| Final Inspections of New Construction Houses
The following letter offers a clear perspective of the appraisers duties and responsibilities when completing final inspections of new construction houses and how all parties (the lender, the buyer, and the builder) need to cooperate with the appraiser.
Eyes of the Lender
Our question this week is from an underwriter. This person wants to know what to expect from an appraiser when they are performing a final inspection on a newly constructed home? We have expanded the question to include, what should be expected when an appraiser performs a final inspection on any appraisal that is "subject to" the completion of construction or repair?
The most important thing to remember when inspecting property for the completion of required repairs or construction is this; appraisers are the "eyes of the lender." The lender is relying on the appraiser to certify that the collateral is secure and that the all required construction is complete. The underwriter's position should be to trust the appraiser's judgement in the assessment of the level of completion and the quality of the completed requirements. In order to earn this respect the appraiser must always fully represent the state of the repair.
Some appraisers take the "generous" approach and state that the property is complete even when there is work to be done. Remember, it is not the appraisers job to be lenient in these matters. If there is work in progress, the inspection document should be printed to reflect the facts. People reporting that construction is complete when work is in progress open themselves up to a large amount of liability. The problem is that many builders will "spike" a job. When they know that the appraiser or inspector is coming to look at the home, they will place a large crew of workers in the home. When the inspector leaves these crews are then pulled off of the job and sent to complete work in other homes. The appraiser being "generous" reports that the work is complete, the borrower then closes the loan and the lender funds thinking that the collateral is secure. The proud new homeowner may even move in to the house on the promise from the builder that the work not completed will be performed at a later date.
The problem arises a year down the road. The homeowner's warranty is over, and the builder refuses to come back and finish the job. Now for the rub, the homeowner will be angry and seeking someone to pay the cost of the unfinished work resulting from his or her bad decision to close the loan in spite of the job being incomplete. They most probably only have recourse against the one individual set in place to protect their interest and the interest of the lender. The person these people see as the responsible party is the appraiser. The appraiser is open to a huge liability by being "a nice guy." In the end, all this person will receive is the potential for a large lawsuit.
So what is the answer for appraisers? Lenders want to close fast, excited homeowners just want to move into their new castle, and the builders want to move on to a new home and more profits. The answer is educating the parties involved that all the appraiser/inspector's duty is in this situation is to be the "eyes of the lender." Yes it sounds corny, maybe even cliché, but this is a very effective tactic for allowing the job to be done properly without upsetting any of the parties involved. When all parties, including the underwriter for the lender, understand that appraisers neither have nor want the power to make the decision to close the loan, the parties involved will typically work among themselves to resolve incomplete items before an inspection request is issued. When performing a final inspection the appraiser should report exactly what they see. If the home is marketable and inhabitable, but painters were painting the hallway and carpet was being installed in the master bedroom, report these facts. The job as defined by most lenders is not to decide for the bank when they can close the loan, but to tell the lender what progress has been made so that they can make an informed decision.
A very important factor to remember is that the lender makes the decision on when to close the loan. Many lenders will close the loan with work in progress if the total cost of the work to be completed is less than 5% of the value conclusion. So, when reporting on work that is not complete, detail the incomplete items and assign an estimated cost to complete the unfinished task. Furthermore, take the unusual step of estimating the approximate market value of the incomplete items. This will allow the lender to make an informed decision about whether to close the loan and about how much money to hold in escrow to insure the completion of the project.
"What is the appraisers responsibility when inspecting properties that are "subject to" completion?" The answer is to give a full written representation of the completeness of the work performed or currently in progress and to include pictures of the project. The appraiser's responsibility is to be the eyes of the lender and to let the lender make the decision on when to close the loan.
By Michael Gross
Copyright by Michael Gross & e-appraiser.net. All rights reserved.
Reprinted by permission of Michael Gross and e-appraiser.net.
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