New Construction Custom Value Issues

[jsmith1437]

I have been reviewing threads on this site for quite a while and would like to say I had no idea how complex and challenging the appraisal world is! I am seeking advice on how I am handling a situation with appraisals on my new construction project. I am an architect and we are building a fully custom 6000 SF house with an in ground pool, and barn on 14 acres in a suburban/rural area. The bank ordered two appraisals and told us that they would use the lowest value. The first appraisal that came in, the appraiser had called the builder to ask a few questions about features, location, etc. That one came in close to where we needed it to be $953,000. The comps also seemed more relevant, they were newer construction, but some distance from the house. There was one comp that was within the last 12 months. He gave adjustments for actual age, condition, pool, extra fireplaces and overall site improvements. The second appraiser called the builder and asked how far along the house was and when it would be done, that was it. This right away caused concern in that she didn't understand what the process was. We do not have an address yet, it is listed as vacant land and she didn't even ask for clarification on where it was. With no other info provided, the second appraisal came in at $850,000. I sent a "rebuttal" letter asking for clarification on the types of things I just mentioned. The closest comparable in age was from 2008. There was a very small actual age adjustment on the others that were from 2002. There were no comparables that were new construction. There was one property included in both reports and the value given varied by $90,000 from one report to the other. The cost approach was completed on both and came in nearly the same. The higher value report essentially had the sales approach and the cost approach at a similar number and stated they were both strongly considered. The lower value report used the sales approach only, which was lower because there were less adjustments made. I also asked for clarification on why, in a market where most of the homes in this area are custom built and not transferred, meaning I don't believe they are searchable as comparables, was the cost approach not given more emphasis. I believe that the cost approach in this area more accurately reflects what buyers in the market are doing. Am I approaching this correctly? As I said, I understand this is complex, I'm just trying to understand how two appraisals can be so different. What else could I do to reconcile these values? Thank you in advance for anyone that takes the time to respond, it is much appreciated.

 

[hastalavista]

Is your loan for the purposes of building the house, or do you already have a construction loan in place and this is for the permanent financing once complete?

 

[jsmith1437]

Is your loan for the purposes of building the house, or do you already have a construction loan in place and this is for the permanent financing once complete?

It is for new construction but I own the land already. No loan in place, this is for a construction loan that converts to perm after completion.

 

[J Grant]

Honestly, nobody here can say which appraisal is "better"...we'd have to see both, know your property etc. Overall though, the sales comparison approach per what Fannie and lenders require places far more weight on the sales comparison approach. Other than send the lenders some sales you think might be relevant for appraisers to consider, there is nothing you can do to affect the outcome....you can apply to another lender , but that can get expensive . Why 2 appraisals in this high price range are aprox 10% apart...very possible due to how appraisers see it and what comps they used. The first appraisal you said used comp sales further away...it might be possible those are in a superior area. Sounds like the land , barn and pool would have a lot of value aside from the house?

 

[jsmith1437]

Honestly, nobody here can say which appraisal is "better"...we'd have to see both, know your property etc. Overall though, the sales comparison approach per what Fannie and lenders require places far more weight on the sales comparison approach. Other than send the lenders some sales you think might be relevant for appraisers to consider, there is nothing you can do to affect the outcome....you can apply to another lender , but that can get expensive . Why 2 appraisals in this high price range are aprox 10% apart...very possible due to how appraisers see it and what comps they used. The first appraisal you said used comp sales further away...it might be possible those are in a superior area. Sounds like the land , barn and pool would have a lot of value aside from the house?

Thanks for your response! I included two addresses for comparables in the rebuttal letter that I hope they consider. The higher value report explained the comparables from further away by stating that there were limited new construction properties within range, which is my point also. But, all of his comparables were within 15 miles. Out here, that is closer than the nearest sizable town. I definitely am not experienced and don't understand the methods and rules, but, to me as an outsider looking in, it is hard to understand how a house that was built in 2008 (commodities to build a house have increased substantially since then) can be used with no adjustments for new construction. That was the newest comparable included. I am very respectful of the process and don't want to do anything out of line, just find it interesting how this is done. Okay, let's just me honest, maybe also a little frustrating given this is my "dream" home! Thanks again...

 

[J Grant]

Appraisers usually make and imo should make, a condition adjustment for a 2008 built vs a new home. Other than that, who knows...every area is different, but I get a red flag raised if all comps are far mileage away using rationale no new homes found, since a new home can also have recently built, such as the 2008 home, as a comp ( assuming that sale was in subject area

With large acreage and pool/barn etc there is more to value than the new house itself But I don't know your area. 15 miles/far miles away or may not be meaningful in terms of not just distance but about the property values/land values in the areas .

 

[hastalavista]

From what you describe, your loan is not what we (on this board) might call a "Fannie/Freddie" (Fannie Mae/Freddie Mac) type loan. As such, unless the lender has a specific guideline, the cost approach (done correctly and assuming the quality of data is "good") would be expected to have similar consideration in the final-value reconciliation as the sales comparison approach.

The operative words here are: (a) done correctly and (b) good data.

Many appraisers are experts in the Fannie/Freddie appraisal process. They know those guidelines inside and out and know what the expectations are from those users. In a Fannie/Freddie assignment, significant consideration is given to the sales comparison approach; so much so that over time, some appraisers (even for proposed construction such as yours) conclude that the cost approach to value isn't meaningful or necessary.
But for non-Fannie, construction loan financing, the cost approach can be very reliable and may warrant equal if not superior consideration in the final value reconciliation (and there is no rule that says that cannot be the case).

Your situation isn't cost-approach related as you indicate both reports come to a similar cost approach value indication.
Your situation is sales comparable selection and adjustment related. On the face of it, newly built homes of similar condition/configuration/and quality would be superior comparables than older homes. In many situations, older sales (6-18 months ago of similar, newly constructed homes) are superior data than more recently closed but less similar (in age, quality, etc.) homes.

As JGrant points out, none of us can tell you if the comps used were the best or the adjustments sound. But I would try to argue with my lender that the appraisal that used the more similar, newly constructed sales and arrived at a value conclusion that is consistent with the cost approach is superior to the appraisal that used older, not-newly constructed homes where the value conclusion is significantly different than the cost approach.

Good luck!

 

[J Grant]

I can never understand why lenders decide to use the lower of 2 values by default. They should use (imo) the stronger supported appraisal. It's possible neither one did the greatest job and value is in the middle of the two...

 

[hastalavista]

I can never understand why lenders decide to use the lower of 2 values by default. They should use (imo) the stronger supported appraisal. It's possible neither one did the greatest job and value is in the middle of the two...

Because some do not want to run the risk of appearing to be "value shopping".
But you are correct: an appropriately constructed review and underwriting policy/process could be used to address such scenarios.

 

[NachoPerito]

You can post the grids here if you want, but black out any identifying information. In a rebuttal you will need to have concrete reasons why the report is flawed. Just saying "hay these comps are better" doesn't go very far because it is a judgement call. I am not surprised that a home built in 2008 would be used as a comp, but an age/condition is generally appropriate. When you say "commodities to build a house have increased" you are talking about construction costs in 2008 right? That would be irrevelant. You are comparing a home built in 2008 to your home today, so in theory, you would be using replacement cost today.