So how do you appraise a home that isn't built yet? This is a question I get quite often when I speak to potential clients about construction loans. The answer is, plans and specs.
The appraiser will be given a copy of the legal description for your land, so they will know where you're building. But instead of being able to inspect an existing home, they will be given the plans for the home and the specifications of the materials that you are going to use. Then they will know what you are planning to build. With that information they will be able to complete their report and give an opinion of value.
Of course once the home is completed they will have to make a final inspection. This will be done once the Certificate of Occupancy is issued and your builder calls for their final draw. The appraiser will return to the job site, take pictures of the completed home and (hopefully) attest to the fact that the home that was built was the home they were given the plans and specs for.
The more important question, and the real reason I'm writing this blog, is how does the appraiser arrive at their opinion of value. In other words, how is an appraisal done.
After the appraiser inspects your lot they will turn their attention to finding sale comps for the home you are going to build. A sale comp is the recent sale of a similar existing home in your area. Your "area" can be defined as your subdivision, a mile radius around your home, you city/township, the school district or even your county. This is the call of your appraiser. The less populated an area you are building in, the larger an area an appraiser can pull comps from. If you live in a city or suburban area, the appraiser certainly shouldn't have to go further than a mile away. If you're building in a rural area the appraiser may just try to stay in the school district or county.
The trouble starts when the appraiser can't find at least a couple of like comps. The problem normally falls into 3 categories;
First, you're not building a "standard and customary" home for the area. What kind of homes are not standard and customary?? Glad you asked. Pole barn homes, domed homes, earth berm homes, mixed use (residential and business use), Quonset Hut homes, straw bail homes, homes with one or no bedrooms above grade, homes with extra large garages (more than 3 stalls) just to name a few. Here are some of the issues your appraiser and lender face if you try to build one of these homes, https://www.mckissock.com/blog/appraisal/appraising-unique-homes-barndominium/.
Second, you're over building for the area. If you're building a 2000 square foot colonial in a area with 1000 square foot ranches, you're going to have an appraisal issue. If the appraiser has to use significantly smaller homes as sale comps, you're going to have an appraisal issue.
Third, excessive land. Every home has to come with some land but at some point you just have more land than what is needed or customary for the area. At that point the lender isn't just making a loan on a home, they are financing you excessive land. Lenders don't like to do that. How much land is excessive? Take a look at how much land your sale comps are on. If your sale comps are all on an acre or less, and you have 10 acres, you're not going to get value for all 10 acres. Here's more on excessive land, https://www.appraisalinstitute.org/valuing-excess-land-creates-challenges-for-appraisers-the-appraisal-journal/.
If you have a large down payment (30% or more) your home can appraise for less than the sum of the components and it won't affect you. But if you are putting 20% down or less, you need to avoid these issues.
If you would like more information please check out my website, https://www.bestfhaconstructionloan.com/.