The Housing Crisis Is Real – Week 5

Cash Proffers:

Cash Proffers were probably well intentioned but never well thought out. Once created, counties seized on them as a way to force growth down the road to the next county.

The impact of cash proffers comes from the fact that appraisers add the cost of the cash proffers to the cost of the lot. Then the appraiser looks at the ratio of the lot cost to the cost of actually constructing the house. Normally the appraisers like to see the lot be 1/5 of the total, but in recent years it has become more normal to be 1/4 of the total. In some northern Virginia communities, the lot price is 50% of the total price.

When the Virginia legislature allowed cash proffers, they were applied to new housing units. Most counties that were experiencing significant growth in the late 1990’s and early 2000’s cranked up cash proffers so as to provide a disincentive for someone to build a new house in their community. Northern Virginia counties’ cash proffers got up in the $60,000 to $80,000 per residential unit or more getting very close to some of the California normal cash proffers for housing where cash proffers approach $100,000 per unit.

In either event, the cash proffer is therefore multiplied either by four or five times which has a high impact on cost of housing. In order for the new house to “appraise”, the house has to be large enough that that ratio is maintained. You may remember in the early 2000’s, most new houses being built were called starter castles and McMansions as a result of the impact of cash proffers.

The Virginia legislature has addressed the most grievous misuse of cash proffers diminishing the abuse. But cash proffers are a root cause of the housing crisis in California. The real solution to that crisis is eliminating cash proffers and letting the market create affordable housing.