What is a "Future Value" Appraisal???

[Pamela Crowley (Florida)]

This is posted on a mortgage brokers forum:

What is a "Future Value" Appraisal???

Where did that term come from???

From what I can figure out from reading about that here, it means an appraisal that was done on a property that is subject to the construction being completed, right?

Well... most appraisers have never heard that term and my first response to it was, "What!?! You want me to use a crystal ball?"

We have more than enough misconceptions already, so to clear this up, I'm asking that we try to use terms that cannot be misunderstood.
I've given this a lot of thought and came up with two terms that would be more appropriate:

"Hypothetical Appraisal" or "Proposed Construction Appraisal"

Hypothetical is a big word, is used often in appraising, most underwriters understand what it means, it actually does means exactly what this type of appraisal is, and will make you look good (intelligent) if that's what you use.

An appraisal based on the 'Hypothetical' condition that what is going to be built (proposed construction) already exists as of the effective date of the appraisal.

The misleading part of calling this a 'future value appraisal' is that this type of appraisal has NOTHING to do with the future!!! There is an effective date that is the day the appraised value is being based on - ASSUMING, as the "Hypothetical Condition", that the proposed construction is already finished as of that date. This in NO WAY means that the property actually WILL BE that value next month, in 6 months, next year, whenever it is completed and actually does exist. The value at some time in the future after the construction is completed might be the same as today's (IF it existed), might be higher, might even be lower. The construction might never be started, or might take years to be completed.

Just trying to clear up what too easily can be misunderstood and hoping to not see that 'future value' term used.

Here's a couple of the responses:

There's no use in splitting hairs over a term being used. I see that term used with a lot of the construction lenders. Indymac, Flagstar, etc. Even in the literature they provide to lo's.

It's used more often on Rehab Loans.

FHA uses the term in their underwriting guidelines.
Future value is based on the cost and quality of materials and labor described in the contractor's bid. Appraiser is required to re-inspect to assure quality of materials.

Every rehab loan I have done required 2 appraisals. Current value and Future Value (or Completed Value depending on the lender).

I've never heard this term used before.
How many of you here are familiar with it???
Is it really included in some of the literature and UW guidelines as they say?
If so, could someone point me in that direction, please, I'd like to see it.

 

[The Warrior Monk]

I've never heard of Future Value, but there is a Prospective Value, which is a value as of future date. Off the top of my head I think it's covered in SMT 4.

I have never heard of a prospective value being used for single-family residential lending.

 

[CANative]

Prospective appraisals (effective date of the appraisal subsequent to the date of the report) may be required for valuations of property interests related to proposed developments as the basis for value at the end of a cash flow projection and for other reasons. (See SMT-4 on Prospective Value Opinions.)

"Future Value" has no place in ordinary mortgage loans for ordinary brokers.

 

[Mike Garrett RAA]

Got it right...Prospective Value.

 

[Pamela Crowley (Florida)]

BUT, they are NOT using this for a 'prospective value' appraisal.

They are using the term "Future Value Appraisal" for a proposed construction or rehab!!!!!

These are NOT "Future Value" or even "Prospective Value" at all!!!!!
They are current value while pretending the proposed construction or rehab is already done, as of the current effective date - completed as a "Hypothetical Condition". The 'Future Value" could very well be very different in the "Future"!

 

[Rice Brewer]

"Future Value" is an economic term as well all know - or should know.

 

[Pamela Crowley (Florida)]

OK, semantics is fun, but I want to see where this is referenced in any guidelines or lender literature.

 

[Tony V]

Future value....Isn't that what the folks in Nevada are hoping for ......when California falls into the ocean??

 

[The Bob]

I don't think either term applies, assuming we are talking about a typical assignment where you are appraising from plans and specs. What you are really doing is appraising the CURRENT market value with the assumption that the improvements are completed. Here's the wording I use so there is no misunderstanding.......

This is an appraisal of proposed new construction that is to be completed at a later date. The value estimated in this report is the current value of the completed improvements, as of the effective date of this appraisal. This appraisal is made subject to the completion of the improvements as described in plans and specifications on file with the appraiser or as decribed in this report. The foregoing constitutes an extraordinary assumption to the attached appraisal.

 

[Mark A Rewbury]

I don't think there is a future value appraisal. I think future value is used to determine present value of future cash flows, ie shopping malls etc. The present value is the amount that must be invested now to produce the known future value. DDC, future value of a dollar, interest rates and all that stuff. This would apply to commercial investments with known future rents and cash flow.