"Subject to" AND "as is" on new construction?

[The Warrior Monk]

One of the issues that arises is that the improvements are not necessarily just proposed, but rather under construction, which makes estimating the "as is" value more difficult. It didn't come across this issue much when I did GSE work, but it is not uncommon with FRTs.

 

[TJSum]

I've had clients who have been requiring this for probably 15 years now. It's not new. I seldom charge extra for it unless either one or the other is a real hassle to find the data for.

If you're developing a value based on a hypothesis, how better to demonstrate the effect on value of that hypothesis than to provide the "as is"?

How would we determine the "as is" value of a new construction that is 50% +/- complete? We might be able to come up with a cost figure to finish construction, but how do we come up with the market reaction to that?

 

[TJQuate]

I've had clients who have been requiring this for probably 15 years now. It's not new. I seldom charge extra for it unless either one or the other is a real hassle to find the data for.

If you're developing a value based on a hypothesis, how better to demonstrate the effect on value of that hypothesis than to provide the "as is"?

Yes, me to George. The reason is clear in my market - builders abandon the home when they go bankrupt and what is it worth "as is"?

If a house is 70% finished, I will give it about 50% of completed value. Less than 50% value, I give it only about 25% of the completed value. It's a gray area until you get into a city that has a lot of abandoned construction that has started to resale. Then you have concrete market value.

 

[JSmith43]

One part that distressed the OP has not been commented upon. I'll give it a try.

What if the proposed new construction is, say, 50% complete at time of inspection? In residential assignments, appraisers have mostly been giving land value estimates for the assumed "as is" value as of the inspection date.

If doing a draw inspection, perhaps the improvements are 50% complete. But if the land/50% complete improvements were exposed to the market for a reasonable period of time, what is the most probable price?

It would be a PITA to estimate the price a likely purchaser would settle for to the package at various phases of construction. The appraiser would have to determine how much crap the local building authority might put the new purchaser through & back into the investors mind set unless data is available such as purchases of reasonably similar partly built homes in the area.

I found two relatively new sold homes that were nice outside, but similarly stripped/gutted for parts when I needed them for a recent assignment. Anything is possible:icon_lol:

Edit: I see TJQuate gave a reasonable response above. If you've got nothing for direct sales data, develop a rationale for estimating market reaction in terms of % completed, by all means. It would be best to figure out an actual rate of return expected by potential buyers of such a mess. Call some builders and/or a few flippers and ask them what their target rate of return is, if nothing else. Actual rate of return would be best. Then use that information to develop a percentage adjustment.

 

[Lost Cause]

The regulation in question was issued on December 10, 2010 as a revision of Interagency Appraisal and Evaluation Guidelines. The agencies involved are the OCC, the Fed, FDIC, OTS, and the NCUA. I don't suppose the revised guidelines are applicable to appraisals meant for the GSEs as they are exempted from Federally-Regulated Transactions.

An excerpt from the letter:

"The estimate of market value should consider the real property’s actual physical condition, use, and zoning as of the effective date of the appraiser’s opinion of value. For a transaction financing construction or renovation of a building, an institution would generally request an appraiser to provide the property’s current market value in its ‘‘as is’’ condition, and, as applicable, its prospective market value upon completion and/or prospective market value upon stabilization."

Link to the letter:

http://www.gpo.gov/fdsys/pkg/FR-2010-12-10/pdf/2010-30913.pdf

 

[George Hatch]

Assignments involving partially constructed structures do require some competency with respect to construction cost allocations at the various stages of construction. I think I remember M&S had such a breakdown table in their "other information" section. That's the same kind of allocation the construction lenders commonly use when dispersing construction funds on a draw. They don't hand the contractor 100% of the funds up front, they fund control by paying them out in stages as each phase of construction is completed.

It's not that cost equals value, but rather that you can't figure out what it will take to get to the "as completed" condition without at least understanding the remaining costs involved to go from 25% or 50% or 70% to 100%. That's just for the hard costs.

Figuring out the investor incentive necessary to motivate an outside contractor or investor to undertake both the knowable costs as well as a contingency factor for the unknown is a bit tougher. Sometimes, and depending on local market conditions, you might get lucky and actually run across some sales data involving properties with either substandard physical conditions (aka "fixers") or even incomplete projects. Some of those will even involve subsequent resales upon completion of the physical improvements. If you can figure out what the starting and ending conditions were like and get an idea of the hard costs involved the residual could be attributed to the contingency and profit margin incentive. With a little luck and a couple of phone calls you could even know the answer instead of having to extrapolate on your own.


The general rule of thumb that many of the construction lenders have been using for the last 22 years that I've been doing appraisals involving construction and rehab projects is that the incentive and contingencies will usually start at 50% of the hard costs and sometimes exceed 100% of those costs, depending on how tricky the remainder is and the marketability of the finished product within what is expected to be the prevailing market conditions upon completion. That it can sometimes take a long time to finish and market a property under certain market conditions is also a consideration.

There usually less drama involved with the analysis if the partially finished structured you're looking at is still being actively worked by the contractor and hasn't been abandoned to the elements for the last 6 or 12 or 24 months. If you do run into the latter scenario then it's pretty common for the new contractor to have to come in and dismantle anything that isn't serviceable and restart from whatever is remaining that is usable.

The first couple of these you do will probably involve a learning curve, but once you develop the competence for it the process does go a lot more quickly. The main thing about such an assignment is that they do include a heavy construction cost element. If an appraiser is one of those who has never taken the Cost Approach seriously then that would be a competency they would need to consider before accepting the assignment.

 

[Roseann Dufala]

Thank you for the answers AND for the links to the appropriate documents.

 

[jimmyfrank]

Assignments involving partially constructed structures do require some competency with respect to construction cost allocations at the various stages of construction. I think I remember M&S had such a breakdown table in their "other information" section. That's the same kind of allocation the construction lenders commonly use when dispersing construction funds on a draw. They don't hand the contractor 100% of the funds up front, they fund control by paying them out in stages as each phase of construction is completed.

It's not that cost equals value, but rather that you can't figure out what it will take to get to the "as completed" condition without at least understanding the remaining costs involved to go from 25% or 50% or 70% to 100%. That's just for the hard costs.

Figuring out the investor incentive necessary to motivate an outside contractor or investor to undertake both the knowable costs as well as a contingency factor for the unknown is a bit tougher. Sometimes, and depending on local market conditions, you might get lucky and actually run across some sales data involving properties with either substandard physical conditions (aka "fixers") or even incomplete projects. Some of those will even involve subsequent resales upon completion of the physical improvements. If you can figure out what the starting and ending conditions were like and get an idea of the hard costs involved the residual could be attributed to the contingency and profit margin incentive. With a little luck and a couple of phone calls you could even know the answer instead of having to extrapolate on your own.


The general rule of thumb that many of the construction lenders have been using for the last 22 years that I've been doing appraisals involving construction and rehab projects is that the incentive and contingencies will usually start at 50% of the hard costs and sometimes exceed 100% of those costs, depending on how tricky the remainder is and the marketability of the finished product within what is expected to be the prevailing market conditions upon completion. That it can sometimes take a long time to finish and market a property under certain market conditions is also a consideration.

There usually less drama involved with the analysis if the partially finished structured you're looking at is still being actively worked by the contractor and hasn't been abandoned to the elements for the last 6 or 12 or 24 months. If you do run into the latter scenario then it's pretty common for the new contractor to have to come in and dismantle anything that isn't serviceable and restart from whatever is remaining that is usable.

The first couple of these you do will probably involve a learning curve, but once you develop the competence for it the process does go a lot more quickly. The main thing about such an assignment is that they do include a heavy construction cost element. If an appraiser is one of those who has never taken the Cost Approach seriously then that would be a competency they would need to consider before accepting the assignment.

Good, George GoodI It would also be a good time to use some common sense as you have alluded to!

 

[Couch Potato]

I attended an appraisers conference the past couple days. One of the speakers who is the chief appraiser for a large, but local bank gave a talk on requirements. He stated that any property that is either proposed construction, new construction, or to be renovated MUST have both a "subject to" value AND an "as is" value. He said you cannot have a "subject to" value dated today on a property that does not exist or will exist at a point in the future. He said that this "rule" went into effect on Dec 11, 2010 and the reason it hasn't been enforced yet is that the lenders are still learning that this is a new requirement. (Although I wasn't clear on WHO the new requirement was issued by.)

I asked for clarity--as did many people there. I understand that a proposed construction would have an "as is" value of just the land value. AND that a "to be renovated" property would have an "as is" AND a "subject to" value. BUT, how does an appraiser put an "as is" value on a property that is already under construction? When I asked him this specific question, his answer was to say that depending on how far along it was, it would have value as a storage building only??????

Does anyone out here in appraisal world know about this "NEW" requirement by lenders? This chief appraiser said that lenders were not to accept anything that did not have BOTH values.

HELP---I have been doing appraisals on new construction. I will stop doing them if this is a new requirement because I do not have the vaguest idea on how I would do it.

Thank you ahead of time for any help.

This has been true for federally related transactions for quite some time. Fortunately, residential appraisals reported according to the guidelines of fannie or freddie, FHA, and VA are not classified as federally related transactions. Feel free to read the current FannieMae selling guide dated January 27, 2011 for yourself to see what is required. Never rely solely on anyone spewing words. Look at authoritative sources for yourself.

 

[Terrel L. Shields]

The interagency guidelines for REGULATED banks has required this since the de minimus was $50,000 so its been around for 2 decades. For proposed construction, the as is value is the site value. And it only applies currently to projects over $250,000. Fannie and Freddy are not "regulated" institutions. Nothing new.