New construction is treated a little differently by lenders, FHA, and the GSEs. As you appraise these properties, you must take into consideration certain features and attributes that don’t necessarily apply to re-sales. It requires more work, so you want to be sure that you are charging for your effort. However, perhaps more than that, you want to be sure you’re following the proper protocol. Stick to these best practices to ensure you cover all your bases.
1. Don’t rely totally on blueprints
Blueprints can certainly provide a place to start, but you need to take your own measurements. The “calls” that architects use are different than the ones you will use to calculate square footage.
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.
3. Talk to multiple local builders
You can gain valuable information from builders—as long as you talk to them now to evaluate current costs and value. Don’t rely on data you received from builders years ago or even months ago. The market is always changing. Also, speak to more than one builder to gain an objective viewpoint. And remember, other builders may be rivals of the builder constructing your subject property, so they may not be entirely objective. Make sure you include plenty of notes in your workfile about who you spoke to, when, and what the person had to say.
4. Be careful as you choose comparable sales
First and foremost, some lenders have requirements for selecting comparable sales, so follow their lead. For example, many tend to require that at least one sale in the subdivision be by another builder. They don’t want to see all the comps by the same builder because the builder could be inflating the value of property.
Additionally, to demonstrate the marketability of the area, some require you to provide a comparable sale from a competing subdivision, built by another builder. Others want to see at least one comparable sale within a mile of the subject property.
Plus, custom-built homes recently built in the neighborhood cannot be considered as comparables unless they have been exposed to the market and to a typical buyer—and not just to the person who requested the custom features and design in the first place.
Those 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 6 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 create a credible estimate of value. Make sure you provide plenty of notes justifying why you chose the comps you chose and how you adjusted value based on them.
5. Use the sales comparison approach (if possible)
The sales comparison approach, when you estimate the home’s value based on sale prices of comparable homes, tends to be the best approach. However, comparables can be hard to come by for similar new builds. If the sales comparison approach is not applicable or credible, state that in your report and use one of the other methods, for example:
- Allocation method: Here, you use several sales in the subject subdivision and take the cost of construction from the total sales price to arrive at a site value. Use several sales, get an overall ratio of land to improvement value, and then apply that ratio to the subject property.
- Extraction method: Similar to the allocation method, but instead of applying the ratio, you use the derived site values as land comparables.
6. Know your FHA, HUD, and USPAP Requirements
The requirements vary, and they can change, so follow your lender’s instructions to a tee. Some big ones to know (at least until they change):
- FHA requires that you gather information and execute tasks weeks ahead of the appraisal order.
- FHA requires a final inspection. The final inspection can take place if the improvements are within 90% of completion and must be done by an appraiser.
- Appraisers must complete Form 90251 for FHA loans.
- Fannie Mae allows appraisers to use plans or a model home that is similar to the proposed construction, to come up with a preliminary value.
- USPAP allows appraisers to use documentation other than plans and specifications as long as there is enough detail to create a credible report. For a current value, you would use a hypothetical condition. For a prospective value, you would use an extraordinary assumption.
- USPAP requires appraisers to keep true copies of all the information used to complete the appraisal report, including blueprints and specifications, in the workfile.
Bottom line: Check with the lender every time to confirm that you are following the most up-to-date rules and meeting their requirements when completing a new construction appraisal.
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