How much will it sell for?

[Paul Burger]

I've got an appraisal order for two houses in a new subdivision (the only two that are complete). The builder is my client. The appraisal will be made in order to help him decide the list price. Will this be a different kind of appraisal than a refi or purchase? Are there any extra steps I should take?

 

[Terrel L. Shields]

I know, I know. Every Res. appraiser hates the cost approach. But check this.....Get the builder to level on exactly what he spent, building, lanscaping, septic and well (if present), labor and all..Then the lot value and any building permits, etc. etc.

Assuming this is a garden variety home (i.e.-no exotic architecture plans except something out of a catalog, you know, $150 from Bitter Homes and Garbage Magazine. Properly, I think in my area, 7 - 10% allowance for contractor profit, then maybe 10% for Risk and an allowance for time. I.e.- He has (likely) borrowed money at commercial rates for 6 mo - 12 mo to construct the house and allow time for a sale. Say, 6 mo. to build, 6 mo. to sell [that would work in my area except in Lakeside because land is scarce and houses bring a premium]

That number should be a starting point. Find a similar new subdivision if possible and then check the prices. I prefer to adjust lot prices first (i.e.- land values may be different depending upon lot size etc.) Subtracting out the land value, the solds in another subdivision should be close in $/SF.

Clearly, the house cannot sell for less than the guy has in it, or it is a disaster. It is a hot market indeed for it to sell for more than 20% above cost + lot in my opinion.

Using Marshal & Swift in lieu of actual costs remember they include a contractors profit and allowance for time.

Your comparable sales needs to be truly comparable for the improvements in age (new), style, and size as well as quality. The lot values can be adjusted out.

 

[Richard Carlsen]

Terrel has hit it right on the nose with the Cost Appraoch.

It is new construction and therefore cost should equal value, unless the builder has done something dumb in the floor plan or oversized the house for the neighborhood.

I would give equal weight (as I do on new construction) to the Cost Approach and the Market Approach.

Remember the Principal of Substitution in new construction when you are dealing with a builder.

 

[Restrain]

Don't forget marketing costs, 3% for the realtor, survey costs,sellers closing costs over and above profit and risk.

 

[Steve Owen]

Terrel has it right, so long as there are not unusual market conditions, such as oversupply, which would make the house sell for less than cost. I almost always start with the cost approach on residential property, even older houses. It's a good way to get in the high end of the ballpark, as long as you depreciate appropriately and take into consideration any unusual market conditions.

One other thing you might want to do with this assignment is to consider current listings. If you can find currently listed homes that are very similar to your property, they will provide an indication of the upper end of the range for sale price. Like the cost approach, this is also a matter of substitution; no reasonably intelligent buyer would pay more for your subject than it would cost to buy a nearly identical property. Whenever an assignment is for the purpose of determining an offering price I always look at current listing data.

Last, but not least, especially if these houses are small properties in a tract development (1400 sq. ft. or less in my market), you might want to look and see if any similar properties are being purchased as income producing SFR's. If there are, then an income approach might be appropriate.

Of course, at the end of the day, the sales comparison approach is most likely going to give you the best indication of value for these homes if there is enough good data. But, these other approaches and market factors can help a lot, especially when the data from sales comparision is not conclusively solid.