Appraisers of homes yet to be built rely on the plat, floor plans and detailed specifications of fixtures and finishes in order to qualify new homes for both construction and permanent financing. They sometimes also compare the existing value similarly-finished existing homes (or comparables) to calculate their figures. However, before a buyer of a newly-completed home can close on a loan, the appraiser must confirm that the home was actually built and finished the way it was presented, and – additionally – many buyers may opt for an appraisal contingency before agreeing to purchase.
The completion walk-through is an important step in the process, confirming that the home was completed in accordance with plans and specifications, built in accordance with existing code, and that it passed required inspections and is ready for occupancy.
Helpful terms and procedures to keep in mind include:
Professional appraisers go to great lengths to assure that the figures they use to justify valuations on homes yet to be built are representative of local costs, and reflect the quality of proposed construction as well as the fair market value of unimproved land. The Cost Approach takes into account typical local building costs for labor and materials, and is easily adjusted based on the type of construction specified. This method is used both for new homes and for additions or remodels in existing homes. It is also a valid way to determine insurance replacement costs.
Sales Comparison Method
The Sales Comparison Approach is less reliable for new construction appraisals unless there are many recently-completed homes within close proximity in a relatively stable real estate market. Such appraisals are perfectly acceptable for tract homes on a fast build-out schedule by a reputable builder; in such cases, sales statistics are valid value indicators and are acceptable for most lending purposes.
New Subdivisions Versus In-fill Lots
When an entire subdivision is being built, the process is similar, and appraisers rely partially on the builder or developer reputation as well as on similar subdivisions with homes of comparable size and quality, even if each home is a custom design. For instance, gated communities with parks and playgrounds might be deemed more desirable and warrant a higher lot valuation than a “normal” city lot on a typical street.
Possible Stumbling Blocks
Although it normally happens infrequently, there are some factors that require a change in the appraisal, including buyer-requested plan alterations that either add value or lower the cost of construction. For instance, if a prospective buyer opts to finish out a basement listed on the plans as “unfinished space,” it will add value to the home. Similarly, if plans call for a perimeter fence or a covered patio, and the buyer chooses not to install such improvements, the appraisal value could be decreased. A buyer would be wise to consult with the lender prior to making changes that might jeopardize a loan.
In addition, if the local real estate market changes appreciably during the construction term, final appraised value can be affected positively or negatively.
Appraised value typically lags somewhat behind “actual” value, but in a declining market the resulting adjustment between pre-construction value and appraised amount at completion can be significant. Some builders and buyers were caught in that situation during the housing crisis of 2007-2008, resulting in homes under contract not closing, and builders unable to sell homes for their expected price.
Typically, however, because appraisers are careful not to “inflate” appraisals, the completed value is in line with the initial appraisal. The final completion walk-through is simply a matter of verifying completion; the appraiser measures exterior dimensions, verifies interior finishes and installations, and takes pictures that become part of the lender’s loan file.
Anthony Gilbert is the owner of The RealFX Group. Anthony specializes in real estate lead generation and digital marketing.