Horrible, perhaps, but it’s a hitch many architects would welcome right now. It means they’ve landed a project, and it has appraised for enough money to obtain a loan. Memphis architect Todd Walker, FAIA, principal of Archimania, says low appraisals nixed three potential jobs in the past two years. One client, hoping to convert a warehouse to apartments, received an appraisal on the existing building 40 percent lower than its 1995 value. “It’s disheartening,” Walker says. “Generally appraisals are better with existing houses where people have equity.”
It’s the same in Minneapolis, where Sarah Nettleton, AIA, LEED AP, says clients recently tried to refinance a home she completed in 2007. They couldn’t get comparables to support its value. Another client is awaiting word on a construction loan. “We’re hearing they’ll loan 80 percent based on appraisal, but this is a neighborhood of older custom homes,” she says. “There are few comparables, and the underwriting has gotten stricter.”
Restrictive lending has forced architects to shift their sales pitch. Pre-crash, their first priority was to sell the design; now financials are front and center, perhaps rightly so. “I don’t give them the full stream of, ‘I can make this happen,’” Nettleton says. “It seems unfair for clients to pay tens of thousands of dollars for a piece of paper that’s a dream, and then what? In the first meeting I try to filter out how the money works. It adds a level of complexity to something that wasn’t easy to begin with.”
Further proof that low appraisals are weighing down the housing recovery, the National Association of Realtors (NAR) said that 16 percent of realtors surveyed reported a canceled contract in June of this year, and blamed the high number on low appraisals. In June 2010, only 9 percent reported a cancellation. Another NAR report found that 32 percent of members surveyed either negotiated a lower sales price or had a contract canceled or delayed as a result of a low appraisal in the previous three months.
“It should be noted that appraisal-related cancellations generally result from banks requesting eight to 10 recent comps versus the traditional three, when there simply aren’t that many apples-to-apples comps,” says NAR public affairs officer Walter Molony. “For example, an appraiser may be forced to include trashed foreclosures in valuing a traditional home, so pressure from lenders is contributing to low appraisals and elevated cancellations.”
Ken Chitester, communications director for the National Appraisal Institute in Chicago, confirms that foreclosed properties may be used as comps. “In Las Vegas, if we eliminated foreclosures as comps, we wouldn’t have any comps,” he says. “The problem is that there are many inexperienced appraisers who don’t know how to adjust the numbers properly when using them as comps.”
Ditto that for adjustments in valuing one-of-a-kind properties. Declining appraisals go with a declining market. Yet the premium for quality architecture has never been well understood by most appraisers. “It’s a mathematical flaw to say you can’t design the best or worst house in the neighborhood, that it always has to be somewhere in the middle,” says Eric Rawlings, AIA, LEED AP, principal of Rawlings Design, Decatur, Ga.
As an example, Rawlings says a house he designed for a local speculative builder appraised for $725,000, just $25,000 more than a nearby cookie-cutter house 1,400 square feet smaller. As comps, the appraiser used two $800,000 houses Rawlings also had designed. However, this house, too, eventually sold for $800,000, and he suspects the bank came up to the contract price after it was put on the market. “Value is such a fluid thing, that’s why there’s so much confusion,” he says. “A lot of people assume appraisers have a magic methodology, but it’s quite unremarkable when you look at it in more detail.”