Newly built home nearly finished. Appraising new construction concept.

Appraising New Construction: Guidance for Follow-Up Inspections

While most residential appraisals only require a single field visit to the subject property, when it comes to appraising new construction, you may need to visit the property several times.

The number of property visits depends largely on lender/client requirements. Not only will you need to inspect the site before construction starts, but you may also need to visit the property at various points during construction to assess progress and report when certain stages of work are complete.

You will also need to conduct a final inspection to verify completion of improvements. This article provides guidance and best practices for an appraisal on new construction, during construction, and your final inspection when the property improvements are complete.

Inspecting a property under construction

The lender may require you to visit the property and inspect it periodically during construction to assess progress so that the lender can release construction draws (funds taken from the loan to pay material suppliers and contractors). It’s possible that the lender may ask a non-appraiser to complete these inspections (e.g., an employee of the lender), but if you are called upon, make sure you complete the inspections in accordance with the client’s requirements. Do note that your stage inspection visits aren’t the same as inspections done to confirm the work is to code.

Appraisers are not code inspectors, nor are they expected to be. For these inspections, the lender typically wants you to confirm that certain construction stages are complete based on visual observation. For example, the lender may ask you to check to see that the footer, foundation walls, and foundation drain system have been completed. You would not be responsible for determining whether the footings are the proper width or depth or that the foundation walls are appropriately reinforced with rebar.

Related Reading: 6 Tips for Appraising New Construction Homes

Final appraisal for new construction

When the construction is complete, the lender will often ask you to inspect the property and verify completion in accordance with the plans and specifications. It is important that the improvements be 100% finished (i.e., not 98% or 99%), so it is advisable to contact the builder and verify completion with them before going out to the property.

Sometimes, the builder will tell you they are waiting on tradespeople to finish their work. For example, the carpet in one bedroom is on backorder and has yet to be installed or the plumber is scheduled to come out on Monday to install fixtures in the primary bathroom. If that is the case, hold off on making the inspection until the builder says the work is complete. Once you confirm that the dwelling is complete, you can make your visit to the property. This type of inspection is known as a recertification of value, which is an assignment performed to determine whether the conditions in a prior appraisal (in this case, completion of the dwelling) have been met. This does not change the date of the value conclusion; you are merely indicating that the dwelling is complete as per plans and specifications.

Depending on the type of loan or the amount of time that has elapsed since the original appraisal was done, the lender might also ask for an updated value. This assignment, referred to as an appraisal update, requires the appraiser to provide a current value opinion for the property. Guidance from Advisory Opinion 3 in the USPAP Guidance and Reference Manual indicates that this is not an extension of the previous appraisal assignment; it is a new assignment.

Make sure the lender provides you with specific instructions whether they are asking for confirmation that the construction is complete (recertification of value) or an opinion of the current value of the property (appraisal update).

When you do your final inspection, follow this guidance:

  • Take your notes and original sketch of the improvements with you.
    • Confirm all your measurements and finishes. Changes may have, and most likely, occurred during construction. Square footage could have been added or omitted, a change request for custom features could have taken place, or materials and finishes could have been downgraded because of budget issues.
  • Be completely honest.
    • An appraiser who means well might report a dwelling as complete, even though minor work is not finished. Don’t be lenient. If work is in progress or tasks are left undone, state that in your inspection report.
    • If you say work is complete and the lender releases funds, but the work is not done, you are liable if the builder doesn’t finish the project—and could face a lawsuit. Always report exactly what you see.
  • Remember that it’s not your job to tell the lender when to close a loan.
    • It’s your job to report to the lender the progress on the home so that the lender can make an informed decision. Be detailed in your construction appraisal reporting, include many photos, describe the incomplete items, and assign an estimated cost to complete them (if required). Then let the lender decide what to do next.

When appraising new construction and performing construction stage and completion inspections, remember that you are the eyes of the lender. The lender relies on you to confirm that the collateral is secure, and that construction is complete. Don’t drop the ball when assessing the construction’s completion level. It’s your job to protect your client, the lender.

Gain appraising new construction skills and more

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