appraising new construction
by Jesse Lochman, State Certified Trainee Appraiser
During the past several years, we have seen quite a bit of new construction in our market area. Most of the new homes currently going up in our area are custom-built homes, for which the buyer has purchased a lot or tract of land and has hired a general contractor to construct the home for them. There are a few instances where a builder/developer is constructing spec homes and selling them after completion, but this accounts for only a minority of the construction in our area, and many times these homes are sold prior to completion, with buyers even choosing the level of some of the finishes and/or interior design.
Most of the new construction homes that we have seen built during the past couple of years have construction costs within the $250,000 to $400,000 range. One of the trends we are continuing to see with custom homes is that borrowers are willing to fork out extra money now for features that may either take a long time to pay for themselves, or will never pay for themselves, but will add to the energy efficiency or comfort of the home. A classic example would be a ground-source heat pump, which are found in most of the new custom homes in our area. These are far more efficient than any other HVAC, but given the relatively low price of crude oil during the past several years (and subsequently natural gas/propane), we would have expected to see a move away from GSHPs. Instead, they appear to be as popular as ever in this area. Other items that we often see are environmentally friendly insulation, extreme amounts of insulation, and 2x6 exterior walls. I believe the popularity of most of these energy-efficient upgrades is driven by a fear of increased future energy costs, which is pushing market participants to be as independent as possible from purchasing energy in any form.
Appraising new construction can be very challenging. Sometimes we are given a list of raw materials and asked how much they will be worth when nailed together. How the materials are assembled is just as important as the quality of the materials used. For this reason, when we are asked to appraise a new home scheduled to be constructed as if it is complete, we try to obtain as many detailed plans from the architect, designer, and builder as possible. After all these items are gathered and analyzed, a conversation with the borrower may be necessary to obtain additional information.
Functional obsolescence is difficult to quantify in the appraisal of not-yet constructed properties. Sometimes, a person who is building a home to fit their own needs and doesn’t ever plan to sell it will design a property with market-perceived functional obsolescence. An example of this might be a bachelor who constructs a master bedroom with a tiny master closet only large enough to accommodate a single modest wardrobe, or a couple with young children who construct a nursery room that can only be accessed through the master bedroom. Sometimes these items are curable, and sometimes they are not.
What I’ve found is that custom new construction homes that haven’t been built yet are more complex to appraise than a home that has been completed already. In completing many of these types of appraisals, I’ve learned that through careful analysis of plans, materials, and design, it is possible to arrive at an accurate and credible opinion of market value. If you are looking for an appraiser with experience appraising homes that are to be completed, call us today.