AUTHOR: Anthony Blackburn is a Certified Residential Appraiser in Martinez, CA and one of the co-owners of Apple Appraisal, Inc. - 811A Ferry Street, Martinez, CA 94553 - Apple Appraisal, Inc. does Appraisals and Reviews Throughout California.
So many times, when I am reviewing an appraisal of proposed new residential construction, I find that appraisers don’t put the necessary information in the appraisal for me to make a good judgement about the quality of their work.
There are several key pieces of information in an appraisal of a new home in a tract, that must be included in the report.
1. Base price of the subject and comparables.
Being able to compare the base price of the subject and sales of the same model, is the best way to track prices over time, discounts and incentives notwithstanding. For example, with all else being equal, if the subject’s base price is $200,000 and the same model, with a different contract date has a base price of $190,000, then the difference in base price of -$10,000 is a time adjustment.
2. Lot Premiums.
Because buyers in new subdivisions pay for difference between properties on a dollar for dollar basis, the lot premiums paid for things like views, large lots, cul-de-sac locations, etc., become the site size or location adjustments. If your subject has a $2,000 lot premium for it’s larger lot, as compared to a comparable in the same tract with no lot premium, then your lot size adjustment to your comparable would be $2,000. Remember, that $2,000 is exactly what the buyer paid for that larger lot. By definition, the adjustment is $2,000. What could be easier?
Here again, the adjustments, or differences between the subject and comparables in the same tract are on a dollar for dollar basis. I usually make this adjustment at the bottom of the grid, where I can put my own line title of “Upgrades”, but putting it in the “Quality of Construction” field works too, as long as you explain that the adjustment is for upgrades and not the overall quality of the home.
This is the most difficult item in a new home appraisal to quantify. IF you can get the builder to fully and accurately disclose all the incentives, sometimes it can take some work to see where they fit in the appraisal. Incentives can be loan related, like rate buy-downs, prepaid payments, closing costs and more. Other incentives can be a little easier to quantify, like free upgrades. Sometimes an incentive is just a discount on the total package. The best way to handle adjusting for these is to find out the total incentive, what it was made up of, like free upgrades or discount points being paid, and split them up into their proper places in the adjustment grid.
5. Prices of different models in the same tract.
The difference in base price, in the same time period, of one model, vs. another, is generally related to size. If you have model A in a tract that is a 3/2 and 1,200 sf, base price of $200,000 and Model B, which is a 4/2 and 16,00 sf, base price of $215,000, then your total “Size” adjustment is $15,000.
There are other pitfalls to watch out for. Sometimes a builder will have homes in “Standing Inventory” and need to move them. These can be great deals for home buyers, but tricky for an appraiser, as many of the options are pre-decided by the builder and the incentives or discounts can be greater than on other homes.
What does FNMA say about appraising new construction?
From the FNMA 2007 Selling Guide, Part XI, Chapter 4, section 406.2:
“For properties in new subdivisions or for units in new (or recently converted) condominium or PUD projects, the appraiser must compare the subject property to other properties in its general market area as well as to properties within the subject subdivision or project. This comparison should help demonstrate market acceptance of new developments and the properties within them. Generally, the appraiser should select one comparable sale from the subject subdivision or project and one comparable sale from outside the subject subdivision or project. The third comparable sale can be from inside or outside of the subject subdivision or project, as long as the appraiser considers it to be a good indicator of value for the subject property. In selecting the comparables, the appraiser should keep in mind that sales or resales from within the subject subdivision or project are preferable to sales from outside the subdivision or project as long as the developer or builder of the subject property is not involved in the transactions."
Many times I see reports where all the comparables are located within the same tract and are new sales from the builder. It is key that some sales data in the report be from outside the builder’s sphere of influence. Preferably, the sales from outside the builder’s sphere of influence, in order of preference:
1. New sales from a competing builder
2. Resales from the subject’s development
3. Resales from outside the subject’s development
When using new sales from a competing builder, make sure you et all the same Base Price, Lot Premium, Upgrades and Incentives info. Although there will be some differences in pricing, remember that these builders are competing against one another and their prices for the above components will be comparable.
Remember that resales will usually have rear landscaping and hardscape, assuming the subject sold with only front landscaping, which is common. Landscaping can be a significant issue to the market and have a significant cost factor, so make sure it’s adequately addressed in the adjustments.
Make sure that you take the time to visit the builder’s sales office to get all the info in this article. I have generally found staff to be accessible and very willing to help, and a great source of information to boot. You can pick up brochures on the subject’s development and many times, good information on the market area and neighborhood, as builders will generally have this info available to prospective buyers.
Remembering these basic rules of new construction will not only make your appraisal process easier, but it will make your reports stronger and more credible as well.
AUTHOR: Anthony Blackburn is a Certified Residential Appraiser in Martinez, CA and one of the co-owners of Apple Appraisal, Inc. - 811A Ferry Street, Martinez, CA 94553 - Appraisals and Reviews Throughout California