Lenders, FHA, and the GSEs (Fannie Mae and Freddie Mac) treat new construction a little differently. When appraising new construction homes, certain factors that don’t always apply to existing dwellings must be considered. New construction appraisals require more work, so you want to charge a fee that is commensurate with the work involved. Perhaps more than that, you need to follow the proper protocols. Stick to these best practices to ensure you cover all your bases when performing a new construction appraisal.
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1. Don’t rely totally on blueprints during a new construction appraisal
Blueprints can certainly provide a place to start, but you will need to personally calculate and confirm the gross living area reported in the plans. The “calls” that architects use are often different than the ones you use to calculate square footage. Open two-story spaces, outdoor kitchens, finished lower levels, a casita, and a breezeway might be considered in the architect’s finished living area, but these areas are not included in above-grade gross living area (GLA) as defined by the GSEs and HUD/FHA.
2. Gather as much detail about plans and specs as you can
Homebuilders keep and maintain both building plans and specifications that include any construction materials they plan to use. The most diligent ones will update those plans and specs as things change. Make sure you get your hands on the plot plan, home-building plan, spec sheets, and cost breakdown list.
Along with calculating the gross living area from the plans, you will need to examine the specifications which list the materials being used, including doors, windows, cabinets, plumbing fixtures, and electrical fixtures. The specifications will also describe the size and finishes used in the construction and will offer you an idea of the quality of construction and how the proposed improvements compare with other sales in the market. This information is critical so that you can compile a list of comparables. Once you have the dimensions, materials, and so on, you can use a cost service to estimate the cost of the new construction.
Note: Sometimes fine finish amounts aren’t always available, so you can consider a builder’s allowance amounts if necessary. Be sure to review the allowances for reasonableness (not as an expert, but as an objective observer).
3. Keep a file of local building costs
You can obtain valuable information from builders when completing a new construction appraisal. For example, every new construction appraisal you complete gives you insights into current construction costs in your market area. This local construction cost data can be compiled and maintained on a spreadsheet or in a file.
When appraising new or proposed construction, you can review your files for data regarding prior construction projects that are similar to the subject property in quality, size, and features. Use this data to support cost estimates for the current appraisal. As the cost of construction materials continues to increase due to inflation, it may be necessary to adjust for time, depending on how old the cost data is.
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4. Be careful when choosing comparables for a new construction appraisal
As the appraiser who is signing the certification, you are responsible for determining which comparables are most appropriate for the assignment. However, some lenders have additional requirements to include specific comparable sales to demonstrate market acceptance, so you will need to follow their directives.
Some examples include:
- At least one settled sale that does not involve the subject’s builder or developer
- A comparable sale from a competing subdivision (to demonstrate marketability in the area)
- At least one comparable sale within a mile of the subject property
When providing builder sales that are not available through public records, multiple listing services, or similar typical data sources, you may need to verify the sale from the settlement statement. Furthermore, the GSEs do not permit appraisers to “create” comparables by combining the purchase price of a lot with the total cost of a new dwelling that is subsequently built there. These requirements can make it hard to find other new construction comparables.
If you can’t find recent sales within the immediate neighborhood in the past six or 12 months, you may expand your search to other neighborhoods or go back further in time—even if doing so is outside the lender’s guidelines. Do so only if those comps are necessary for you to produce a credible value opinion. Make sure to provide sufficient commentary in the report explaining why you chose the comps you did.
5. Use the sales comparison method for site value (if possible)
The cost approach is usually necessary for credible results when appraising new construction, and a credible opinion of site value is essential in developing this approach.
The sales comparison method is the preferred method for estimating site value. However, sales of comparable sites can be hard to locate in some markets. If the sales comparison method cannot be developed due to a lack of sales, state that in your report and use one of the other recognized methods:
- Allocation : With this method, you analyze improved sales to derive a typical ratio of land value to total property value.
- For example, if a builder purchases a lot for $100,000,constructs a new house on it, and sells the finished property for $500,000, the land represents 20% of the total property value ($100,000 / $500,000).
- By analyzing multiple sales, a typical ratio can be extracted and supported. The ratio can then be applied to the subject property.
- Extraction: This is similar to the allocation method because it looks at sales of improved properties. However, instead of applying a ratio, you subtract the depreciated cost of the improvements from the sale price to indicate a site value.
- For example, if a new house just sold for $650,000 and you can reliably estimate that the cost of the house and the site improvements was $500,000, then the site value, by extraction, is $150,000.
6. Know the applicable requirements for an appraisal on new construction.
Requirements of the GSEs, HUD/FHA, and USPAP can change, so you need to keep up on these requirements when appraising new construction properties. Some big ones to know (at least until they change):
- HUD/FHA distinguishes between proposed construction and properties under construction.
- For FHA loans, the Mortgagee must provide the appraiser with the Builder’s Certification (Form HUD-920541).
- If the property is 90% or less completed for an FHA loan, the lender must provide the appraiser with a copy of the floor plan, plot plan, and any other exhibits necessary to determine the size and quality level of the house the appraiser is valuing. If construction is more than 90% complete for a FHA loan, the lender must provide a list of the components to be installed or completed after the date of inspection.
- FHA requires new construction to meet both HUD’s Minimum Property Requirements (MPR) and Minimum Property Standards (MPS).
- USPAP allows appraisers to use documentation other than plans and specifications if the documentation is sufficient to identify the scope and character of the proposed improvements.
- USPAP requires appraisers to retain the information used to complete the appraisal, including blueprints and specifications, in the workfile.
- When appraising proposed improvements with a current effective date, you would use a hypothetical condition. For a prospective value, you would use an extraordinary assumption.
Bottom line: Check with the lender/client to confirm that you are following the most up-to-date rules and requirements when completing a new construction appraisal.
Become a Certified Luxury Home Appraiser
Many new homes built today are luxury homes with high-end finishes, large square footage totals, and complex elements. As a Certified Luxury Home Appraiser, you’ll have the advanced knowledge and skills to complete these appraisals and can separate yourself from other appraisers by offering this sought-after service. Check out McKissock’s Luxury Home Certified Appraiser Program to take the next step or get it included with your Unlimited CE Membership.
To discover more about new home inspections, check out this post: Appraising New Construction: Guidance for Follow-Up Inspections.
Editor’s note: This post was originally published on September 6, 2019. The information was updated on August 26, 2024, and is current as of that date.
