New construction 50% complete as-is value

[bugknuckles]

Working on a new construction assignment, with as-is and as completed values. the subject is approx. 52% completed. Of course no comps/sales of partially completed houses. Should I base the as-is value on adjusted cost approach ?
Recommendations??

 

[J Grant]

Working on a new construction assignment, with as-is and as completed values. the subject is approx. 52% completed. Of course no comps/sales of partially completed houses. Should I base the as-is value on adjusted cost approach ?
Recommendations??

Imo A half fished house would appeal more to an investor buyer than an owner occupant buyer ( typically) so base it on resale houses that flip and needed a roughly equivalent $ amount to remodel as would take to finish this house... a cost approach would help support that but imo straight cost to finish does not include the fact that a half finished house usually does not qualify for financing needs to be a cash sale and most owner occupants do not want to take on that big a project.

 

[The Bob]

Are you appraising a house that is under construction and just happens to be 50% complete?

Or is this a case where the house is on the market as unfinished new construction?

If the former, just estimate what the current value of the completed improvements are. The "as is" is a requirement for banks.

If the latter, you will need to do as J Grant posted. There were a bunch of these around 2009. Maybe go back in time to see what % discount people were paying. But keep in mind markets change.

 

[JeffSH]

For the as-is value in this situation, I would take the as-complete value and discount it based on how much work remains. Then subtract extra for the new developer's time/cost/profit (I forget what the technical term is).

 

[Jwalker]

Working on a new construction assignment, with as-is and as completed values. the subject is approx. 52% completed. Of course no comps/sales of partially completed houses. Should I base the as-is value on adjusted cost approach ?
Recommendations??

There's a lot of situations that affect this. Did someone start and run out of money then abandon it? Is it someone who's just in the middle of their own project and possibly needing another loan to finish what they started? Did contractor A skip town now we're moving on to contractor B?

The big kicker that I would be focused on is the difference between the same people being involved finishing the same project vs someone taking over someone elses project entirely.

 

[Terrel L. Shields]

as-is and as completed values.

I'd do the "as completed" value first. Then I'd look to do a really good assessment of the various components (included in the report) and what stage they are complete to. Then I'd make an adjustment for that. There is the issue of a discount for being partially done. So the as is value should be between the lot value and the completed value somewhere. I am not a big fan of making some large adjustment to the subject when you have ZERO evidence to support that adjustment even though we might all think it is obvious some discount applies. I might simply jawbone that in the reconciliation or I'd ask some rehabbers and builders what they think should be the discount and go with that.

 

[Overimprovement]

The problem is in a declining market, who is going to want to take on a half finished house? Builders can't find buyers for their own stuff, much less someone else's. They don't know what short cuts the original builder took, and sometimes there is some non-disclosed reason the builder is walking--seeing settlement issues already, big delays on some needed components, maybe even title issues. Lot of risk to someone coming behind the original builder.

There will very likely be a much bigger discount on an SCA basis for the as-is value than simply pro-rating the cost to finish, even including entrepreneurial profit. For someone to take it on, they will do their own calculations on likely time to complete, carrying costs, likely value at completion (if not sold before then), and a pretty large risk factor.

I would call a couple local builders and casually ask them what percent discount they'd need to want to tackle such a beast in today's market.

And if your market is declining, I would certainly make that known in the report for the as-completed values. Do they want a value as-completed today? Or value as completed at estimated date of being finished? Those would be different in a declining market of course.

 

[George Hatch]

The typical buyer for a property in this condition is a builder, not a homeowner. Their typical approach is just like any other new construction: start with the retail price as of the estimated date of completion and back out all the hard costs, then back out some more to account for the builder's end - their profit margin. What's left over amounts to the maximum they can pay for the acquisition and still make their profit. After all, nobody works for free.

Look at the flips: they acquire the "before", spend the hard costs on the materials and labor, and then resell for whatever the market will bear. The residual between (resale price) - (acquisition+cost-to-cure) is their profit margin.

Rule of thumb is 2x cost-to-cure. If I have to spend $50/sf to complete it then I want to make another $50/sf on top of that. Not only is there opportunity costs involved but also the value of my own time/effort, contingencies for the unknown and the overall amount of risk involved.

 

[Zoe]

I agree with all the above. They know your "as is" value opinion is not real accurate. Get your as completed opinion as close as possible as of effective date. Round your 'as is" value to a larger point than as completed. Like if as completed is to nearest $5,000, round your as is to like nearest $10,000 or $20,000. You'll get there.

I would absolutely rely heavily on the cost approach estimate to complete. I would state that in my report. They can take it or leave it. Include entrepreneurial incentive in your cost estimates.

 

[Zoe]

One more suggestion if I were you. I would ask lender or somebody if they have a copy of plans and specs on the proposed construction. I would want that in my file or you will have to assume on things like finish.

Theoretically, you might could take plans and specs to somewhere like Home Depot or Lowe's and they could give you a rough estimate on cost to complete. You would still need entrepreneurial incentive included in cost to complete estimate.