Anyone care to educate me on developing the As-Is value mid new construction?

[Surf Cat]

I would sum the land value, and assemblies from cost books or the builders estimate of completion and call it good.

They are condos though. The land might be shared between both units...

 

[Elliott]

So let's say you appraise the house and land for $400,000 when it is finished. Let's say the house is currently 60% complete, then its as is is $240,000.

 

[Dublin ohio]

So let's say you appraise the house and land for $400,000 when it is finished. Let's say the house is currently 60% complete, then its as is is $240,000.

If only it was that easy

 

[George Hatch]

All RE is local but you can look for actual sales of partial construction. They'll often be REO resales. You can extract investor profit margins off of the heavy fixers and remodel/flips. A contractor will approach this as a cost analysis, looking for the hard costs to cure.

The rule of thumb for the total discount from as-completed which has worked in this region is costs x 2. If an investor or contractor has to spend $150k to finish then they can't pay much more than [As complete - $300k = acquisition cost). Nobody works for free so the discount has to consider:

hard costs of material + labor at the retail rate​

Fees and permits and any outstanding fines​

Financing or opportunity costs​

Holding costs such as property taxes and insurance​

Contingencies (the unknown X factor)​

Any anticipated changes in the overall market conditions over the length of time to complete​

​

Also, if an unenclosed building has been exposed to the elements for longer than just a couple months that can damage existing components

 

[Tom D]

I would ask to clarify the value, subject to be finished in 4 months, or as if sitting vacant for a year weather beaten tear down. Two wholly different values. This seems like a very dangerous appraisal with too many bear traps in it. If i'm the state board i would be asking you 50 questions on how you got this, or this. Then fine you for every wrong answer.

You ain't getting paid enough for this one. Maybe not even thinking about the amount of detail you will need in your work file. Plenty of good advice before me. Is it worth the existential threat that i see here doing it. And if you get it wrong, you just bought that unfinished condo.

 

[DWiley]

What is the value of anything that isn’t complete? It's more complex than finished value minus cost to complete, profit, etc. Assuming it’s a marketable floor plan, location, design, etc., who would buy it “as is”? The logical buyer is a builder/investor who would take it through completion. Assuming there is an active investor market for it, establish the market for the finished product, the time to complete, and market it, etc., to project a closing date.

Along with the cost to finish, holding costs during completion and sale, selling costs, profit, etc., the investor will expect a return on their expenditure and a return on the investment dollars, plus a premium for the risks inherent in taking over an unfinished home. Basically, you must back into this. I contacted multiple small custom home builders to get their ideas on the risk factor (what type of annualized return would be required). Most responded with percentages that were within a reasonable range.

From that, I create a matrix with multiple columns (one for each builder) showing the anticipated selling price upon completion. The anticipated selling price represents the investor's total exposure. Next, you must consider the months to complete, marketing time, etc. Let's say you have 12 months of completing, marketing time, etc., until closing. The investor is going to want their annualized rate against their total investment.

If the investor wants 12% annualized, and it will take 1 year to finish the home and close the sale, the completed sale price represents 112% of the investor’s total investment. If the completed price is $500,000, then ($500,000/1.12 = $446,428) total investment. From that, deduct the cost to complete to get the indicated “as is” value to the investor. By placing this in a matrix (like a sales grid), you can show the potential sale price, less each investor's required return, less the cost to complete, to get to the “as is” for each investor (again, like a sales grid). You can then reconcile the indicators as a range of X to Z, selecting the most reasonable one.

I also check with agents; they have investors who look for opportunities. The key is to present logic along with verified investors (builders, agents, etc.) you talked to.

This. 100%.

Any time that we opine a market value, we must start with, "What is the market?" Just taking the value as if completed and deducting the cost to finish is combining two different markets.

I did a lot of these types of appraisals back in the day (after the big crash), and the discount (at that time and in my market) on the unfinished portion was much larger than I think most appraisers would have estimated, because of the risk of taking on a project that someone else started.

We saw a similar thing after our big flood back in 2010. We had thousands of homes that needed big repairs, and a lot of them ending up selling to contractors. There was a large condo (mostly townhomes) complex near me that was full of units that were worth about $150,000 pre-flood and after the flood they needed ~$50,000 in repairs. I saw a lot of appraisal reports where the appraiser just took the as repaired value of $150,000, deducted the cost to repair ($50,000) and reported a value of $100,000. That was not accounting at all for the risk involved. Those units ended up selling mostly in the $40K to $50K range, not $100K. Its not exactly the same scenario, but it is the same principle. For people who were trying to file an amended tax return to get disaster dollars, those incorrect appraisals cost them a lot of money in relief.

 

[J Grant]

Could be but if doing a new construction loan and conventional non-conforming loan, the FDIC requires 'as is'.

I would sum the land value, and assemblies from cost books or the builders estimate of completion and call it good. I would not include EP and would not pull some number from the air as a "discount" for partial completion unless you have real sales that are not distressed sales where something sold in the middle of building. You might mention that it is possible such a discount exists but there is no market evidence to support a number. They cannot prove you "wrong".

There IS market evidence if one takes the time to look for it as far as a discount expected. We could compare it to prices of homes with deferred maintenance or mold that needed to be stripped to studs, if it is hard to find half-built new homes... because it is likely the same small pool of potential buyers - spec builders, contractors, investors. They look for profit opportunities, whether in half-finished construction, problem child houses, homes needing massive repair, etc.

 

[WestMichiganCG]

I've been asked to do an as-is, upon completion and as-stabilized...a lot. The biggest issue is understanding the scope of the work. I've rolled up on a job where I thought the project was done and the driveway wasn't done and 10% of the interior work wasn't finished. The bank wanted to know an "as-is" valuation and it can get sticky. I argued that an investor would pay full price for the property as the contractor was a solid business acting in the area so the bankruptcy risk was zero, they had been paid for the work and the material was on site getting ready to be attached save the concrete that needed to be added to a parking lot. I had to use an extraordinary assumption to meet the banks request and my upon completion value was solid. The work was also wrapped up in 2-weeks. Same issue on another site and the bank said value the as-is assuming the work was done because they were screwing the last piece of metal roof on an awning as I was pulling out. If the site is worth $200,000 and upon-completion is worth $1,000,000 and the contractor is done with 50% of the work, I've done the $1,000,000 finished - $200,000 land = $800,000 x 50% =$400,000 work complete + $200,000 land = $600,000 as-is. This is common when banks are doing "calls" with a contractor and they want to release the money in conjunction with completion numbers. As-is mid construction when the contractor pulls out and the owner is bankrupt is another issue completely.

 

[cdanj]

Did you do the original "subject to plans and specs" appraisals? Or, is this for a construction draw where they're just looking for photos and a description of what's been completed and what's left to finish?

Yes I did the original and I put the as-is value as site value only with the statement, and I simplify it here, that incomplete construction would sell as distressed.

 

[cdanj]

You need the back out the profit margin and remaining work from ARV.

Do I use a difference form? Or do narrative cost approach and give it full weight?