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As is residential

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Joker

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May 28, 2002
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Certified General Appraiser
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Ohio
I think I am having a brain ****!

I have been asked by a client to appraise a single family residence (spec home) that is currently under construction and is about 50% complete. The appraisal is to be done "as is" only. I just want a few other opinions, which is most likely to be the most applicable approach: the Cost Approach or the Sales Comparison Approach? The Sales Comparison Approach would rely on sales of completed residences less a cost to cure. This would require a huge adjustment, with no market support from sales. The Cost Approach assumes that someone would rebuild that structure to its present condition. Is the home worth what it costs to replace it in its present condition? Is it worth less than that or would it be worth more than that? I guess neither of these approaches is very reliable in this case because of the broad assumptions made.

Comments?
 
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Florida
Very strange request!

I think I would do both cost and sales comparison and reconcile between the 2. In any case, it will take alot of extra work.
 

Judy Whitehead (Florida)

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Jan 20, 2002
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Florida
You must use at least two approaches to value if it is residential.......it sounds like to me it is just a "semi-improvement" on a piece of property. If you can't live in it and it doesn't have a certificate of occupancy, then is it really a residence?

I've done some appraisals where there were improvements on a site (some actually livable - illegally) and some not. I usually treated it as a vacant land appraisal with improvements, although it sounds like your improvement is worth more than what I had.
 

Restrain

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Jan 22, 2002
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Florida
I would consider the following: (1) the cost to cure, that is, the cost to complete the home, or (2) if the home has been setting a long time and has deteriorated, the land value less cost to demolish. Also, consider the fact that the purchaser will have to get creative with the financing. He will have to get a 203K loan to finish out the home or a purchase loan with home improvment loan, both of which will have to be refinanced after completion. As such, you have additional financing costs that wouldn't happen with a completed home (higher interest rates, fees, etc).
 

Mountain Man

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Not to forget that the buyer would be expecting to get a really good deal, or profit for being an entrepreneur as a builder.
 

rtubbs

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Jan 15, 2002
Not knowing any other info other than what you've given, I would develop a value as if the residence was completed and deduct an estimate for the work that is remaining to arrive at the "as is" value.
 

Lee in L.A.

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Jan 24, 2002
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Certified Residential Appraiser
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California
It would be a lot easier if you could do it "subject to" completion. Either way sounds like you need detailed plans and specs to do the job. Any buyer of a half built house would want that stuff too, along with a good low price. Assuming they were planning to finish it rather than demolish.

Oh, Charge a high fee. :wink:
 

Ben Vukicevich SRA

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Feb 9, 2002
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New Jersey
Doug,

You really don't have a "market value" for the home. Because there is a limited pool of buyers for it. Ask yourself who would be the probable buyer of the home. That's the "market" you operate in.

Most likely, there will be no financing available as the home is not livable. You then enter the realm of the scavenger small builder. Mel mentioned that in his post. The general contractor-type guy with the cash; who will want the cash discount and the entreprenurial profit of the prior builder. Start calling these guys and see if they will give you a discount rate they use and how they would approach your situation. There lies the solution to your valuation problem.

Depending on whether the home is enclosed and out of the weather, the small builder may complete it. If it's sitting there, exposed/rotting away as Roger stated, it may be time to bulldoze it and start over---land value less demolition cost.

Now you know why Statement 10 does not apply to FNMA/FHLMC/FHA and VA appraisals. Imagine doing the "as-is" value on every under construction appraisal?? Not a pretty sight.

Ben
 

Mike Garrett RAA

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Jan 14, 2002
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Certified Residential Appraiser
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Colorado
Take the easy way out. Do the appraisal "subject to completion per plans and specs". Then give them an "as is" value based on the percentage completed.
 

Joker

Thread Starter
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Joined
May 28, 2002
Professional Status
Certified General Appraiser
State
Ohio
Thanks for your input, folks. I did the appraisal based on both the Cost and Sales Comparison Approach. Thankfully, I have a good base of sales for the "as improved" and for lot sales. This allowed me to use market abstraction to determine the contributory value of the improvements. I used Marshall and Swift and talked to builders as to the approximate cost to finish, as well as the approximate completion percentage. I allowed for that same amount (per cent) of our local builder's profit percentage and added it to the cost to cure. I deducted this from comparable sales of other homes in the neighborhood. So far, everyone is happy. The borrower is a builder who is only borrowing $21,000 (first mtg) on a home that should sell for $105,000 when it is complete. It has only been under construction for a month. At 50% complete, I think it's a good risk for the lender, but by the time the report was done, it was nearly 75% complete. The builder/borrower understood and expected the deduction for entreprenurial profit. The lender concurs that he owes me one. (regular fee).
 
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