New construction is treated a little differently by lenders, FHA, and the GSEs. When appraising new construction homes, 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 will need to personally calculate and confirm the gross living area reported in the plans. The “calls” that architects use are different than the ones you will use to calculate square footage. Open two-story spaces, outdoor kitchens, finished lower levels, a casita, and a breezeway may be considered in the architect’s finished living area.
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. 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. Some of the best construction cost data is compiled by you as you complete new construction appraisal assignments. When appraising new proposed construction, the prior data can be reviewed for those construction projects that are most similar to the subject property in quality, size, and features and be used as cost data to support cost estimates for the current appraisal. As the cost of construction materials generally continue to spiral upwards, it may be necessary to adjust for time, depending on how old the cost data is.
4. Be careful as you choose comparable sales
First and foremost, you are responsible for determining which comparables are the best for the assignment. However, some lenders may have additional requirements for including specific comparable sales to demonstrate market acceptance, so follow their guidance. For example, many tend to require at least one settled sale that does not involve the subject’s builder.
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. When providing builder sales that are not available through public records or multiple listing services or similar typical data sources, you must verify the sale from the applicable settlement statement.
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.
5. Use the sales comparison approach for site value (if possible)
The sales comparison approach, when you estimate the property’s site value based on sale prices of comparable sites, tends to be the best approach. However, comparable sites can be hard to locate in some markets. 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 estimate the cost of construction and divide that by the total sales price to arrive at the percentage of improvements cost compared to the purchase price. The inverse of this percentage is the ratio of land to purchase price. Use several sales, get an overall ratio of land to purchase price, 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 when appraising new construction properties. Some big ones to know (at least until they change):
- 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 a FHA loan, the Mortgagee 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 greater than 90% complete for a FHA loan, the Mortgagee must provide a list of the components to be installed or completed after the date of inspection.
- FHA requires new construction to meet HUD’s Minimum Property Requirements (MPR) and Minimum Property Standards (MPS).
- 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.
Editor’s note: This post was originally published on September 6, 2019. The information was updated on March 28, 2022 and is current as of that date.
Learn more with our post, Appraising New Construction: Guidance for Follow-Up Inspections, and our CE course, New Construction Essentials: Luxury Homes.