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

[Overimprovement]

Why can't they see it?
They might have access to inspect what was done, but they still take on a lot of risk. Their risk has nothing to do with ours in relying on a PDC -for too many reasons to count. Good try though!

An investor/contractor /spec home builder knows the drill that a C of O will be needed, code inspections at the end, etc. That is part of the reason they expect a significant discount. The average investor who does light repair and cosmetics to flip is probably not going to take this on.

Have you ever built a home? How are you viewing these items once drywall is up? Gonna take it all down? Or do you implicitly trust government-paid inspectors? If rural, the inspections may be very sparse and more prone to external influence.

 

[J Grant]

Have you ever built a home? How are you viewing these items once drywall is up? Gonna take it all down? Or do you implicitly trust government-paid inspectors? If rural, the inspections may be very sparse and more prone to external influence.

They can drill holes in drywall or do mold tests , see if there is moisture etc. The point is, the buyer is usually granted access to view the property, and even if not, their risk has nothing to do with appraisers relying on a PDC collection.

We agree that these buyers take on risk, whether they can inspect the half-finished subject or not - which is why they expect a discount.

 

[Terrel L. Shields]

You--the new builder--will have to warranty this new home.

I've never run into that situation. 10 years ago I did a per-construction appraisal. The guy was in deep but tried to build a larger home than the approved plans and specs but ran out of cash and let the bank have it back. The lender then contracted someone to look it over and that's when they found out it was not being built to spec but was built about 400 SF larger. It was framed, decked, roofed. The new builder made some proposed changes to the layout and moved some walls. In the end, the builder bought the house for what the bank had in it and moved into the house himself. It was only a block from where his wife taught school. So, what "discount" applied? The guy got paid for his labor and ultimately paid the bank what they were owed...which was the draws from the first builder. What discounts were there? Both bank and builder were happy and all it cost the bank was me going back weekly and telling them what had been done that week. Took the guy 6 weeks if I recall correctly to finish.

 

[Terrel L. Shields]

They can drill holes in drywall or do mold tests

Most would have inspections at rough in plumbing and electrical already. C of O might be big issue in big city, not near the problem in smaller towns with lax inspections. So, I suppose it makes a difference at one point construction stopped. Right? I saw slab foundations during the 2008 crisis walked away from but the concrete guys are the one who got stiffed and many filed liens that ended up the bank paying for twice. Same for framers, roofers, plumbing, electrical contractors. Often the builder drew from the bank but then stiffed the contractor.

So, to me the primary question is how much of the construction is done, not how much it cost the bank already. That can be considerable more than what is finished, and the less that is finished, the easier it is to vet from the builder-buyer (and most are going to be builder-buyers as JG notes, not individuals or low-budget flippers.) I knew a flipper or two who were builders though. I knew one guy who moved houses and bought bank REOs who taught construction and design for years at a local college. He'd tackle anything that he could turn a good profit on.

 

[Terrel L. Shields]

Again, much of it is a stab in the dark and the appraiser should explain their decision to discount or not discount and why.

 

[J Grant]

I've never run into that situation. 10 years ago I did a per-construction appraisal. The guy was in deep but tried to build a larger home than the approved plans and specs but ran out of cash and let the bank have it back. The lender then contracted someone to look it over and that's when they found out it was not being built to spec but was built about 400 SF larger. It was framed, decked, roofed. The new builder made some proposed changes to the layout and moved some walls. In the end, the builder bought the house for what the bank had in it and moved into the house himself. It was only a block from where his wife taught school. So, what "discount" applied? The guy got paid for his labor and ultimately paid the bank what they were owed...which was the draws from the first builder. What discounts were there? Both bank and builder were happy and all it cost the bank was me going back weekly and telling them what had been done that week. Took the guy 6 weeks if I recall correctly to finish.

Your particular example, where the builder buyer moved into the house, does not represent the typical investor buyer who never moves in and wants to flip it for profit.

That is why MV references the "typically motivated buyer" - not the outlier buyer.

There is nearly always an exception. But an MV purpose appraisal does not provide value for the exception - unless that is the assignment condition.

 

[J Grant]

Again, much of it is a stab in the dark and the appraiser should explain their decision to discount or not discount and why.

It is not a stab in the dark, (nor is it a precise fact ). It is a supported opinion that is credible because of market evidence - I agree we need to explain the decision (which might be that no discount is indicated ). Whatever our decision is, it should be market-based for the majority of cases - we've just covered that there can always be an outlier or exception.

 

[Terrel L. Shields]

It is a supported opinion that is credible because of market

Well, when the evidence shows 10-50% discounts or none at all, it is a guess upon the part of the appraiser. Call it gut feeling, intuition, or heuristic analysis, it is a random walk thru the data based upon the feelings of the appraiser.

 

[George Hatch]

All RE is local. But this sort of analysis will hinge on the availability of relevant data to the appraiser, most likely going back several years when it comes to demonstrating the discount from completion. The chances of finding partials will be greater when the overall volume of sales is larger. A county that's selling 20,000 SFRs/Yr is going to be easier to find these than a county with far fewer sales.

Most of of these partials will eventually sell either for land value or for completion, even if it takes several listings to sell them. I usually also look at expired/withdrawn listings because sometimes they end up selling later. I just found 2 comps for one of my assignments that way that I would never have otherwise found if I didn't look. Obviously that's more common with non-SFR properties, but anything that's weird is going to require some extra research.

You'd be looking for the adjustment factor via comparison to operating condition comps there, not necessarily looking for directly competing sales with the subject, although you might get lucky with one or two of those.

Aside from that, you do have to be on point with your cost analysis, or else get a contractor breakdown. The 20-second version of the CA that a lot of appraisers stuff onto their 1004s isn't going to be sufficient to purpose.

 

[J Grant]

Well, when the evidence shows 10-50% discounts or none at all, it is a guess upon the part of the appraiser. Call it gut feeling, intuition, or heuristic analysis, it is a random walk thru the data based upon the feelings of the appraiser.

You often default to this random guess/dartboard idea. Analyzing enough data, talking to investors and RE agents, and reading articles on it could help tighten the discount to a narrower range within 10-50%. If MOST investors expect 20-30% in an area for X property type , then apply 25% and explain there is a range around that.

If most of the evidence indicates no discount, then none is applied. Again, an outlier or exception nearly always exists. But unless it is an assignment condition, we do not appraise for the outlier. MV is a model value per the terms and conditions in the definition of MV used. Which is why MV references average, typical, reasonable, and most probable- even for LV or DV, which are forms of MV. The terms and conditions are just different in DV or LV - shorter marketing times, less marketing effort, more urgent motivation of the seller.