High Quality, New Construction Appraisal

[smorabito]

"Luxury" finishes have relatively little effect on overall costs when compared to the major components of construction. An average quality home with the 4" concrete slab and the 8ft ceilings is not a great candidate for the level 2 quality upgrade on the finishes because it doesn't have the heavy 2x6 or 2x10 framing and the 10-12 ft interior ceilings and the heavy tile roof and the like.

- You can put a monkey in a silver suit but that doesn't make him an astronaut.

- The most profitable addition/remodel project will result in a property with features that are bracketed the other homes in it's immediate neighborhood. They won't be the best homes on the block and they won't be the worst. Getting out in front and leading the market is almost always a losing proposition when compared to staying within that existing range.

Thanks for your insight. I am not trying to invest or flip this house. This is for my primary residence I intend to stay in - possibly forever. I'm not suggesting the bank cares, I'm just letting you understand my motive here. In terms of quality, I assure you the builder is going to build Class 2. We're not putting lipstick on a pig with a few tiles and some granite countertops. The builder uses quality craftsmen and quality materials that are used in my area just not most new houses.

I guess I'm curious why the cost model even exists. Is the point of a cost comparison to ensure the build costs from the contractor are reasonable? It appears the cost model is irrelevant in actual appraising so I'm confused.

What about the value of new? If there are tons of 40-50 year nice quality old homes at 2,500 s.f. selling for $600k, can some depreciation factor bring it that number up to match new construction? The area I live in is one of the oldest communities in the country - there simply aren't many new homes being built for comparison.

I am looking for advice on this because there does not appear to be a simple answer. Hoping that my randomly selected appraiser understands this non-cookie-cutter project doesn't seem prudent - there must be ways to steer away from a misleading appraisal. I don't want my proposed project compared against truly lower quality houses. At a minimum, it would seem that an accurate material list would help an appraiser - again assuming the appraiser I get understands the difference between a house built with roof trusses and a stick built house made by a master builder. I can't be the only one who's done this...

 

[George Hatch]

Most of the cost is in the core of the home, which include the kitchen and initial bath count. Adding bedrooms and family rooms is way cheaper on a price/sf basis, especially when its 2-story construction. .

 

[Joe Flacco]

Just make sure the specifications are as detailed as possible and maybe you can provide a sale or two for consideration that are similar quality construction as examples. Then you wait for the result. Not much can be done other than that.

 

[George Hatch]

Let me preface my other comments by saying that making improvements to your property to satisfy your own interests rather than clearing a profit is not only extremely common, but it's among the best reasons to make those improvements. Nevertheless, we aren't trying to figure out what the value of the property to you is; we're trying to figure out what the value is to the "typical buyer" for that property in that area. Meaning, the reactions of the herd, not the reaction of any of the outliers to that herd.

The brokers define value as one willing buyer + one willing seller. And that's appropriate given their role as an advocate for the deal. They only need that one special buyer to get their deal done.

We specifically eschew that perspective in favor of the "most probable price to the typical buyer", because, unlike the broker, our role is that of the outside referee. So we have no trouble reconciling the idea that the property with these improvements might be worth way more to you than to any outside buyer.

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The Cost Approach is a valid approach to appraising, but it's more directly applicable to some situations than others. For example, if I'm appraising a concrete tilt-up industrial building in a business park that's under development my Cost Approach will usually come in at the same number as my Sales Comparison - and it's precisely because of the lack of sentimentality among the principals in those transactions. The buyers are looking for utility and one 10,000 sf tilt-up is just as usable as another. by contrast, the majority of SFR appraisers approach that analysis as an afterthought because it's usually just not that relevant to the outcome of their assignments - and that's because none of the buyers are using cost.

Cost analysis is also way more complicated a process than many people realize. I taught the Cost Approach Course developed by Marshall and Swift (which is another cost data service) to appraisers for many years so between my exposure to that material and my personal exposure to construction lending appraisals and reviewing - which comprises the bulk of my SFR appraisal exposure since 1990 - and my use of it with other property types - I tend to approach Cost analysis in a fair bit more detail than most SFR appraisers.

The questions you're asking about older homes selling at pricing that's higher than might seem reasonable on the Cost basis are great questions to ask, but the explanations for those answers - the types and extent of depreciation over time and in different locations - are way too complicated to convey to a lay person in a forum setting.

Suffice it to say that what we measure in the profit/loss components of a Cost Approach is the market's reaction to these attributes. A developer who is building during a down market might actually lose money rather than make money; whereas a developer working in a really hot market might double or even triple their normal profit margin. Because of these factors we approach depreciation as an economic concept more than a purely physical concept.

 

[TRESinc]

I am looking for advice on this because there does not appear to be a simple answer. Hoping that my randomly selected appraiser understands this non-cookie-cutter project doesn't seem prudent - there must be ways to steer away from a misleading appraisal. I don't want my proposed project compared against truly lower quality houses. At a minimum, it would seem that an accurate material list would help an appraiser - again assuming the appraiser I get understands the difference between a house built with roof trusses and a stick built house made by a master builder. I can't be the only one who's done this...

your post reads as you are looking for a way to make the appraiser view things the way you do, and that you are concerned that isn't going to happen. that should set off alarms in your head that your project may not be financially responsible. the things that are important to YOU are not necessarily the same things that are to the typical buyer, and that is what we look at.

when borrowers ask me where to spend money on improvements on their home i tell them to spend the money where it will make them happy, because while you may place a higher value on "level 2 options" the next buyer may not, so if you are going to spend money make yourself happy first and foremost.

you answered your question in your first post, but bear in mind what you "need" has no impact on the appraised value:

Assuming I add ~2,000 s.f. and a garage to my 1,000 s.f. house, it will cost $700-$800k. I owe $400k on the property.

To pull this off, it appears I'd need an appraisal to come in around $1.1 or 1.2MM. Sales comparisons are very hard to find. There are tons of $1MM+ sold houses in my area but they're all 5-6,000 s.f. There is almost no new construction remotely close to smaller 2,500 or 3,000 s.f.

so properties that are selling in the range of what you "need" are 60-100% larger than what your end result will be but you want the value to be the same. there are no new construction properties remotely close to what your proposed project will be yet you still want to borrower someone else's money to make that happen. it doesn't appear to be financially responsible. consider this - if you had the cash would you spend $800,000 to expand your $1,000sf house, or is it just a possibility for something to do with someone else's money?

 

[George Hatch]

As for your situation, my advice is to seek out a list of ALL sales in your market area and sift through them for properties with homes in the similar size ranges for both the home and the site. You will not be ending up with a 2017yb home that has the 2017 design and features and floorplan and the like, so I wouldn't pay much attention to the new homes even though some components of your home will be new. You are working on what amounts to a hybrid, so a competent appraiser probably won't be making direct comparisons to anything newer than, say, a remodeled 2000yb home.

Those will be the primary competition to your project upon completion. Those prices might get adjusted upward for condition - and quality - but those adjustments are merely refinements to the underlying pricing structure. And the further from the norm you get the less those adjustments will be directly related to the costs. Way of the world.

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With respect to providing your opinions to the appraiser, there's nothing wrong with that. But in all honesty an appraiser will be more interested in the 3 or 4 sales you think are most directly comparable in attribute (not target price) to your project. Due to our role as the outside party, we specifically don't much care what property owners opinions are because we get paid to develop our own opinions.

But we definitely respect data. In God We Trust; all others bring data.

 

[Frederick R. Ruffell]

Thanks for your insight. I am not trying to invest or flip this house. This is for my primary residence I intend to stay in - possibly forever. I'm not suggesting the bank cares, I'm just letting you understand my motive here. In terms of quality, I assure you the builder is going to build Class 2. We're not putting lipstick on a pig with a few tiles and some granite countertops. The builder uses quality craftsmen and quality materials that are used in my area just not most new houses.

I guess I'm curious why the cost model even exists. Is the point of a cost comparison to ensure the build costs from the contractor are reasonable? It appears the cost model is irrelevant in actual appraising so I'm confused.

What about the value of new? If there are tons of 40-50 year nice quality old homes at 2,500 s.f. selling for $600k, can some depreciation factor bring it that number up to match new construction? The area I live in is one of the oldest communities in the country - there simply aren't many new homes being built for comparison.

I am looking for advice on this because there does not appear to be a simple answer. Hoping that my randomly selected appraiser understands this non-cookie-cutter project doesn't seem prudent - there must be ways to steer away from a misleading appraisal. I don't want my proposed project compared against truly lower quality houses. At a minimum, it would seem that an accurate material list would help an appraiser - again assuming the appraiser I get understands the difference between a house built with roof trusses and a stick built house made by a master builder. I can't be the only one who's done this...

Why not engage an Appraiser yourself so you can hand pick a "competent" Appraiser and feel confident that the result you get is one that meets your requirements and is credible. Know that the Lender will probably not accept this appraisal for the lending transaction. Then when you get said "rookie appraiser" and review the appraisal for the lending transaction you can ask to have the rookie mistakes corrected. If that doesn't get you the loan then go ahead and build your dream using your own monies as you may not require an appraisal, and if you do require an appraisal you have the appraisal from the Appraiser you hand picked to justify your expenditure.

 

[George Hatch]

Not that it applies here, but on an economic basis some projects shouldn't get built. I can't count how many times I've passed a property and wondered what appraiser told that lender that was a viable project.

A penny saved is a nickle earned.

 

[Deleted member 77547]

Not that it applies here, but on an economic basis some projects shouldn't get built. I can't count how many times I've passed a property and wondered what appraiser told that lender that was a viable project.

A penny saved is a nickle earned.

Let me tell you a story about a couple who put in a $70,000 kitchen while leaving the rest of the house (40 yrs old) original....in a $200,000 neighborhood......I guess that story tells itself.

 

[TRESinc]

Let me tell you a story about a couple who put in a $70,000 kitchen while leaving the rest of the house (40 yrs old) original....in a $200,000 neighborhood......I guess that story tells itself.

hate getting those. i recall one many, many moons ago where the owner added on something like 1,800sq to an 800sf slab ranch in a neighborhood where the largest house was around 1,100sf. of course he knew his house was going to go up in value $4$...