Proposed New Construction For Only The Exterior Of The Home

[Baldr Odinson]

Hello,
I am working on an appraisal that the bank wants as an FNMA 1004. The property is vacant land right now except a well and septic system. The constructions statement is only for the completion of the exterior of the home. The interior will have concrete floors, and stud walls with in-floor heat tubes connected to propane. The owner plans on finishing the home himself in the years following the initial build of the exterior shell.

I have found a few sales of other "shell homes", they are fairly far from the subject and differ a good deal in size. Sadly none of the sales bracket the overall "above grade living area" of the home, as the subject is fairly large and there are relatively few shell homes that have sold recently(past 3 years). The comparables do bracket the land and water frontage.
I have a few questions that if answered, will hopefully help me and other people who view this forum in the future.

1.) Is the Quality line in the sales comparison approach applicable? Should I call the subject Q6 ? Or is it possible to put N/A in the quality line?

2.) I plan on using a reduced value adjustment in the "Above Grade Gross Living Area" section to give some value for the overall size of the place. I am going to accompany this with a comment explaining that this doesn't represent true living area as it is unfinished. Is this the right way to handle this? I am planning on listing the room and bathroom count of the subject and all comps as 0.

3.) I am planning on adjusting the condition line and actual age line of the sales comparison approach, with the subject being C1, and most other comps being C2, as they are mostly a year or two old only and not finished yet, is this right? If not, what would you do?

4.) Do you see any other problems with this type of assignment?

5.) Have you had an assignment like this before? Please share your experience.

I likely wouldn't have accepted this assignment had I known it was for the completion value of just the exterior of the home. It was sent to me as a conventional new construction assignment, which for fully finished homes I do regularly. I appreciate all the help anyone can give. Thank you.

 

[sebridges]

Use the comps that are available for the best market analysis possible and then rely on the cost approach? If it's not livable, C6. If livable, C5.......

 

[George Hatch]

Nope. As far as the valuation itself your appraisal problem includes an uncommon variable, namely the interior buildout or lack thereof. You want to get an idea of how the market reacts to that attribute, so if it's not present among your direct comparables you need to look for other examples and then measure how they fared in relation to their competition.

It's similar to performing a land sale analysis in order to develop an excess land area adjustment for a subject when none of the direct comparables have excess land. You're not using the land sales as direct comparables for your subject, you're using them to isolate land value adjustment factors that you can then import into your own analysis.

So go scout out some other shell homes and run the comps they would have competed with to see what the difference in pricing was - that's the adjustment factor for that variable. Rack up a few examples of those so you can identify the trend and you're set - you've got your adjustment factor to apply to your direct comps.

It's not a difficult process, but it is a little time consuming. You could use that process for any wierdo variable like the tennis court or the bowling alley or the equestrian features or the man made pond or the straw bale construction.

 

[Baldr Odinson]

Thank you for that reply, that is a really good idea, I'll work through that process tomorrow then.
As far as the Quality and Condition go, should I still use Quality and Condition adjustments for the local finished comparables, in addition to the "Adjustment Factor"? Assuming I will be calling the subject Q6 and C6?

 

[George Hatch]

I don't work on the GSE side so I'm not the person to ask about that type of issue. Most everyone here is more informed on that than me so I'll defer to them.

 

[Overimprovement]

Couple thoughts--is it even a permissible use to leave the house in shell form in your town/county? Could someone legally live there? If not, then that becomes quite a problem. Even if it is legal, this becomes similar to an REO that needs significant work to be acceptable to market. If you can demonstrate market acceptance as a shell, then I agree that is the best bet. If not, then you will need to work through cost to cure (likely to an investor) to make the home minimally acceptable to market.

 

[Baldr Odinson]

Nope. As far as the valuation itself your appraisal problem includes an uncommon variable, namely the interior buildout or lack thereof. You want to get an idea of how the market reacts to that attribute, so if it's not present among your direct comparables you need to look for other examples and then measure how they fared in relation to their competition.

It's similar to performing a land sale analysis in order to develop an excess land area adjustment for a subject when none of the direct comparables have excess land. You're not using the land sales as direct comparables for your subject, you're using them to isolate land value adjustment factors that you can then import into your own analysis.

So go scout out some other shell homes and run the comps they would have competed with to see what the difference in pricing was - that's the adjustment factor for that variable. Rack up a few examples of those so you can identify the trend and you're set - you've got your adjustment factor to apply to your direct comps.

It's not a difficult process, but it is a little time consuming. You could use that process for any wierdo variable like the tennis court or the bowling alley or the equestrian features or the man made pond or the straw bale construction.

Doing it this way seems right. I do have a couple questions about proceeding with it. If anyone can answer these it would really be appreciated.
I will be comparing the subject to completed single-family homes and then applying an adjustment factor?
In the subject's sales comparison grid, what would the right Quality and Condition for the subject be? The comparables will likely be Q4 C1 or C2, or if I'm comparing to the subject being Q6 C6 then going with the REO sales, or other really low-quality, probably Q5 C4 or C5 homes, in addition to an "adjustment factor" as a bonus adjustment at the bottom of the sales comparison grid?

Should I give the subject the room count provided in the construction statement, even though they won't be finished?

Thanks again for the help.

I will check on the legality of leaving it as a shell tomorrow and post an update.

 

[J Grant]

Are there going to be bathroom fixtures , sinks tubs and toilets in place? (I assume not but want to clarify)
In other words this house is stud walls not even drywall/electric in place or not even that?
I assume it will have a roof and windows and door, or is my assumption wrong ?

If it has roof, windows and door it can be safely left closed for months or even a year. plus...people are allowed to leave homes vacant for periods of time-. I dont know if I would call it a "shell", if it will be a completed home on exterior with a semi finished interior ( if that is what it will be )

BTW here in FL, on some very expensive new homes, they sell them what is called "decorator ready) , concrete floors , bare walls, they do have drywall and all electrical systems and baths in place. And they sell for millions of $....

Back to your problem, you can't reduce the # of rooms or SF just because they will be semi finished or unfinished inside, the blueprint is there for them and exterior walls built around that sf and room count. I dunno what lender/investor program lends on a semi finished house but that is a lender problem not yours...yours is to appraise the house in a semi finished state.

Q and C ratings would have to think about it, but my initial answer is the Q rating should reflect the ext quality, is it cheap, good, high end etc what kind of roof, windows, ceiling height and design? C rating not sure, technically it is a C1 not finished but if any of it is a health/safety issue then it becomes C 6- but if it is C 6 it is normally subject to repair so not sure about that.

 

[J Grant]

May I ask what price range it is ?

I dunno about REO comps...( unless they are similar size and build quality). More like flip sales perhaps...if this is a large higher $ house, the fact is that many wealthy buyers will buy a house in good condition but not to their taste , then demolish the interior and remodel...almost like a hobby for some. I've seen that many times here. That , or a property flipper will buy an avg condition home, gut it and remodel with latest high end trend finish. You need to find some of those sales, a semi finished builder offering if possible, a new home comp and deduct for the finish interior...additional comps than normally use in a problem like this. .

You mention water front...talk to RE agents in area are a number of their buyers buying houses and then tearing out inside and remodeling them after purchase?

If that is the case, a buyer might even prefer a shell interior to one they have to rip out. It depends what is going on in the area and whether, for the presumed sale in the sales comparison approach, would the likely typically motivated buyer for a home in this semi finished state be a speculator, such as a lowball flipper or contractor, who will finish it for resale, or a high end owner occupant who will finish it to their taste. ?

 

[Deleted member 130081]

LOL. You are being asked to smash the square through the round hole a bit. I would consider the pre-printed certifications on the 1004 and wonder if I had ample comparable sales data to develop the approach before I did anything. I might refuse to do the assignment on a 1004 and rather do it as a narrative. Further, before doing anything, I would obtain in writing the expectation of the client. This means I would send the client a detailed expectation of what I could and could not do for them, including an opinion of whether or not the scope of work was adequate for the intended use (if not I would decline the assignment) and then, get them to write back confirming my intentions and providing THEIR opinion if the scope of work is adequate for the intended use, or not (and again if not, the assignment would be modified or declined). USPAP places the scope of work decision, which is tied to the intended use, on the shoulders of the appraiser. However, logic dictates this decision is sometimes only made with input from the client.

If I decided I had enough data, then I would hope the other shell homes I found were at least similar in terms of size, exterior, site, location, etc. If not, the analysis would become a bit more complex because, the ratio of value difference between a certain pair of sales, a shell home and finished home, might not be apples to apples when applied to the subject. I think that is where additional question marks enter and the appraisal weakens further. The technique itself is generally sound, but it all comes down to the quantity and quality of the data plugged in - garbage in garbage out. The first question mark is applying the ratio in the first place and the second question mark is applying a ratio that may not be apples to apples - each of these potentially weaken the appraisal.

I would likely decline this sort of assignment on a 1004. The certs on the 1004 say I have adequate market data to develop the sales comparison approach. Of course the term adequate is subjective, and it is the subjective nature that makes me uneasy. I think the subjective nature could also allow some appraisers to justify completing the assignment.