If you are financing your new construction project, your lender will need to order an appraisal of the property. We get questions all the time about what appraisers are looking for and how in the world they can appraise a house before it is even built.
We contacted local appraiser, Ed Schmidt, to talk to us about what goes into new construction appraisals. Ed has been doing real estate appraisals for 11 years. He is also a licensed real estate agent so he knows his stuff! We asked Ed five common questions and I think you will find his responses quite helpful as you plan your new custom home project.
QUESTION 1: How do you appraise a house that doesn’t yet exist?
Ed Schmidt: When appraising a house that does not exist the appraiser is relying on construction plans and builder spec sheets. The more accurate and detailed the plans and spec sheets are the more likely the appraiser is going to be able to discern the level of construction and finish in your new home. The appraiser will very often have discussions with the builder representative and in some instances the borrower to confirm or get a better sense of the spec sheets, drawings and overall level of finish of the house to be built.
QUESTION 2: NDI builds in a lot of areas where there aren’t a lot of new builds. How do you find comparable properties?
Ed: When there are no sales within the immediate neighborhood then it is acceptable to expand search guidelines to other nearby areas that are similar to the subject, even if they exceed the lenders distance guidelines. Most lenders require at least one comparable sale within a mile of the subject property on appraisals in and around the beltway. Sales outside a mile or in other jurisdictions or areas that compete with the subject market can be used if they are considered necessary by the appraiser to yield a credible estimate of value. When this is done, it is requisite of the appraiser to provide supporting commentary to explain why the sale was used and dollar adjustments must be made to the comparable as compared to the subject to approximate the differences in market appeal between the locations. Sometimes an appraiser may be able to find a sale of an older home from within the neighborhood that has been expanded and has similar overall utility, square footage and finishes. When a comparable sale like this is used it is adjusted for its difference in age, depreciation, condition as compared to the subject property.
QUESTION 3: What upgrades have the biggest impact on the appraisal? What upgrades have the least?
Ed: I believe hardwood floors have the most substantial impact on value relative to their cost. Buyers want hardwood floors on the main level and they want hardwood staircases to the second level. If a purchaser can allow for it in their budget, I would also suggest hardwoods on the second level landing and hall. Additionally, in the northern Virginia market, purchasers want walk out or walk up basements. I believe that you are stepping over a dollar to pick up a nickel if you eliminate these items from your construction project. The cost of installing a wet bar in a basement is an item that does not typically add a tremendous amount of value relative to its cost.
QUESTION 4: If a buyer must choose between finished square footage above grade or finished square footage below grade, which has more value?
Ed: Above grade square footage will always yield more market value then finished space below grade.
QUESTION 5: Does the buyer have any recourse if the appraisal comes in lower than expected.
Ed: If your appraisal comes in lower than expected, my suggestion is to review it diligently. I would look for incongruities in adjustments; look for missing features in the description of improvements that the appraiser may have overlooked as compared to the comparable sales. Make a list of the items that you feel were not adequately accounted for in the appraisal and then also review all the comparable sales that were used in the report. When reviewing the comparable sales look for sales that may have some negative influence to its value that the appraiser may not have been aware of and did not account for in their analysis. This influence is often a school system in the northern Virginia market. Go through each sale and check the GLA (gross living area) or what is referred to as taxable living area, which is indicated in the local online tax record. Confirm that all this data is congruent with what the appraiser has reported in the report.
If when you are done with your careful review, you have found some significant inconsistencies and errors, prepare a thoughtful and polite narrative that supports your conclusions with tax record information, sales data and possibly builder spec sheets( in the case of missing significant features) and send it to the lender.
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