How would you do this?

[DWiley]

Builder walks away from a partially built dewlling (and the construction loan). The Client wants the value subject to completion AND the as is value of the property. The improvements are 50-55% completed. How do you support your opinion of the as is value?

I did several of these in the post crash days. As with any market value, you have to start with, what is the market? Who would buy it? I found the typical buyers to be other builders or investors.
It is important to do more than just look at the cost to complete; must also account for the ROI to the buyer after all is said and done.

Example - I am an investor that requires a 20% return. I can net $500,000 from a sale of the finished home. I would look at the combination of purchase price and cost to complete would provide that 20% return. And some would go deeper and seek a greater return on the initial investment, because buying an unfinished home is more risky than just building from scratch.

To do these well one needs to interact with the market participants who are buying them and reflect what they are doing (as we do with other appraisals).

 

[Terrel L. Shields]

The improvements are 50-55% completed. How do you support your opinion of the as is value?

Conventional lender is REQUIRED to have an "as is" value. That is in addition to the proposed future value.

The contributory value might be less than 100% of the expenditure to date but....do you have any partial built sales? Probably not because that usually means the bank is going to take it over and very often, they are going to work a deal with another builder to finish.

So, first, it's almost certainly an in-house project. Chances of a serious FNMA type review is low. No one can prove to you that the value is somewhat less than the monies already invested. So, try to estimate how much has been spent and how much more will need to be spent deducting that from sale of a similar property.

Land is valued as if vacant and available for your highest and best use. Do the cost approach. 3 land sales, or 2 at least.

Land - (say) $100,000

2,000 SF at $200 (say) per SF

Cost 400,000
Total cost plus land $500,000

So, what's done? Foundation? Framing? Roofing? Ruff in plumbing and electrical?

Use the guideline is Natl Building Cost Book (Craftsman Book) - it has a page where it breaks down the percentage of each assembly should contribute to the building. Say, it totals 55% - 55% x 400,000 = $220,000 plus land equals $320,000.

Insufficient market data to justify a further deduction for inadequacy unless you can find some similar sale. Even in the midst of the great recession, I did one of those builder walkaways and guess what? A builder was happy to complete the project and then bought the bank out when finished and sold his own home. So, the bank came out whole and he got a house that was 200 yards from where his wife taught school. Both were very happy.

Since this appears to be in-house, I would not worry about trying to extract some functional obsolescence without any other sales data to justify it. (BTW - if you DO run across such sales, then by all means flag them and keep for future reference even in 10 years down the road.)

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[sputnam]

I had a request from AMC: New home framed plumber, etc. Budget 1.8 mill 372k spent to date. Per lender: appraiser to back into the value by using a cost to complete and include a builder/entrepreneurial profit of 15-20%

I ignored that quote order
..


I found two incomplete homes, just not new construction....
2430 lemon tree charlotte nc
4221 westcliff charlotte

Yeah... not least because Lenders/AMCs aren't supposed to tell the appraiser what methodolgy to use.

 

[TerryRohrer]

I have seen numerous sales of unfinished new construction and remodels in the MLS over the years, so would analyze those. Depending on when construction stopped, some of the existing improvements may require demolition (Osb is unsound after a few wet/dry cycles, etc).

 

[NC Appraising]

I have seen numerous sales of unfinished new construction and remodels in the MLS over the years, so would analyze those. Depending on when construction stopped, some of the existing improvements may require demolition (Osborn is unsound after a few wet/dry cycles, etc).

It would be great data if they were purchased by an investor and then resold. I would then contact the listing agent to see what the reno budget was.

True Market data on the actual amount of EI

To bad we do not have CE classes like this with real world examples

Maybe you, Terrell, dwiley and others on here can team up to provide meaningful CE?

 

[TerryRohrer]

To bad we do not have CE classes like this with real world examples

Maybe you, Terrell, dwiley and others on here can team up to provide meaningful CE?

The thought has crossed my mind. Obstacles that seem insurmountable are that appraisers are generally looking for the cheapest, quickest way to get 28 CE hours (with a coupon code). Having read the horror stories of small enterprises trying to navigate the course approval process, I would never attempt to offer anything intending to gain approval for broad, “approved” CE. Any course that was worthwhile but didn’t guarantee CE credit would likely have its author as the entire market for that course. Appraisers are like the rest of society…they want paid for their “worth” but insist anyone selling to them ensure absolute maximum benefit for absolute minimum cost.

 

[George Hatch]

The discount from "as completed" will be far higher than the costs to complete. No investor takes on the various risks for the unknown contingencies and holding costs and lack of liquidity/lost opportunities and such for free.

All RE is local but in this region it's often "Costs x 2" with the heavy fixers. You can seek out before/after remodel flips to compare the

("as completed - costs = profit residual") = discount

I know some investors operate off an arbitrary profit margin the way DW mentioned but I prefer to extract that factor from actual resale examples. Depending on the level of competition between the contractors, market conditions and pricing trends that factor can sometimes vary widely from one year to the next. Either way, the appraisers have to be savvy about the percentage of construction costs that are complete at the time of acquisition as well as estimating a cost to cure.

You can also seek out past sales of partially complete vs their subsequent resale to identify the difference between acquisition+hard costs and the resale. You're not looking for direct comparables for your subject's SC; you're looking to isolate the discount factor.

 

[Terrel L. Shields]

No investor takes on the various risks for the unknown contingencies and holding costs and lack of liquidity/lost opportunities and such for free.

But would they necessarily discount more than their anticipated entrepreneurial profit assuming the buyer is a builder and that area activity is sufficient to anticipate a speedy sale upon completion? In my over-heated market, I suspect a builder would jump on any opportunity to finish such a partial built dwelling with some anticipation of a rapid sale upon completion... perhaps not so much if it were in Boise City, Oklahoma or Cotton Plant, Arkansas.

 

[Tom D]

You need to do the finished value 1st. If you have no 'as is' comps, you can back into the as is. Subtract cost to complete, all soft costs coming and going, and hopefully a 30% profit. A lot of people don't understand all the soft costs involved in buying, holding, fixing, then selling.
Every property i buy to fix/flip i reverse into the as is value, cause i want to make a profit. I don't need as value to buy it, only to see what finished is. Then subtracting all the cost for my pay no more than value. Flipper makes only 2 mistakes which can eat the profit. You either over pay for the property or you underestimate the rehab cost. Now i say 30% profit of the finished value. Sometime it can be more, or less.
Forget the as is comps, because they can be in different forms of incompletetion, and nobody here can be that good in how much $ wise to finish.
And last of all, only the sharks will be looking at this deal.

 

[Zoe]

Conventional lender is REQUIRED to have an "as is" value. That is in addition to the proposed future value.

The contributory value might be less than 100% of the expenditure to date but....do you have any partial built sales? Probably not because that usually means the bank is going to take it over and very often, they are going to work a deal with another builder to finish.

So, first, it's almost certainly an in-house project. Chances of a serious FNMA type review is low. No one can prove to you that the value is somewhat less than the monies already invested. So, try to estimate how much has been spent and how much more will need to be spent deducting that from sale of a similar property.

Land is valued as if vacant and available for your highest and best use. Do the cost approach. 3 land sales, or 2 at least.

Land - (say) $100,000

2,000 SF at $200 (say) per SF

Cost 400,000
Total cost plus land $500,000

So, what's done? Foundation? Framing? Roofing? Ruff in plumbing and electrical?

Use the guideline is Natl Building Cost Book (Craftsman Book) - it has a page where it breaks down the percentage of each assembly should contribute to the building. Say, it totals 55% - 55% x 400,000 = $220,000 plus land equals $320,000.

Insufficient market data to justify a further deduction for inadequacy unless you can find some similar sale. Even in the midst of the great recession, I did one of those builder walkaways and guess what? A builder was happy to complete the project and then bought the bank out when finished and sold his own home. So, the bank came out whole and he got a house that was 200 yards from where his wife taught school. Both were very happy.

Since this appears to be in-house, I would not worry about trying to extract some functional obsolescence without any other sales data to justify it. (BTW - if you DO run across such sales, then by all means flag them and keep for future reference even in 10 years down the road.)

Getting the Most From Building and Remodeling Cost Guides

Use unit-price estimating guides to accurately price out your building or remodeling project. Learn how to adjust labor and material costs to fit your project.

buildingadvisor.com

You could just do cost approach. Especially if you don't have any good new construction to do sales comp approach. I would do combo like Dwiley. I would with as if complete and back out costs to complete and overhead costs for an investor/contractor/developer to buy it. That would be my "as is" after I had a good grasp on "subject to" value.