As is Appraisal on partially constructed house(s)

[Yimmydatulip]

My boss recieved an order to do some appraisals on some houses that are partially constructed. I was assuming he wanted the appraisals subject to completion, however, after speaking to the client, he wants them as is (apparently the builder went belly up so he bought these partially constructed houses through the bank). How do I go about doing these appraisals? Would I put in finished houses and adjust? I don't have any partially constructed comparable sales, so I'm thinking I would just use regular sales and adjust?? I have a few of these and the guy is rushing me to get them done, no surprise, so I'm kind of in a bind. Any advice would be greatly appreciated. Thanks :new_smile-l:

 

[The Warrior Monk]

How I would handle it depends on the market data available, and who is the buyer of such a property. Some suggestions:

• Sales Comparison Approach: Have other similar, unfinished properties sold in the area?
• Income Approach/Discounted Cash Flow - How much will it cost to finish the project, how long with it take, and what is the expected return on investment?

 

[DWiley]

This is a fairly big topic in the AI REO seminar. We have done lots of appraisals on partially completed homes this year.

One thing to consider (that a lot of people miss) is whether or not a discount is needed - a discount beyond the cost to finish the home. For example, if a home is 60% complete, what buyers compose "the market?" If the market is composed of builders/investors, they will typically be looking for entrenurial profit, and one must account for that.

 

[Restrain]

Definitely consider the fact that a potential purchaser will have to get a bank loan, get a second loan to finish it, have to deal with contractors to get it finished, have holding costs on both loans, then closing costs to refinance at the end of the deal. Finally, you'll have to discount for the hassle of dealing with all this.

If you're dealing with a probable investor purchase , figure 15-25% profit margin.

 

[Ken B]

There is a lot of risk associated with these appraisals.

The lender should have copies of Progress Evaluation Reports which will, hopefully, have been recently completed by an engineering/general contractor firm. A company named "Varian Associates" inspects almost all, if not all, construction projects in this area. If I ask a lender for the "Varian report", most know what I am talking about.

Lenders typically collect information other than the appraisal on these properties. Request copies of any progress evaluation report that may be available. Request copies of any bids received for completion of construction. Request copies of construction budgets.

Inspect the properties. Compare the condition of the properties to the progress evaluation reports. If very similar, make an EA that the percentage complete indicated by the reports is accurate. Analyze the general contractor bids. See if a profit line is included. Consider that if no bids are available, that the GC which completes construction is taking on risk associated with work performed by others. The GC will expect a higher profit due to that risk. Consider that the GC may need to perform some demolition work prior to continuing construction if the improvements have not been protected from the elements for an extended period and/or there has been any vandalism.

Assuming you are estimated market values of the individual properties and not a bulk value for multiple properties (if you are providing a single value for multiple properties, a Certified General appraiser must sign the report), consider that a purchaser of the property is going to consider the time required to complete the properties, trends in market values, and will discount the expected future sale price of each property to a current value and then deduct costs, expenses, and profit.

This will be a very good educational experience for you, although it is not likely to be a very profitable venture.

Good luck!

 

[George Hatch]

I've done a number of these types of assignments over the years. In my experience there's always a discount above and beyond the hard costs to cure, and that discount ain't small.

For me, the hard part isn't the discount, but trying to quantify the unknown. These assignments don't usually come up the week the contractor ceases working on the project. It usually takes from 3-6 months before the appraiser gets out there, by which time the partially completed structure has been just sitting there. Maybe it's been secured but more often not. Maybe if was sufficiently completed to keep the elements out but more often not.

How much removal/replacement of existing components will be required before there's any actual progress? That's where the outside expertise comes in handy.

 

[Yimmydatulip]

Well the client is the actual owner of the properties, he just recently bought them from the bank. He would not disclose to me what he paid for the properties because he said "it might sway my opinion of value". I tried to explain to him it wouldnt, but, that's his choice (I guess?). He says his use for these appraisals is for his own personal portfolio, so there apparently is no lender involved.
The houses he purchased are partially complete (with the exception of 1 that is 100% complete). I did some research on the houses and it appears, like George made note of, the construction company went belly up almost a year ago and the houses have been left untouched ever since. Some are really nice, although incomplete. Thanks for all your help everyone, my boss is a smart guy and he has been doing appraisals for a long time, but I always like to seek a 3rd opionion and when I do, I turn to everyone on here. =)

 

[PropertyEconomics]

He is establishing a market value base for capital gains purposes would be my guess.
I frankly dont take assginments where there has been a transaction and they wont tell me what it is. First I need to report a three year history of the property. Second if he doesnt trust me enough to be blatetly honest with him then hes probably not a client I want. And finally, I dont think hes being honest with me. Mind you this all assumes my job isnt to tell my client a value without knowing because there is a dispute. I accept those jobs, but in this instance I sure would want the information.
I would do my best to find out what the transaction was ... the infomation in that sale is invaluable for many reasons.
The additional discount is there, the hard costs are there, the carrying costs are calculated in his purchase.
Has he told you what his anticipated carry time is? Has he told you what his anticipated hard costs are?

There are just so many questions that need to be answered in order to do this job well, considering what you have just told us.

Good luck.

 

[Terrel L. Shields]

In my experience there's always a discount above and beyond the hard costs to cure, and that discount ain't small.

true enough but that is a pretty 'hard' number to vet.

Lost opportunity costs are what I call 'em and in my opinion it will occasionally assume the old saw I was taught a long time ago by an investor. If I invest a dollar, I want the return of the dollar, a return on the dollar and another dollar for risk...so i am expecting the amount I invest in repairs to be paid back between 2 - 3 dollars.

Therefore, if the market value is $300,000 "as complete" and it takes $50,000 to repair then the amount I would pay would be $300,000 minus 2 or 3 x 50k or 300,000 - 100,000 - 150,000...If I can buy it for $150,000 - 200,000 then I'd go for it.

 

[George Hatch]

The reason it's a cliche is because a lot of investors and construction lenders have been using it. It's not always 3:1, but it's almost never less than 2:1.

Cost doesn't equal value, but it's also not irrelevant.