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How To Appraise A Home That Is New Construction, 1/2 Built

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Eddie B

Freshman Member
Joined
Feb 25, 2008
Professional Status
Certified Residential Appraiser
State
California
I work for a private money lender and we are doing a loan on a home that has framing and some plumbing and electrical rough ins. We ordered an as is appraisal and of course the appraiser said to do the appraisal subject to which makes the most sense. The investor on the deal wants to know what the true as is value is. If the property just lacked some finishes I would think you could back out a cost to complete, but this home is just framing, windows, an rough ins. No roof, stucco, drywall, finishes, landscape, ect.
How would you suggest this be appraised to get an as is value? There will not be any market data to determine what someone will pay for a 1/2 built house. And the value of land plus entitlement and materials constructed may give you an idea of value, but is not the way to complete an opinion of value for an appraisal, in my opinion.
Any advice is appreciated.
 

J Grant

Elite Member
Joined
Dec 9, 2003
Professional Status
Certified Residential Appraiser
State
Florida
I work for a private money lender and we are doing a loan on a home that has framing and some plumbing and electrical rough ins. We ordered an as is appraisal and of course the appraiser said to do the appraisal subject to which makes the most sense. The investor on the deal wants to know what the true as is value is. If the property just lacked some finishes I would think you could back out a cost to complete, but this home is just framing, windows, an rough ins. No roof, stucco, drywall, finishes, landscape, ect.
How would you suggest this be appraised to get an as is value? There will not be any market data to determine what someone will pay for a 1/2 built house. And the value of land plus entitlement and materials constructed may give you an idea of value, but is not the way to complete an opinion of value for an appraisal, in my opinion.
Any advice is appreciated.

Imo, the key to this is the buyer. An owner occupant buyer would buy new construction subject to completion ( they move in when home is complete). But a half built home the more likely buyer is a contractor or investor who would finish it and flip it ( that;s what I've seen in my experience). So they might pay close to land value , or land value with a discount off what is already built ( they will be buying all cash, typically )

The cost approach is useful in this situation, price of land and cost to date what has been built.
 

AMF13

Elite Member
Joined
Jan 24, 2002
Professional Status
Certified Residential Appraiser
State
California
What J Grant said.
 

nstanbru

Senior Member
Joined
Feb 19, 2009
Professional Status
Certified General Appraiser
State
California
I've seen too many of these kinds of properties rotting away waiting for someone to take over where someone else left off. I'd probably value it at no more than land value.

This has been my experience also.
 

DWiley

Elite Member
Joined
Apr 4, 2007
Professional Status
Certified Residential Appraiser
State
Tennessee
The first step in determining market value is determining the market. Who would buy such a home? An investor or contractor? I have seen cases where these sold at basically land cost, and I have seen cases (especially if what exists is in good condition) where an investor calculated the cost to finish and factored in an incentive, and bought based on that.

Say the finished home would be worth $250,000, and it would cost $70,000 to finish it, and I, as an investor, want a 30% gross return. The most I would pay can be calculated as follows (PurchasePrice + $70,000) x 1.3 = $250,000, solve for purchase price. The most I would pay as an investor is $122,300.

I have seen this actually work in the market. YMMV.
 

KONA

Junior Member
Joined
Aug 16, 2007
Professional Status
Certified General Appraiser
State
California
I have seen cases where the work to-date was so bad that the site had to be scraped before continuing with the project. Many issues to consider.
 

Meandering

Elite Member
Joined
Feb 26, 2006
Professional Status
Real Estate Agent or Broker
State
Pennsylvania
We are lucky in that at the end of '08 we had more than a few half finished houses sell through the MLS without another lick of work by the original builder. So we can show an historic trend for price differentials between incomplete at purchase, and completed at resale. Work it out as percentages, to be used to against the sale of completed homes, to understand if investors have changed their requirements for profit and incentive. But don't forget to weight those percentages against estimated costs to complete those that sold mid construction.

.
 

DWiley

Elite Member
Joined
Apr 4, 2007
Professional Status
Certified Residential Appraiser
State
Tennessee
There are several other costs/expenses/allowances to be deducted but essentially, that is the process.
Of course. Depending on the data available, and depending on whether one uses gross or net returns, the math could get much more complicated. The purpose of the simple example was just to illustrate the concept.
 
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