Appraisal Midway During Construction - For Divorce

[herenorthere]

Looking for a rationale either way on whether to discount or not discount the value of a home that is midway through construction as of the effective date of the appraisal. This is for an "as is" appraisal and not for a "subject to completion" appraisal. This question has come up in a divorce appraisal where the home was ~80% complete at the time of marriage and also in an estate appraisal where the owner passed away during a major renovation of his home. My question is whether the as is market value should be discounted for the risk that a hypothetical buyer would assume if the subject home was actually marketed in its incomplete state? In both cases that I mentioned, the homes were not actually on the market and the context and intended use of the appraisals were NOT to establish distressed values.

 

[BRCJR]

I think the typical market participant in this type situation would look at both buying at a discount for the risk and the EI for the fruits of their labor.

 

[Tom D]

depending on the completeness of the home it doesn't look like a typical buyer. so the contractor, investor, is going to pay vacant REO price minus the damage, lack of completeness, and fruits of labor stated before me. i can't imagine any comps
to do this baby. you better be good at the cost approach minus.

Cost approach = Acquisition Cost - Building Cost - Holding Cost - Cost of Sale - Entrepreneurial Incentive.
If the developer anticipates an excessive amount of building cost, then the risk demand (anticipated profit) tends to be higher. The higher the risk, the greater the anticipated reward.

maybe the current value of the incomplete dwellings is only the actual, or reasonable, costs involved to that point. so you are doing a hypothetical 'as is incomplete value'. seems like a cost approach.

 

[Tim The Enchanter]

Look for "major fixer" type comps in the likely event you have no 80% built comps.

 

[chad hampton]

I wouldn't do it.

I assume this is a custom build - I'd have the lender provide you with a contractor's estimate of the remaining work. That would be a starting point. You have a real mess of an appraisal on your hands.

 

[George Hatch]

You will see more of these situations occur during an economic downturn. I've heard it said many times that major remodels and owner-builder dream home projects actually cause divorces.

As a general rule of thumb (and in our local region) , the discount usually amounts to more/less the cost to cure x 2; meaning that if an investor has to spend $50k in hard costs they're going to want another $50k for their contingencies, lack of liquidity, risk and profits. Depending on the market conditions that margin can vary.

You can see examples of that general application with major fixers and remodel/flips.

You definitely need to have a handle on performing a real Cost Approach, not the stripped down version in the URAR. That includes having a real indication of the site value, not land-value-by-I-backed-into-it.

 

[Mr Rex]

You will run into these in the MLS every so often but you have to read the fine print and view the photos. The most noticeable thing is an inexplicably low sales price until you do read the fine print and look at the interior photos.

 

[Renee Healion]

Build a house, lose a spouse! I have done this for court. Very acrimonious, a custom, not completed house. Agree with the good advice above. As always, who would buy it, usually a narrow pool of buyers. Who would buy like that and how much would they discount to buy it, finish it, deal with it all.

 

[Tim The Enchanter]

Build a house, lose a spouse! I have had done this for court. Very acrimonious, a custom, not completed house. Agree with the good advice above. As always, who would buy it, usually a narrow pool of buyers. Who would buy like that and how much would they discount to buy it, finish it, deal with it all.

Good thing we only built a new kitchen here.

I think a key is the narrow pool of potential buyers. Normal buyers would not touch it, will need a contractor or investor buyer. State that in the report. Your comps are other things those buyers would consider.

 

[Mark K]

From what I've observed, a house that's 80% complete will sell for about 50% +/- of completed value.

So yes, I'd definitely discount it.