As Is Vs. Upon Completion Value

[Thomas Frye]

I am appraising a property in which the owner is in the process of constructing additions that will add a large amount of GLA to the property. The additions/rooms are finished and ductwork provides heat to the rooms. However, the rooms are framed but unfinished (no drywall, flooring, fixtures for bathroom, etc.). The lender is requesting an as is value, although I have advised them that is highly unlikely that there will be any comps for the subject in its current condition (1/2 finished and 1/2 unfinished) and it would be better if we did this appraisal subject to completion. My question to the group, "Is an appraisal using only the original square footage considered reasonable in this instance? Of course, mention would be made of the additions that are currently under construction, but not included in my GLA measurements.

 

[Sue McHugh]

Thomas,

I just ran into this last week.

I did the appraisal "as is" and used the original s.f. and did not give the unfinished portion any value. I describe the unfinished portion and included it on my sketch.

 

[Phil McDonald]

Hi Thomas,

I think you are on the right track. The addition is not GLA, it is something different, so it should be treated different.

It is my understanding that when a property is completed subject to, an "as is" value is also required.

You will probably not find comparable sales that are 1/2 finished and 1/2 unfinished. However you can still develop a credible "as is" value of the subject property.
I would consider approaching the "as is" value by deducting from the subject to completion value, the cost to cure (complete) the subject and a deduction for entrepreneurial profit. I think calculating the cost to cure would not be to difficult. The entrepreneurial profit comes from market participants. What return would an investor expect to receive given that they would need to make the investment to complete the home if they purchased it today in it's "as is" condition.

 

[dobie]

Originally posted by Phil McDonald@Sep 24 2005, 05:17 PM

I think you are on the right track. The addition is not GLA, it is something different, so it should be treated different.



I would consider approaching the "as is" value by deducting from the subject to completion value, the cost to cure (complete) the subject and a deduction for entrepreneurial profit. I think calculating the cost to cure would not be to difficult. The entrepreneurial profit comes from market participants. What return would an investor expect to receive given that they would need to make the investment to complete the home if they purchased it today in it's "as is" condition.

I am doing a job like this now and am struggling with some of these issues. Since we agree that the unfinished construction is not GLA do we develop the "subject to" value by counting it as GLA with a hypothetical? using similar sized comps.
Then explain in an addendum that the discounted "as is" value (minus the cost to cure) is X?

I'm really not sure on the reporting format although I agree with the methodology.

Any thoughts?

 

[Jim Onderisin]

Those are tough appraisals. The owner wants to borrow money to finish the work so the lender wants the value 'as is'. Most of those are a little easier than you've described, because they are closer to completion. I appraised one 4,500 sf house which had a new 1,500 addition at the rear. The exterior of the addition was complete, but the interior just as you've described. I excluded the addition from living area. I gave a detailed description of the addition in the report along with my rationale that its contribution to value was at least offset by its cost to complete.

 

[CANative]

Don't forget that exposure time is inextricably linked with market value. I've noticed that houses that are unfinished can require up to 365 days to sell when typical exposure time is 90 days +-

IMO, this has to be addrressed and dealt with in the analysis and the report. Especially as it relates to the possibility of extended marketing time. If it's market value you're after and the market is 90 days, then signficant discounts above and beyond cost to cure and typical EP would probably apply.

 

[Phil McDonald]

Hi Scott,

I think you could complete the assignment "as is" or subject to completion. It depends on what your client would like. You could provide them with both the "as is" value and the subject to completion value. Just make sure you get paid for the extra work.

In completing the "as is" value I think you could approach it two different ways and reach a credible conclusion. The approach you take will most likely be determined based on the reliability and availability of the data you have. You could treat the addition as something other than GLA. In this approach I would compare actual GLA to actual GLA of the comparable sales. I would adjust the comparables for the "as is" value of the addition, just as you would adjust for outbuildings, garages or other space that is not GLA. You could also compare the total finished and unfinished space (proposed GLA) to similar GLA and make the adjustment for the cost to cure. I would probably work it both ways and then decide which approach is better supported.

In completing the subject to completion I would compare the subject's proposed GLA to similar GLA, but there would be no cost to cure since the value is subject to completion.

 

[Lobo Fan]

Your lender will not be able to complete the loan with a subject-to value, which may be why you were directed to complete it as-is. If it were me, I would go with the completed square footage as a base number. If yoiu think it is far enough along, you can add some value for the newer portions, though it is obviously not GLA. Submitting it as subject-to after your client has requested as-is will just get you into a fight and an unpaid appraisal bill.

 

[Terrel L. Shields]

did not give the unfinished portion any value

You mean that partial construction will never contribute a dime to the value of the property? I don't see that here. It will contribute something commenserate with the amount done less a discount for the risk of finishing the work.

 

[Fred]

I did the appraisal "as is" and used the original s.f. and did not give the unfinished portion any value

I am wonder how an appraiser can ignore the improvements in place as of the valuation date and call the appraisal “as is?”

The lender is requesting an as is value, although I have advised them that is highly unlikely that there will be any comps for the subject in its current condition (1/2 finished and 1/2 unfinished)

Well of course not.

All transitional properties are “complex” appraisals. Phil posted the only method I know of, and asks:

What return would an investor expect to receive given that they would need to make the investment to complete the home if they purchased it today in it's "as is" condition.

Extract that from purchases of fixer-uppers and other incomplete projects.