How do you appraise new construction with no comps?

[nanzilla]

I turned this plans & specs order down because I have no idea how I would proceed without making it my life's work: New construction of about 7,000 sf GLA, price range of about 1.5m. Absolutely no comps within the entire county that sold in the past 24-months at that price range or GLA. There are perhaps similar houses in its exclusive development similar in size but nothing that has sold or is even currently listed.

I recommended they get a Cert General to do it but would like to ask the pros here how one would go about appraising this with no comps anywhere in sight. I would need to make adjustments of about 50% to any of the available comps to match the subject. Even though the fee offered was good, I feel like I would be spending the next 6-months explaining the report to some underwriter.

 

[J Grant]

I turned this plans & specs order down because I have no idea how I would proceed without making it my life's work: New construction of about 7,000 sf GLA, price range of about 1.5m. Absolutely no comps within the entire county that sold in the past 24-months at that price range or GLA.

Your first problem was trying to find comps within the price range of subject. We are not supposed to search by price range, at least initially! Were there similar size square footage comps at any price range?

I would expand GLA search from 5000 sf to 8500 sf , how narrow was your sf search?

Did you search outside the subject community for newer or luxury homes of large GLA?


There are perhaps similar houses in its exclusive development similar in size but nothing that has sold or is even currently listed.

I would search expired /withdrawn/cancelled listings to see if homes were listed but not sold. I would talk to realtors as no sales or lisitngs are odd, and search pub recs for sales not on MLS

I recommended they get a Cert General to do it but would like to ask the pros here how one would go about appraising this with no comps anywhere in sight. I would need to make adjustments of about 50% to any of the available comps to match the subject. Even though the fee offered was good, I feel like I would be spending the next 6-months explaining the report to some underwriter.

My answers above how I would go about assignment.

 

[nanzilla]

I searched the entire county for comparables, or about a 20-mile radius from the subject. GLA was my primary seach criteria and there was nothing from 5,000 sf up. I did not start calling realtors or searching for expired listings, etc, as I became discouraged at this point and did not want to get involved with a report for a client who I know has very tight guidelines and endless stips. Also one with a history of turning appraiser's in to the state for perceived infractions.

But you gave me the answer I was looking for and I thank you. If I were going to proceed with the report I would do as you suggest regarding expired & withdrawn listings and call some realtors.

 

[hastalavista]

Let's get real: data searching is data searching. A search by price is a valid data search. In fact, many times in my market, the size of large, custom homes are not in the MLS, so price becomes the search parameter for these types of homes. Price is a valid search parameter for gathering data; it just isn't a valid comp-selection parameter. Anyone in their right mind would want to comment on the competition within that price range, so price is going to be analyzed sooner or later (and, no problem analyzing it sooner). Price just cannot be the filter used to select the comparables.

Referring the assignment to a CG isn't a "mistake" but it isn't what I would do. Some of the best CGs I know wouldn't touch a SFR with a 20-foot pole; and, some of the worst CGs I know complete SFR appraisals. Those CGs who would be competent to do this type of assignment are equally competent as the CRs I know who are competent to do this type of an assignment.
In general, and in my opinion, a CG would presumably bring three things to the table vs. the typical residential appraisers: (a) a better understanding of the Cost Approach, (b) the willingness to go outside typical GSE guidelines, (c) the willingness to hang their hat on the Cost Approach's value indication.

Given that the subject appears to be a near one-of-a-kind, this is a complex assignment for whomever completes it. It certainly can be done. I doubt it would fit the GSE guidelines. I have a client who specializes in up-scale homes (which would fit the profile of this assignment). They cannot care less if the GSE guidelines are met (and, they are a major FRI... a national bank). All they want is a credible report that is adequately supported. My guess is for an assignment like this, they'd want it very well supported.

Maybe the market value is less than what it costs to build (highly probable, but not certain).
Maybe the market value is similar to the cost.
That is not our concern as an appraiser.

What is our concern as an appraiser is if we (individually) believe we have the ability to complete the assignment in a competent manner; and, our belief had better be correct in an appraisal like this, which will (as the OP points out) be scrutinized.

OP: I think you did the correct and prudent thing; both in your initial data-search and in your decision to pass on the assignment. Something like this is an assignment you go into confidently or don't go into it at all.

Good luck!

 

[Mike Garrett RAA]

Very, very, carefully! And, for a substantial fee.

 

[nanzilla]

Thank you so much, Denis, for reinforcing my decision to turn it down. I've done this long enough now to know my limitations and when I really should just walk away.

 

[J Grant]

I think it was smart to turn it down as well.

Since you asked more out of curiosity, I don't agree with an appraiser basing the value on the cost approach (unless the client does not care about MV, and wants to fund a construction loan based on cost plus land)

You can develop a good cost approach, and even derive a land value. But that tells you zilch about whether there is any market for this home once built. I don't see how one could arrive at MV using only a cost approach, though of couse one can arrive at value using only the cost approach.

The expired/cancelled/withdrawn listings tell the story on marketability on these types of large homes. There can be strong demand for them or weak demand, depending on your market. In a market with weak demand, large luxury homes can languish on the market for years, with listings cancelled, withdrawn, then put back on, then expired, over and over again. It gives you insight into marketability and demand (or at least demand at the prices owners are trying to get)

Denis, yes, price is a legit filter and one that has use. But it should not be used early in an assignment, to decide whether or not there are comps, because searching by price early in an assignment can lead to wrong conculsions (such as, there are no comps. Really? If you put in a search of large homes from 800k-2mil, you might find no comps. But if you ran the same GLA search with no price range, you mind find 3 sales below 750k as short sales on these homes, for example)

 

[Michigan CG]

Yesterday we inspected a 7,400 SF home built in 1971. The report will most likely be around 50 pages with significant narrative. These types of properties are challenging but they are also something that makes one think.

The report is for an estate. I anticipate that I will be contacted in the future to do another report for lending purposes in about 6-8 months. Should that happen I will have an engagement letter with the lender, no matter who it is, stating that the typical GSE guidelines will be completely ignored and that after submission of the initial report any changes or modifications, additional stips will be billed at an hourly rate. Should the lender (or AMC) not sign the engagement letter they get no report and can find someone else to do it. Considering there are no homes in my count this size I doubt any other appraiser would want it. When I got this assignment it took two weeks for them to agree to the fee as I am guessing they were shopping other appraisers.

 

[hastalavista]

Since you asked more out of curiosity, I don't agree with an appraiser basing the value on the cost approach (unless the client does not care about MV, and wants to fund a construction loan based on cost plus land)

Without opening up this argument (again), I'll just say that JGrant has her opinion of the Cost Approach not equaling Market Value. She is certainly entitled to it and this forum is all about opinions as well as factual information.
Regardless, her opinion is contrary to all recognized texts (that I know of) and contrary to every appraisal course I've ever taken (which are many). The cost approach, like all approaches to value, if completed correctly, produces an indication of market value for market value assignments. It certainly can be relied upon if the appraiser judges it to be the credible.
Having said that, in the vast majority of my residential assignments, I rely on the SCA and/or Income Approach. I have yet to complete a SFR assignment where I gave most weight to the cost approach. I have completed SFR assignments where I've given equal or significant weight to the Cost Approach.

All participants in this forum should take any advice (mine most certainly included) under advisement and make sure they verify the credibility of the advice themselves.:new_smile-l:

 

[J Grant]

Denis, many appraisers feel the way I do regarding the CA... I would not go so far as to say that it never equals MV, but it often is not a reliable guide to MV. I would write more on the subject but don't have time have to work...maybe later if time allows.

And yes, this is my opinion after 19 years of appraising. I took classes in CA and am capable of developing a well supported CA (in the past I did a cost approach on an entire small res subdivision for a private client, the client was not looking for MV, just cost to build and land),
As you said, readers reading these posts see a variety of opinions , if everybody had the same opinion to offer, the board would be a dull place.