Sean,
I noticed the value problem when comparing my spec house sales to their appraisals. Since my houses sold for top dollar in the area, my appraisals were coming in below my sales history. Those who sold their houses for the least were appraising above their sales history. If we all designed spec houses, we would have immediate sales histories and would be able to prove what our monetary value is as designers. If we wait for our houses designed for homeowners to sell as USED houses, then it will take a long time to ultimately be disappointed about our USED sales histories. Without sales, we have no known monetary value in the eyes of the lenders and therefore little argument concerning what our houses should be worth. My suggestion is that we all insert ourselves into the spec house market and start tracking our sales. I'll bet many of you will be more successful at it than I.
80% of all new houses are spec houses. Of the 20% that are commissioned by homeowners, 8% are built by the owner and are likely located in rural areas with few Architects or Builders. This means 12% of the owner commissioned houses are built by professional builders and this is where the majority of our work is found. In this category we're competing with owners and builders designing, residential designers, and the most dominant are the plan books we invented. I'd say it would be generous to claim we're designing a total of 5% in all 3 categories. I doubt we'll be able to claim more business from the pro-built category, so if we want to grow our territory, we need to insert ourselves in the spec house market (80% of the work!!!). This year I've designed 19 unique spec houses that will only be built once. I know other Architects that have seen success in this market as well. While builders are having a hard time getting 20 loans at once, they're looking into other ways of competing. There has never been a better time to get a piece of the spec business than now.
My idea for "fixing" the system would concern the spec houses first, since they are literally products built and designed by companies with business models and consistent sales histories. I would propose that the appraisers use a Competitive Comparison Approach for spec houses, which would be very similar to the current Sales Comparison Approach. The catch would be that companies would have to use their last 3 sales as comparable properties, rather than using comps from other companies that clearly have different business models and sales histories. The current Appraisal methods are not trying to determine a value for the actual Subject house. They are trying to create a replacement cost for a generic house with the same configuration as the Subject, but using current market values determined by recent sales of "similar" houses. This makes sense for older houses built with different codes, materials, and methods, but not for competing companies creating new houses for sale. The lenders don't want a replacement value, they want to know what is the most likely price they will get for the specific house they are investing their money in should the buyer default.
If you think about the average spec builder business model of deliberately trying to undercut their competitors by building more and more of the cheapest house, then all it takes is one high sale in the area and every lowballing spec builder is hawking on that one comp. Before you know it 40-50 loans are being issued for a higher value because the appraiser used one sale from a more successful company that grossly exceeded the value of the Subject's sales history. This flaw in the system aided in the overvaluing of residential property during the boom. If we can convince a dozen or so government agencies who regulate the lenders and appraisers that fraud wasn't the only reason real estate went up so fast in value and we can help fix the system in terms of spec houses first. This would open up the marketplace for Architects where 80% of the work can be found and we would have a fighting chance to get fair values on houses that sell right away. This is the only way we can prove our monetary value to the lenders and thus the rest of the system would be easier to make more fair to the more expensive projects that often get cheated by the appraiser. There is a difference between being successful and over-building, yet appraisers don't seem to understand that.
-------------------------------------------
Eric Rawlings AIA
Owner
Rawlings Design, Inc.
Decatur GA
-------------------------------------------
Original Message:
Sent: 08-31-2012 16:05
From: Sean Catherall
Subject: Appraisal Reform-An Approach?
Eric, what can we do to support this effort and to stay up-to-date on progress?
-------------------------------------------
Sean Catherall AIA
Integrated Property Services
Bluffdale UT
-------------------------------------------