How do appraisers determine value?

There is only one appraisal done for a construction loan and that is based on the proposed and completed project. The appraiser will use the plans, budget, and specs to determine what the finished home will be like. It’s important to provide the appraiser accurate plans and detailed specs to give the appraiser a clear picture of the project.

Once the appraiser understands what the house will look like and what will go into the project, the appraiser will develop a list of comparable homes just like a non-construction loan. The ideal comparables would be home sales of a similar style and size that have sold within six months and are located within one mile.

One important distinction in new construction appraising is that the comparable must be a sale of a completed home. So if a lot down the street sold for $200,000 and the owner spent $400,000 on construction to live there, that would not be a comparable for a $600,000 project. It would be a $200,000 lot comparable. However if that same person built the same house and sold it completed, it would be a comparable.

At times it may not be uncommon to be building a home similar to what other homes are being built for in an area but because there are no sales of the competed homes, the appraiser is unable to use them as comps. Even if an appraiser is fully aware of what people are spending on new homes in the area, they cannot use them as comps.

Once the appraiser has the 3-6 comps to use for the appraisal report, he/she will make adjustments based on the differences of the homes to develop a final “opinion of value”.

As with a non-construction loan, a big part of the value is the size of the home. So while this is pretty obvious by the plans, the quality of construction at times is not. This is why it is important to make sure the client, the builder, and/or the architect clearly communicates to the appraiser the extent of the quality of construction. After all, the appraiser cannot walk through a home that does not yet exist.

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