Appraising A New Subdivision

[Morton Fitzgerald]

I have been asked to appraise a new residential subdivision in an area that I am very familiar with by a bank manager that I want to keep as my best client. The developer is someone I've done quite a bit of work for, and I'd like to continue to be his preferred appraiser. I definitely can not afford to lose this client to a competitor.

That being said, there are several problems, the first and most important being: I've never appraised a subdivision. I have done some small commercial reports, some small apartment buildings, etc., but never anything like this. I am somewhat familiar with the income approach, though I only get a chance to use it once a year or so. "Rusty" might be the best description of my commercial appraisal expertise.

The development is going to be several phases, and I've been asked to do the first phase of 7 lots. The developer owns the land and has already begun cutting the roads in and building the entrance. The subdivision will have 1500-1700 sf brick homes on slab foundation; average+ quality. Lots similar to these sell for $15,000 in this area. Build-out time for this phase is expected to be less than 1 year.

I have a couple of more experienced appraisers that can help guide me on this, but the fact is, it's been a long time since they have done one like this. I have informed the client of my inexperience in this area and will do so in the written report as well.

Where do I go from here? Has HHH written a book on the subject? Should I just back out and take a chance on losing my best client?

I have a feeling someone will tell me that I have no business attempting to do this appraisal. However, I enjoy a challenge, and I feel that I will do a good job on it. Just need some guidance.

Comments?

 

[Ben Vukicevich SRA]

Morton,

You may want to order this publication from AI

http://www.appraisalinstitute.org/ecom/pub...0&Session=False

You will be under Statement 10 of USPAP

Good Luck

Ben

 

[TC]

If you only have a residential license, it's a moot point, you can't do it. If you have a commercial license and have never done anything like this, I would seek help from a qualified appraiser that would co-sign and guide you threw the report. And he would also expect a hefty fee, but if you want to keep that client, that's what I would do.

TC

 

[Terrel L. Shields]

If you only have a residential license, it's a moot point, you can't do it.

Why not? It is not over $250,000 for 7 x $15,000 = $105,000. What the houses are is a moot point. In my state any SL or CR can appraise anything up to $250,000 - commercial or otherwise.

Go for it, but learn how. Like this.

To comply with the Federal Reserve Appraisal Standards for Federally Related Transactions Subpart G 225.64 of the FDIC, an appraiser must among other requirements,

(9) analyze and report appropriate deductions and discounts for any proposed construction and discounts for any proposed construction, or any completed properties that are partially leased or leased as other than market rents as of the date of appraisal, or any tract developments with unsold units;

Further, the FDIC defines tract developments as follows in 225.62. (2)j:

(j) “Tract Development” means a project of five units or more that is constructed or is to be constructed as a single development.

Therefore, to comply with the Uniform Standards of Professional Appraisal Practice, treat the subject as a Tract Development and apply an appropriate analysis of market absorption rate and to discount the development over the projected period required for the market to absorb the tracts.
When valuing multiple lots or considering the value of a parcel of raw land suitable for subdividing, the Land Development Method is used. The appropriate way is to estimate the cost of developing and subdividing the land parcel and subtract from the total expected sales prices of the separate sites, adjusting for the time required to sell all the lots (individual sites), to determine the value of the undivided raw land.
If the sites (lots) are already developed, but are to be valued as a unit, the appropriate way to estimate the value is to estimate the Sales Prices of the lots, adjusting for the time required to sell all the lots. The costs (expenses) to the date of the appraisal are ignored.
This approach combines the Sales Comparison approach (to estimate the market value of the individual lot and forecast future lot values over time) with the Cost Approach (to estimate the total project cost) but is usually associated with an Income Approach technique known as Discounted Cash Flow. In essence, you are taking a sum of money to be paid at a later date and discounting (subtracting) it, the compound interest it would earn from the present time until the time when it is to be paid.

Expenses estimated annually include insurance (if applicable), taxes, maintenance
(usually low but mowing, lanscaping, etc.), and sales expenses (advertising and Real estate commissions.)

An appropriate discount rate must be chosen, generally considered the current interest rate a developer would typically pay for money borrowed to develop the subdivision plus a risk discount. A range of discounts may be considered if the project is particularly risky.

The projected discounted cash flow then generates a Net Present Value (present worth) that should yield the market value of the property in toto.

 

[Bobby Bucks]

Every couple of years I get a request very similar to yours. I refer it out to a local G-Man who is a one man shop. I don't have to worry about him taking away any business because he doesn't do any assignments for one unit properties. It's beneath him. :lol: Plus he returns the favor. If you refer it out to an operation with Gs & Rs you do run the risk of them taking away some business from that developer.

 

[Pamela Crowley (Florida)]

IN FLORIDA:

If you are not a Certified General, you would have to either refer it to one or work with one that will also be signing with you.

Definately working with a Cert Gen experienced with this type of appraisal would be necessary.

Check your state laws along with USPAP.

 

[Alan Simmons]

Why are subdivision valuations not thought of as very complex RESIDENTIAL assignments?

At what point did everyone agree that CRs just do not have the capacity to do such assignments? Who is actually more competent: a CR in the trenches or a G-man that does not do one-unit properties because they are beneath him?

 

[Pamela Crowley (Florida)]

Alan,

A 'subdivision' appraisal is not the same thing as a SFR in a subdivision. I believe Morton is talking about the value of the subdivision as a whole and could/would very likely include the various values of the individual lots too, depending on the assignment. There are whole books written on doing a subdivision analysis.

The first FL Appraisal Board meeting I attended had a Cert Res that had done some for a local bank whose officer told the appraiser, "Don't worry, these are for the bank portfolio only." Fed Bank examiners found them and turned them in to the State Board and his fines, etc were pretty big.

 

[Terrel L. Shields]

At what point did everyone agree that CRs just do not have the capacity to do such assignments?

That was the reason CR's deal with "1 to 4" family residences.....FIVE or more lots constitutes a commercial assignment because the feds say so, not me. Remember, the CG test and education has emphasis on discounted cash flows and other math associated with analysis of a subdivision. Saying X lots will sell for Y dollars equals Z total is not adequate, because the market has to absorb them all. And as anyone who looks at sales, builders often buy 3 to 30 lots at a time and it is discounted from the sales price of an individual lot.

Again, my state differs from Pam's. If the value is less than $250,000 a CG is not needed.

 

[Otis Key]

Morton - I think what everyone is politely attempting to tell you is "DON'T DO IT"!

It's a complex analysis and property. It exceeds what most residential certified, much less licensed or trainee appraisers are qualified to attempt, without either associating with someone with prior experience and more knowledge about doing such reports. A subdivision is not simply adding up the market value of each lot to arrive at a total. In fact, if you do such a thing you'll stand a good chance of coming up on charges with your state.

I'd suggest you read: Here

It's good money, but long hard work that is above even my 20 years of doing residential appraising.