effect on appraisal of partially constructed house

[dianeflys]

Hello and thank you in advance for any insight.

We live in Oregon and are in the process of refinancing our home. We will be getting it appraised next week. My question is this - how will a partially constructed second house, approx. 75% finished, effect the value of our property for appraisal purposes? Details:

We live on 8 acres with several outbuildings including a large 3 sided pole barn and a shop with concrete floors and electiricty. Our home is a typical farmhouse. We are building a new, custom house on our property which we will live in when it's finished. We are just about finished with rough electrical and soon will be ready for sheetrock and insulation. How will an appraiser view this unfinished second dwelling in terms of it's value to the property?....or for that matter, does an appraiser consider it?..or will he/she only consider the currently occupied dwelling?

Thanks!
Diane

 

[The Warrior Monk]

Have you discussed this with the lender? If not, I strongly recommend doing so. Different lenders will handle this situation differently. That in turn affects how the property is appraised ("as is," "subject to completion," etc.).

 

[NORTON]

the bigger question is how the bank handle this....remember, they are the one's lending the money, the appraiser only provides an opinion that may or may not be relied upon.

 

[Rlong]

You have a property with a number of valuation issues that might be handled differently based on the lender requirements/guidelines as previously pointed out.

But to address solely the partial construction question, I personally will usually do a cost analysis based on Marshall and Swift Cost data, and then use their building component/ percentage complete table to determine an overall completed percentage (I may tweak it a little); from that one must deduct adequate entrepreneurial incentive that would be adequate to motivate another investor to finish the project if you were to be "abducted by aliens" (better than dying). All cost to complete, lost opportunity, needs to be considered. This "deduction" can then be used in all approaches.

Whether the market supports full value of a second house etc.. is a seperately appraisal question, based on your local market.

Bob in CO

 

[Mountain Man]

With an unfinished structure, it's 99.999% likely your property won't qualify for financing.

 

[George Hatch]

I think the main wrinkle will be having two dwellings on the same parcel.

Hypothetically speaking, if it was just the one dwelling and it was partially built or in the middle of a strip-to-the-frame remodel project the lender would probably be required to ask for a value "as if" completed (usually phrased as "subject to completion") and a supplemental value opinion covering the "as is" condition.

In terms of valuation the "as is" value in such a situation would involve taking the "as completed" value and applying a steep discount based in part on the cost to complete the project per plans and specifications. That discount will exceed the cost, often by between 50% - 100% or sometimes even more.

Basically the situation is characterized in terms of who the likely buyer of such a property would be in that condition - most likely a contractor or flip-oriented investor, not necessarily an owner-user. So that discount factor would have to include consideration of risks and returns on their investment. AKA a profit margin.

With two dwellings on one site the first question that comes to mind is if the local planning jurisdiction allows that on such a parcel. If so the value is based on having two dwellings, not one; and in a presumably rural area there might not be a lot of current sales data that's similar enough in that regard for direct comparison. If the plan is to demolish the original house after completion of the new house then that makes the valuation part much simpler.

There are other possible variations, too.

 

[dianeflys]

Thank you to all who responded.

I put in a call to the lender, but have not yet spoken to him. He is in a different state.

Once the new house is complete, the current (existing) home will be decommissioned, but will remain as an outbuilding of sorts. No one can live in it.

I'm worried now, given Mountain Man's comments about it being impossible to re-fi as things stand. It's not critical that we do, as we have a fine interest rate now (4.125%), it's just that we can do better given today's rates (3.375%).
I, naively it seems, believed the new home to be a non-issue at this point. Or at the very least, to be a plus to the property's value. You all have "schooled" me to my ignorance and I thank you!

Any other thoughts, please share. I will keep all posted as to what transpires.

Diane