Trends in Home Appraisal

A letter from an experienced Vermont appraiser crossed my desk last month. He wanted to know how Craftsman’s appraisal tools handle several trends in residential construction. Good question.

Energy-Conscious Design

This VT appraiser asked how Craftsman adjusts costs for homes with superior energy packages. In his experience, homes built to minimize heating and cooling loads cost from 5% to 15% more than conventional homes. I won’t commit to those numbers. But I agree that homes built today offer buyers more opportunities for energy-saving upgrades. Case in point: Last May, Maryland started requiring builders to tell their clients about tax credits for energy-efficient options. (Maryland Business Regulation Code § 4.5-603.)

Still, evolving energy standards are nothing new. Home builders have been on an energy-conservation binge since at least the oil shock of 1973. Craftsman published the Minimum Energy Dwelling in 1977. Since then, residential energy standards have improved every year. What was cutting edge design ten or twenty years ago is the bare minimum now. Our frame of reference has changed.

My recommendation: evaluate energy-efficient design the same way you would appraise better quality anywhere in a home. Craftsman’s appraisal tools offer six quality choices, from Minimum to Luxury, for each of the dozen major parts of a home, from foundation to roofing. When you see built-in energy savings, boost the quality rating on that part of the home. I’ll be surprised if the increase doesn’t fall in the 5% to 15% range.

One possible exception: A PV solar array can add six figures to the cost of a home. But I wouldn’t routinely add the cost of installed solar to any home appraisal. Think of a solar home as you would of a home with a Ferrari parked in the garage. It doesn’t change the home value. The same with solar. The PV array on the roof is probably leased from a solar investment company. Most solar energy systems can be uninstalled and relocated elsewhere. And the useful life expectancy of solar add-ons is much less than the life expectancy of the home itself. That puts PV solar in the class of an above-ground pool, not a fixture that belongs in your appraisal.

Super-Luxury Homes

Every appraiser needs to know about these. Thirty years ago, nearly all homes were built like homes, not like five-star hotels. Now, every state has communities with super-luxury homes:

• Over 3,500 square feet of floor with a massive front entrance,
• Marble, quartz and glass everywhere,
• Over 100 built-in light fixtures,
• Cavernous rooms, 18-foot ceilings, no square wall corners,
• More bathrooms than bedrooms,
• Kitchen built-ins appropriate for the kitchen in a high-class restaurant.

These are homes intended to break the norms of residential construction.

That’s why Craftsman appraisal tools step up the game when a super-luxury home is detected. For example, try NationalAppraisal Estimator. Enter a floor area of over 3,500 SF, more than 10 building corners and luxury or semi-luxury class for each of the 10 quality categories. That elevates your appraisal to the super class. You’ll be counting building masses, not building corners. Your cost breakdown for that super-luxury home will be a step above conventional residential construction. Cost totals for finishes, design and engineering will be a much higher proportion of the construction cost.

If your focus is replacement cost rather than appraisal, have a look at Insurance Replacement Estimator. Like all Craftsman valuation tools, it’s backed by over 60 years of construction cost estimating experience.

What Makes a Good Home Appraisal?

Appraisals come in at least three flavors. The first is based on comps. What would a comparable property sell for in the same area? The second is based on expected revenue. That’s the most common way to appraise commercial properties. The third type of appraisal is the replacement cost. In some ways, cost-based appraisals are similar to construction cost estimates.

Contractors figure the quantity and cost of materials, the cost of labor and the equipment expense. Then they add fees, taxes and markup. That’s the contract price – and also the cost to the first owner.

The most accurate cost-based appraisal would be an exhaustive labor and material construction cost estimate. Few appraisers have the background, experience or patience to do that. Anyhow, estimates start with building plans. Appraisers seldom have the home plan. Appraisers have something better, the building itself.

Sometimes you’ll hear a cost-based appraisal called a valuation. No matter the term, work begins with a visit to the site: counting, measuring, evaluating, making judgments about replacement cost.

Professional Standards for Home Appraisal

Fannie Mae’s Uniform Appraisal Dataset sets the standard for residential appraisals. Appraisers working for Fannie Mae lenders evaluate the residence in two categories: (1) quality of construction and (2) condition of the home.

• Quality of construction can be any of six classes: Q1 (highest-grade materials and workmanship) to Q6 (lowest quality materials, serious deficiencies).
• Condition of the home can fall in any of six categories: C1 (newly constructed) to C6 (safety, soundness, or structural integrity compromised).

Appraisers agree that Fannie Mae standards improve reliability. But that’s not the whole story. Going through the Fannie Mae appraisal process still doesn’t answer the most important question, what’s the value of this building? And that’s where National Appraisal Estimator steps in.

NAE follows the Fannie Mae matrix – 6 quality classes and 6 condition categories. But the result is a neat cost-based appraisal with full audit trail that reads like a construction cost estimate. Labor, material and equipment costs are broken into 28 categories. Indirect costs and markup show up in five categories. All figures are adjusted to the Zip area and are based on current costs of both materials and labor. But there’s more.

Going One Better

Fannie Mae is content to let appraisers drop an entire home into one of six quality classes and one of six condition categories. No appraiser should be comfortable with that. Foundation, exterior and interior finish, roof, windows, doors, kitchen and bath deserve separate consideration. Quality of the floor and quality of the roof may be very different. No single number yields a fair representation. Likewise, condition of the home should be evaluated by category. What’s the condition of the roof? Of the floor? Of the windows and doors? National Appraisal Estimator does all that and more.

If you appraise home values, whether for lenders or for insurance purposes, have a look at National Appraisal Estimator.

Maybe best of all, NAE comes from Craftsman, the publisher of National Building Cost Estimator, relied on by estimators and appraisers for over 40 years. You’re not going to find a better, more reliable appraisal tool than NAE.

Recovery from Hurricane Florence

A week after Hurricane Florence passed through North and South Carolina, rivers are still above flood stage, schools are still closed and owners are still assessing the damage. The number of homes flooded will be in the low six figures – not as many as from Hurricane Harvey (over 200,000) or Hurricanes Katrina and Rita (close to 1 million). But Hurricane Florence is still a catastrophe for the communities affected. Unlike Harvey in Houston or Katrina in New Orleans, damage from Florence is mostly rising water – not covered by home insurance. About two-thirds of homes affected by Hurricane Florence have no coverage. That’s going to complicate and delay recovery.

Water damage to a flooded building is progressive. The longer a building stays wet, the more damage is done. Owners can limit the loss by drying out a home in the first 72 hours.

• Wallboard disintegrates. Wood swells, warps and rots. Electrical connections corrode and short out. Fiber insulation loses nearly all insulating value.
• Mud, silt and contaminants create a health hazard. After 72 hours, OSHA considers stagnant flood waters to be toxic.
• Dampness promotes growth of mildew, mold and fungus, especially in warm weather.

Limit the Damage

Start recovery as soon as floodwaters are gone. Begin at the exterior. Check the building perimeter for a gas leak, toxics (such as a sewage spill) or a downed power line. Check for obvious structural damage: a cracked foundation, framing that’s collapsed or subsiding.

Turn off the power at the main breaker, even if power is already off in the neighborhood. You don't want power to come back on without warning while work is under way. Turn off gas at the meter. Close the valve to any fuel oil or propane tank. Be alert for leaking water pipes. If necessary, shut off the water valve at the main.

Start interior work by checking the ceiling. Look for anything likely to collapse. Wet plaster or wallboard is dangerous when it falls. Check for loose flooring, cabinets or tall furniture that might be ready to fall. Remove mirrors and heavy pictures from wet walls. They won't stay up for long on saturated wallboard.

Unplug all appliances and lamps. Remove the cover plates on wall switches and outlets that got wet. Either disconnect the wiring or leave the wires connected and pull the fixture out of the box.

Secure valuables. Wash and dry high value items (securities and jewelry) and anything irreplaceable. Put saturated photographs, art, and valuable papers in a freezer until you have time to blow-dry each item. Pack room contents in cardboard cartons. You'll need several box sizes, including wardrobe boxes, bubble wrap and sealing tape. Label each box and keep a written inventory.

Relocate heavy items. The best choice will be to a second floor or a storage container placed temporarily in the driveway. If there's going to be a delay in moving some heavy items, set foam blocks or plastic sheeting under legs or supports to eliminate contact with anything that's wet. Moisture will wick up wood furniture legs, discoloring the wood as it goes. If appliances and plumbing fixtures have to be moved, cap waste and supply lines (water, electric and gas). If a water heater has to be moved, start draining the tank right away.

Then get the mud and debris out. Remove saturated wallboard, carpet, pad, cabinets and furnishings. Shovel or squeegee as much mud as possible. If you have water pressure, hose out the interior. Clean the mud out of electrical outlets, switch boxes and light sockets. Pile debris by the street. FEMA has a program to reimburse flooded communities for debris removal.

Remove the vents and registers from a flooded HVAC system. Duct in a flooded basement or crawl space will be contaminated. Remove a section of duct to get access to all areas. Then thoroughly wash out all flooded duct. When the mud is out, clean the duct with a disinfectant or sanitizer.

Get Professional Help

Full recovery will usually require both a building permit and a building contractor. Some communities require a sign-off by the building inspector before repairs can start on a flooded building. When flood damage exceeds 50 percent of the market value of a home, the building department may require demolition and rebuilding above flood level. The code in some flood-prone areas may not permit rebuilding at all.

Contractors in North Carolina don’t need a license for jobs under $30,000. South Carolina requires most residential contractors to register with the state. But no license is required for general contractors.

Whether licensed or not, the best protection when hiring any professional is a good contract. And the best contract writing app is Construction Contract Writer. The trial version is free. For the complete “how-to” of flood recovery and mold remediation, including cost estimates, see chapter 19 of the National Home Improvement Estimator. The trial version is also free.

How Do I Get More Work?

A few years ago, I sat down with an architect friend, Bill Mitchell, to answer a simple question, “How does a contractor find more work?” Bill knows construction. He’s been designing and building residential, commercial and industrial projects for over 30 years. Here’s our list of what it takes to sell construction services in a competitive market:

• Be the most thorough, most complete, most diligent competitor. If you ask owners, especially private owners, why they selected a particular contractor, the most common response will be, “They gave me a good proposal.” In the eyes of an owner, a contractor who doesn’t respond completely or as expected isn’t likely to complete the job as expected.
• Be friendly and likable, someone the owner would consider a good contact. No one wants to disappoint a friend. Be a knowledgeable professional resource.
• Provide something unique, an insight or option the owner didn’t consider. You’ve probably won the job if an owner likes one of your suggestions well enough to request the same feature from other contractors.
• Respond 100 percent to every concern. The essence of salesmanship is eliminating objections. 
• Make yourself a resource. Offer information the owner may not have considered on topics the owner probably does not understand: codes, zoning, permits, choice of materials and potential problems. 
• Demonstrate your knowledge. Describe jobs you’ve completed and your familiarity with trade contractors active in the community. Mention local planning and building department officials by name. Identify resources or authorities you could use on the project.

Every sale of construction services begins with a dialog between a contractor and the owner. The best jobs will require multiple contacts over several days or weeks. The more often you exchange information with an owner, the more likely you are to get the work. 

Be Ready on the Cost Question

Quote a price that’s higher than expected and the job may not happen. Quote a price that’s too low and your casual comment could end up being quoted in a legal brief filed by opposing counsel. Refuse to quote any price and you’ll be considered devious or uncooperative. So what should you say when an owner asks about cost?

No single answer works in all cases. But make one point clear: You can’t quote an exact price yet. Even if you have a ballpark figure in mind, consider keeping that number confidential. Instead, consider one of the following:

• “That depends on what you decide. It’s a little too early to nail down a price. But I’m sure we can live within your budget. What figure do you have in mind?”
• “I’ve seen jobs like this go for between $X and $Y. Of course, the cost could be less or more, depending on choices you make. A lot depends on finish materials and when you want to get started. When I know more about the job, I’ll give you a written estimate.”
• “I don’t want to quote a number off the top of my head. But I have some good references back at the office. I’ll work up some numbers based on those figures and get back to you tomorrow with typical square foot costs.”

Follow these suggestions and you’ll get plenty of offers. But there’s one more question to ask, “Is this the type of work I really want?” It’s a mistake to take work you consider marginal. Even worse than not having enough work is getting stuck on a job likely to end in a loss or a court case. If the job isn’t big enough to warrant your best effort, look for other opportunities.

For a longer version of this discussion, see Paper Contracting: The How-To of Construction Management Contracting by William Mitchell and Gary Moselle.

Do I Really Have to Give the 3-day Notice?

Arguments for skipping the 3-day notice go something like this.

“I get paid in full when the job is done. I’m not a lender. So why do my jobs need a federal truth-in-lending notice? That notice just bulks up my contracts. Makes it harder to get a signature. Anyhow, my clients know what they want. And that’s NOT waiting three days for me to get started.”

Every home improvement specialist knows about the 3-day notice – an owner’s right to cancel a home improvement contract during the first three days after the agreement is signed. What may not be so clear is how important that notice can be.

I’ve written about the 3-day notice at least 5 times on these pages:

February 2010 -- 3-Day Right to Cancel – Contractors Beware

June 2012 -- Waiving the 3-Day Right to Cancel
April 2013 -- The 3-Day Right to Cancel: A Contractor’s Checklist
March 2014 -- Home Solicitation Sales
November 2017 -- Bad Faith 3-Day Rescission

But I still get asked, “Why bother with the 3-day notice?”

That’s a good question, especially if you understand where the 3-day notice came from. It’s part of the federal Truth-in-Lending Act, a law written to regulate lenders, primarily banks. How did it happen that contractors get the same treatment as mortgage lenders? Most contractors expect to be paid on completion and most don’t arrange financing for their clients. Contractors like that are not lenders in any sense of the word.

A Little History

When T-I-L was written (1968), many assumed contractors would not be affected. Not so the Federal Reserve Board. The Fed has rule-making authority under T-I-L and wanted contractors covered by the law. They wrote regulations, including Regulation Z, that required home improvement contractors to give the same 3-day notice that mortgage lenders give when making a loan. The 3-day notice had to be part of the construction contract even when a lender is required to give their own notice as part of the loan agreement.

Several years after the Fed wrote Regulation Z, A group of home improvement contractors filed suit against the Fed, seeking a declaratory judgment that contractors weren’t covered by T-I-L and didn't have to give the 3-day notice. In district court, the contractors won. The court ruled the Fed Governors had exceeded their authority. In the opinion of the district court, T-I-L was not intended to cover future statutory liens such as mechanics liens. All states grant mechanics liens to tradespeople. But those liens don’t arise until well after completion and may never happen. So the district court enjoined the Fed from enforcing Reg Z against contractors. No more 3-day notice.

Naturally, the Fed appealed. The case was Freed Co. v. Board of Governors, decided in 1973. The appellate court reversed the district court, finding clear congressional intent in T-I-L to protect consumers from loss of their home under security interests granted by state lien law. Once again, the 3-day notice was required on most residential jobs.

The Freed case stands today. It’s never been challenged. And until it is, no attorney is going to advise a client to skip the 3-day notice when doing work on an owner’s primary residence.

But be aware. The 3-day notice isn’t needed on all residential jobs. And there are perfectly legal ways to start work on a job the same day a contract is signed. Construction Contract Writer helps you decide what's right for each job. The trial version is free.

Changes in Construction Contract Law – First Half of 2018

So far this year, eighteen states have changed how construction contractors have to do business. Some changes are trivial. Others will affect most contractors in the state. Here’s a state-by-state run-down on the most significant changes.

Wisconsin – The statute of repose for construction has been reduced from 10 years to seven years. Every state sets a limit for making claims against a contractor. That limit is six years in WI. But the claim period for construction defects doesn’t start running until the defect is discovered. That could be many years. The statute of repose now bars all claims seven years after substantial completion. Wisconsin Statutes § 893.89, effective April 18, 2018

West Virginia – Now requires that agreements for jobs over $10,000 cover 15 specific terms – start and completion dates, change orders, etc. A written contract is required with both the owner and your subs. The license Board is authorized to request a copy of the contract for any such job and has authority to discipline any contractor who fails to respond. West Virginia Code of State Rules § 28-4-4, effective April 16, 2018.

Virginia – Contracts by unlicensed contractors are now unenforceable. Virginia Code Annotated § 54.1-1115, effective April 30, 2018. The consumer information disclosure statement required in contracts has been revised. 18 Virginia Administrative Code § 50-22-RBC, effective January 1, 2018. The list of prohibited acts for all contractors has been revised. 18 Virginia Administrative Code § 50-22-260, effective January 1, 2018..

Tennessee – Has added to the list of actions by home improvement contractors that constitute consumer fraud. Tennessee Code Annotated § 39-14-154(b), effective July 1, 2018.

South Dakota – No matter what the contract says, South Dakota Codified Laws § 5-26-6 requires that money due subs and suppliers on state public works projects begins accruing interest at the rate of 10% per year 30 days after the prime contractor has been paid. Effective July 1, 2018.

Nebraska -- If insurance will cover at least part of the cost of a residential repair project, the Insured Homeowners Protection Act, § 44-8601 to 44-8608: (1) Requires new contract disclosures in 14-point caps, (2) Restricts any assignment of rights by the insured, (3) Requires an itemized description and price for the work to be done, and (4) Voids the agreement if the contractor violates any provision of the Act. Effective July 19, 2018.

Maryland -- Maryland Business Regulation Code § 8-620 gives the Maryland Home Improvement Commission authority to impose civil penalties of up to $5,000 for each violation of the code, whether or not the offender is licensed. Effective July 1, 2018.

Kentucky – Courts in most states won’t enforce a “pay-when-paid” clause in subcontracts because the clause defeats lien rights. With a “pay-when-paid” clause, subs have no right to collect if the prime contractor isn’t paid. A recent court decision indicates that Kentucky courts will enforce pay-when-paid clauses in subcontracts.

California – Big changes are coming for California solar contractors. Solar energy projects will have to include a “Solar Energy System Disclosure Document” as part of the contract. The aim is to standardize and simplify disclosures required for all residential solar projects. The Contractors State License Board is required by law to release a prototype disclosure statement by July 1, 2018. As of this writing, that hasn’t happened.

No matter where you build, clients expect you to know and comply with the law. Construction Contract Writer covers all these changes and many more. Regular updates are quick and automatic. CCW is the best way to be sure your contracts comply fully with the law of your state, no matter how the law changes. The trial version is free.

The Wrong Way to Close-Out a Project

A few years ago, Eric Novelli, a Tennessee contractor, agreed to have Wagner Heating & Air install the HVAC system in a new 3-story home Novelli had under construction. There was no written contract.

When work was done, Wagner called for final inspection by the City of Chattanooga. The inspector found no deficiencies. Two months passed. Novelli didn’t make a final payment on the job. Instead, Novelli showed up at the inspector's office with pictures showing what he claimed were defects in Wagner’s work. A senior building inspector re-checked the job and found some problems. Wagner made repairs and called for another inspection. This time, the entire system passed. But that wasn’t the end of the story. When Wagner presented his final bill, Novelli wadded it up, threw it away and told Wagner not to come back to the job. With no other option, Wagner filed a claim for $12,000.

Substantial Completion

The case of Wagner v. Novelli (2018 Tenn. App. LEXIS 281) was decided last week. Wagner got his $12,000. But it’s a classic example of what should NOT happen when work is complete. Here’s what should have happened at substantial completion of the Novelli job.

Work is a candidate for substantial completion when it could be used for the intended purpose – even if minor defects remain. The completing contractor should schedule the walk-through inspection. Everyone doing the walk-through needs a pencil and a tablet to make notes. Consolidate these separate lists into a single punch list of items to be completed after occupancy. Wagner said that he never got a punch list on the Novelli job. So we can assume there was never a final walk-through. Call for a walk-through when:

• Installed equipment has been tested and is working, 
• Testing required by the specs has been completed, 
• Manuals, warranties, keys and controls have been delivered, 
• Debris, waste, and excess materials have been removed, 
• Work has passed final inspection,
• Occupancy has been approved by the public authority,
• Utilities and services are connected and working.

Terminate and rescheduled the walk-through if you discover:

•  Anything that would limit the intended use, 
•  Any problem hard to fix when the building is occupied, 
•  Too many items incomplete, regardless of the type,
•  Anything that would take days or weeks to complete.

The owner has to make a decision at the end of the walk-through. Is the job substantially complete? Or should another walk-through be scheduled later? Acknowledging substantial completion means, of course, that the remaining contract price is due less any retainage and maybe 150% of the value of work identified in the punch list. Clearly, the owner can’t have it both ways – denying substantial completion while using the premises for the intended purpose.

The most difficult question during walk-through is discovery of a problem overlooked by everyone, including the inspector. What happens then? Every case has to be decided on its own merit. But one consideration applies no matter the type of defect:

It’s the owner’s building. The owner has to live with the defect. If the owner considers the problem trivial, forget it. If the owner feels the defect has to be corrected, the contractor has to either make the correction or offer a discount. In the Tennessee case cited above, Novelli complained to the inspector and Wagner made the correction. I’m OK with that.

But I’m not OK with doing any significant construction work without a contract. Construction Contract Writer can head off problems such as project close-out issues before they morph into an expensive dispute. The trial version is free.