
In an excessively risk-a-phobic business climate, home appraisals and the humans doing them are overshooting the value destruction side of the equation, to the detriment of anyone who’s trying to sell. This story is headline news, and Big Builder editor Sarah Yaussi has been on top of the issue for weeks.
Here’s a snippet from her latest download of insight:
Let’s do the math here for a second. If the average price of a new home today is $221,600 and–let’s suspend reality here for a minute–the average home builder makes an 8% margin (we know that many builders today are losing money on every sale in name of simple cash generation, but bear with me).That means theoretically that the home builder would pocket in profit somewhere around $17,728.
But then factor in the incentives the builder might be offering–no closing costs, free upgrades, price reductions, etc. Let’s put that figure at $10,000 (again that’s probably conservative). So, that $17,728 in profit is really like $7,000. Now what happens when the appraisal comes in$5,000 below that $221,600 contract price? You guessed it. It comes right off the builder’s bottom line as he has to slash the price (probably for the second or third time) or cancel the sale, sending a finished inventory home back onto his books. I’ll just skip factoring Realtor co-ops and the like for now.
So, let’s review. Now our builder has seen profits–assuming they were making some–shrink by nearly 85%. I don’t know any industry that would think that was no big deal, as Lyons suggested.
In fact, this issue is a huge deal because it is a matter of life and, well, solvency for many builders. Backlash from the new code has grown shrill enough to reach Capitol Hill. On June 25, Reps. Gary G. Miller(R-Calif.) and Travis Childers (D-Miss.) introduced H.R. 3044, a bill that would place an 18-month moratorium on the new code.
Here’s a slide-cast Yaussi has prepared on a few jaw-dropping appraisal nightmares.
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