New Construction Appraisal Question

[movingup]

We are in the process of building a new home with a large nationwide builder.
The appraiser has yet to visit the site and see the plans. Electrical and structural upgrades have been added to the sale price, but we have not added any interior upgrades.
This is the 2nd home I'm building. With the home I'm in, all upgrades had to be paid in cash, up front. With our current home, they are saying we can roll it into the mortgage, BUT...and here's the huge but...I'm hesitant to increase the COST to build the home in a market that continues to decline, as I'm afraid that by the time the house is done (6-8 months) it may appraise low.
We are building in a rural area that is considered distressed. Nothing in our price point has sold in over a year. Our home is part of a subdivision and we won't be the first to close, so I'm not certain if our comps, by the time we close, will be those which have already sold in the subdivision? Is another appraisal run before closing and would that potentially increase the value of the home?

What comps are used to appraise new construction in this case? If an appraiser goes in now, there are no comps...in 5 months, there will be 3-5 completed homes in the subdivision...

 

[nstanbru]

Whether your loan is a construction loan or a purchase money loan, the appraisal will done subject to completion per plans and specifications. Based on my experience, if it is a construction loan, which is short term financing, a new appraisal will be ordered for the take out/permanent financing loan after completion. If the loan is for the purchase, the lender will order a reinspection for the completion paperwork by the original appraiser. They will most likely also want what they call an update of the original appraisal. In reality, they will be asking for a new appraisal with a new effective date. In either case, the current appraisal will utilize the most recent comparables available.

 

[hastalavista]

Congratulations on building a new home.
I'm assuming your upgrades reflect your desire to improve the quality of the home?

Your concern is, "what if it costs more to build than what the comparables sell for in the market?" is well justified. Indeed, this is why, in many markets, we do not see speculative building- where a builder will build a number of homes under the assumption (speculation) that they will sell when completed at a profit; but we do see owner-user building going on where the builder has already sold the construction to a user (like you).

If your market is declining, one would not expect a builder to build a new home without assuming the price in the future (when it is built) will be lower than the prices are today. It sounds like you don't expect it either. I'd say you are being realistic.

So, if prices continue to decline, or if you improve your home to your tastes and the cost of those improvements exceed what the market is willing to pay, the market value of your home may likely be lower than the cost to build it.

As to the comparables the appraiser will use, in most cases, the appraisal for this type of situation calls for what is known as a "Hypothetical Value": that means that the appraiser values the property as of today as-if it were already built. The comps to use for such an assignment are those most similar comps that have sold recently.
Your lender may have a provision to re-appraise it at the end of the construction period, and if the value is different then, there could be a re-adjustment of the loan. You should be very clear on the conditions of the loan so you are not surprised at the end.

Good luck!

 

[Thomas Fiehler]

Since it sounds like you are getting the end loan and not the construction loan, it is possible that the lender won't order the appraisal until the house is nearly complete so I guess by then there will be some sales. Just check with the lender and see how they operate and how long ahead they order the appraisal.

 

[movingup]

thanks for all your replies.
As far as I know, an appraisal is being ordered now that they have already broken ground. They have asked to see the plans for the home, but we have not yet picked interior upgrades.
Our mortgage broker told us that adding interior upgrades would not likely add much more value...it really just increases the cost on our end.

This initial appraisal, I think, is just to see if a bank would be willing to finance the build and up to how much since 80% of market value and 80% of cost are two totally different things.

My main question was really that of which comps would be pulled because if they appraise now, there really are no comps, but there are homes that will go to settlement before we do. These are homes that will probably be upwards of $750K, where in the last year there, nothing has sold over the $600K mark.

 

[Mark K]

My main question was really that of which comps would be pulled because if they appraise now, there really are no comps, but there are homes that will go to settlement before we do. These are homes that will probably be upwards of $750K, where in the last year there, nothing has sold over the $600K mark.

If these "soon to be closed transactions" are contract build jobs, like yours, the appraiser should not be using these as market sales. Contract build jobs are not open market transactions. They may be included in the report but the majority of the weight in the report should be placed on the actual market "sales", not the build jobs. The lender is not concerned about the cost to construct; they are concerned about how much the house will sell for if they put a "for sale" sign in the front yard.

If the settled transactions are builder spec homes, completed and exposed to the market, that's fine.

In many areas, there are no spec home sales because builders found out 2-3 years ago that, in many areas, the market value is less than the cost to construct. NO banks or mortgage lenders in this area will loan ANY money on spec homes because there are some upper end spec homes that have been sitting unsold for several years.

"We are building in a rural area that is considered distressed. Nothing in our price point has sold in over a year."

Do not be surprised if the cost of the new home exceeds the appraised market value; you might want to get financially prepared for this possibility if you're not already.

 

[Webbed Feet]

If these "soon to be closed transactions" are contract build jobs, like yours, the appraiser should not be using these as market sales. Contract build jobs are not open market transactions. They may be included in the report but the majority of the weight in the report should be placed on the actual market "sales", not the build jobs. The lender is not concerned about the cost to construct; they are concerned about how much the house will sell for if they put a "for sale" sign in the front yard.

<....snip....>

The above is absolutely correct. More, no appraiser with any training, or intelligence after training about it, will use 100% "comps" that are all out of that same subdivision and all built by your builder. Pulling a stupid stunt like that has become a sure way to end up sued later, or end up with an unfriendly spanking by the state appraisal board. Or, get kicked off of lending approval lists as an appraiser.