How would you do this?

[Zoe]

Even a regular homeowner is not going to buy in "as is" condition without expecting some kind of entrepreneurial incentive. So that has to be considered. They are not going in there and contracting it themselves without expecting a return on their time of managing and supervising and contracting the work out. Even if they do all the work themselves, they are still going to want a return on their time and investment.

 

[DWiley]

The discount from "as completed" will be far higher than the costs to complete. No investor takes on the various risks for the unknown contingencies and holding costs and lack of liquidity/lost opportunities and such for free.

All RE is local but in this region it's often "Costs x 2" with the heavy fixers. You can seek out before/after remodel flips to compare the

("as completed - costs = profit residual") = discount

I know some investors operate off an arbitrary profit margin the way DW mentioned but I prefer to extract that factor from actual resale examples. Depending on the level of competition between the contractors, market conditions and pricing trends that factor can sometimes vary widely from one year to the next. Either way, the appraisers have to be savvy about the percentage of construction costs that are complete at the time of acquisition as well as estimating a cost to cure.

You can also seek out past sales of partially complete vs their subsequent resale to identify the difference between acquisition+hard costs and the resale. You're not looking for direct comparables for your subject's SC; you're looking to isolate the discount factor.

We have a local group - Real Estate investors of Nashville. I used to attend and sometime speak at their meetings, and I found them to be a wealth of information.

 

[George Hatch]

The thing about all forms of development is that the final profit margin will effectively be the residual of whatever is left over after all the costs have been spent. As such that will be as dependent on the prevailing pricing and financing trends at the time of resale. That's obviously easier to do when their timeline is 90 days than when it's 2 or 3 years down the line.

What happened in the 90 days after 01/2020 were unforeseen in advance. What happened after mid-2022 when the mortgage interest rates crossed into 6% range was unforeseen in advance, leastwise by most people. It is their expectations at the time of acquisition that figures into their thinking, moreso than the actual wisdom of those decisions when viewed in hindsight.

 

[Tom D]

There is no appraiser here that can do the right cost to cure on this baby, unless it is minimal cost. A good method segregated break down cost approach with actually looking at everything will cost about $750-$1000 to get done by a cost estimating person. And you are doing what. Most of yous are like the professor who never did a rehab or new construction.
I would be asking you how you figured the cost if you were standing in front of me at the board.

The cost approach, if done, is the big thing that most boards get you on when they ask for your work file for costs & land value.

 

[George Hatch]

Unknowable by an appraiser, huh? Can't figure out what they're thinking, huh? Because most proposed construction deals come with a contractor's cost breakdown for the appraiser to analyze and compare to their own cost analysis. It's easy to compare the utility of their cost analysis against the contractor's estimates. Which the appraiser's cost analysis protocols are what you are suggesting are unusable for a current assignment.

Identifying the subsequent resale price of your (previous) subjects after completion is a knowable fact, too. If an appraiser has performed such work before they can see what has happened in the past even if the "as completed" for this current assignment hasn't yet occurred.

No different in that respect than using (known/knowable) comparable sales from the past to get to a value conclusion for a subject prior to the consummation of the hypothetical sale. There is a feedback loop appraisers can use to test the actual performance of their previous analyses. No guesswork necessary.

Whenever I run across a closed sale of a property I had appraised before I always check to see how I did.

 

[J Grant]

these kind of complex appraisals are fun in their own way - a challenge but one that is doable.

 

[Tom D]

Why did the builder walk away, maybe they did the cost approach wrong on this baby. I see many contractors not doing it right on cost.

If the appraiser sees a segregated cost breakdown, it is not the easiest thing to understand or figure out total item cost. This is a not a simple 1004.
And how many of us are so good to see everything needed to get done, seen or unseen with a walk thru. This appraisal should involve a cost estimating person for your info and work file.
But you're not getting paid enough for this complex appraisal. Appraisers are observers, not contractors. Well, some of yous might be, but your posting advice says maybe not.

 

[George Hatch]

I have personally sent contractors back to the drawing table on a number of occasions because their costs were too far out of line with what the other contractors had been doing. (and not just what the cost services are saying). Sometimes way too high, sometimes way too low.

That's the entire purpose of requiring appraisers to perform their own analysis in a construction appraisal instead of just parroting the contractor's costs as if they're the same thing as a more complete CA. The contractor's costs are not supposed to be as high as an appraiser's CA because they don't include some of the indirects, contingency and profit factors. A contractor's costs are *supposed* to be a lot lower than an appraiser's CA. They're not the same thing. That's another reason why just parroting those costs is always the wrong way to do it.

I've seen many examples where my hard costs more/less matched up at that point with the contractor's costs so a good percentage of those are reasonable. But then I have to fill in the blanks that they omit to get to my value conclusion. I'm testing their costs against other contractors AND I'm testing my own analysis at the same time.

 

[Joe Flacco]

My experience has been that contractors costs are not detailed enough on its own to make a determination if it is too high or too low. Same with cost manuals.

 

[George Hatch]

You will also need to see the specifications, but by the time you get around to comparing various cost breakdowns to each other and to the cost services it doesn't take too many passes to see how how accurate the costs services actually are when including the additives. They really do work when the appraiser actually works the process. By which I am not referring to the 30-second version on the 1004 where most (but not all) appraisers are backing into the land value.

Trite but true nonetheless: No mode of analysis can work if the appraiser doesn't actually work the analysis.

By the time the home actually gets built you can see exactly what those particular costs produced and what that developer's margin probably was. Feedback loop and such. When the assignment is a construction loan the appraising will commonly include the "as is" prior to and the "as completed" at the end, so it isn't just one appraisal in the beginning. As applies not just for individual homes but also for entire subdivisions and condo projects as well as non-residential property types. It all depends on what kinds of clients and what kinds of assignments you're working.

Needless to say, an appraiser cannot competently appraise a larger residential project - including the retail values of the individual units - without first understanding how to appraise those individual units.