Unfinished home, "Subject To" completion.

[J Grant]

The requirement makes no sense, since the lender won't lend on house till it's complete, and there is a completion inspection done to prove it. Once it's complete, it becomes an "as is" loan, so aren't these loans sold to Fannie /Freddie at that point?

These are not a construction draw loan where money is released in phases, I can see the need for an as is value in those loans....this money is not released till closing when the house is complete and the loan is made on the house "as is" of last inspection completion date.

 

[sputnam]

The requirement makes no sense, since the lender won't lend on house till it's complete, and there is a completion inspection done to prove it. Once it's complete, it becomes an "as is" loan, so aren't these loans sold to Fannie /Freddie at that point?

Since when do banking regulations have to always make sense? It's the rule, we have to deal with it even if it's stupid.

 

[J Grant]

A very stupid rule.

I am just wondering if these are really FRT loans or intended for Fannie/Freddie, since even though the MVO is "subject to", the closing of the loan not green lighted until the final completion inspection changes it to an "as is" property.

 

[Lost Cause]

You can acceptably base the as-is value on the hypothetical condition that there are no improvements on the effective date...or...you can estimate the percent complete and apply that to your subject to value. The lender and regulators will be fine with either approach. Just make sure you are clear about what you do.

The second suggestion works fine, but I'm not too sure about your first suggestion. Are you really suggesting a hypothetical to replace the hypothetical subject-to conclusion? Assuming no improvements is just as hypothetical as assuming completed improvements.

 

[Mark K]

If you are completing the report based on a hypothetical condition of completion then there is no need for an "as-is" value unless the client previously requested it.

A house that is 80% complete is usually NOT worth 80% of completed market value; often only about 50%-60% +/-. Be careful when you report an "as-is" value on uncompleted improvements. An 'as-is' value needs support, comps, a previous study, etc. so be prepared to back up your value if you take this route.

Personally, if the lender requested an as-is value in addition to the HC I'd quote an additional fee that would likely convince him that it was not necessary.

 

[George Hatch]

By definition, an "As Is" value will not include any hypothetical conditions. If you're using an HC that appraisal is "Subject to" the HC.

Partially completed construction projects have an as is value in the market, just like heavy fixers. The buyers for such a project will not generally be owner-users. That alone explains why the "as is" value will not usually consist of the "subject to" value - cost to cure.

You would only need a couple of examples of such transactions to identify the adjustments involved, and they wouldn't have to be directly comparable to your subject. General rule of thumb at the banks that get involved with these situations a lot is that the discount will usually be about double the cost to cure, the margin being inclusive of the investor's contingencies, risk, lack of liquidity during the holding term and profit incentive.

You guys have tons of examples of flips where buyers went in and bought a heavy fixer, spent $30k in rehab and flipped it within 3 months at the remodeled price that includes the additional markup. Finishing a partially constructed house is basically the same process except (often) on a larger scale.

Competency for completing such assignments will include having some familiarity with construction costs, cost allocations based on the amount of the structure that's been completed, and - as cited above - the extent to which the investors are discounting. As with anything else, the first couple may be time consuming as you invent the wheel for yourself but after that it's neither difficult nor time consuming to do.

You learn new skills by accepting new challenges. I don't think this particular situation is anything any appraiser should be intimidated by.

 

[George Hatch]

The requirement makes no sense, since the lender won't lend on house till it's complete, and there is a completion inspection done to prove it. Once it's complete, it becomes an "as is" loan, so aren't these loans sold to Fannie /Freddie at that point?

These are not a construction draw loan where money is released in phases, I can see the need for an as is value in those loans....this money is not released till closing when the house is complete and the loan is made on the house "as is" of last inspection completion date.

If it's a GSE or FHA assignment or the loan is for permanent financing and involves a sale that won't close until the structure is completed then the as is may be pretty meaningless. But FRTs and RRTs aren't limited to residential properties and long term financing situations. Even with SFRs they're sometimes done as interim financing vehicles to complete those structures.

One plausible scenario for this situation is that the builder might have run out of money and been forced to seek interim financing to complete the project. Maybe the builder had initially planned to pay for everything out of pocket and they ran out of money. It could even involve a different lender than the one that got them this far.

Strange things happen out in the real world. The point is that it's a good idea to make the inquiry up front because if it is an FRT the lender has no discretion, even if they're unaware of their own rules. It's not something they can legitimately opt out of, deliberately or otherwise. And if those external requirements apply to that assignment they're present whether you're aware of them or not. IMO some assumptions are more reasonable than others.

 

[Mike Garrett RAA]

I never provide an "as-is" value for incomplete new construction under contract for sale. I check under construction on page 1 and make my value conclusion "subject to completion per plans and specs" on page 2.

The exception to that would be a partly finished property that won't be completed by the builder. Ran into a few of those during the recession where the builder went broke and the bank was foreclosing on a construction loan. The engagement letter clearly stated the bank wanted an "as-is" value and an "as-completed" value.

 

[TRESinc]

I never provide an "as-is" value for incomplete new construction under contract for sale. I check under construction on page 1 and make my value conclusion "subject to completion per plans and specs" on page 2.

The exception to that would be a partly finished property that won't be completed by the builder. Ran into a few of those during the recession where the builder went broke and the bank was foreclosing on a construction loan. The engagement letter clearly stated the bank wanted an "as-is" value and an "as-completed" value.

yep, same thing i do. similarly it always irks me when i check the "subject to completion per plans and specs" box and then have a client ask me to write the same thing on the line below. why state it twice within 3 lines?

 

[George Hatch]

What's annoying to me is that these FRT rules have been on the books in excess of 20 years, there was a 14-page Statement of Standards (SMT#10) on this material in USPAP for 9 years (2000-2009) and then when the SSR was retired the material was moved to an AO that's still in the book (AO-30).

This material is not some arcane secret that nobody expects you to be aware of.
IT'S BEEN SPECIFICALLY NOTED IN USPAP FOR A LONG TIME.

If you guys are doing these assignments you need to be competent.