The basics of appraising new construction

Appraising brand new homes presents some unique challenges to valuation experts.

Appraising brand new homes presents some unique challenges to valuation experts.

Appraising property that is brand new or hasn't been built yet seems like a confusing process. In most cases, though, a valuation expert will play a role in this process. In the construction of brand new homes, the appraiser must follow a few key guidelines to ensure an accurate and honest value judgment.

"The more detailed these documents are, the more accurate the appraisal."

Getting it together
As noted in The Reverse Review, appraising new construction presents a unique challenge to even experienced professionals. While the sales comparison is the most reliable and frequently used method to determine a home's value, it is not entirely applicable to a home that has not yet been built. Therefore, appraisers need to rely on alternative strategies to arrive at a newly constructed home's value.

There are four main data sources that an appraiser will need in order to craft a thorough value analysis. According to real estate expert Tim Swierczek, the lender should obtain this information and then pass it along to the valuation expert.

  • Building plans - The design for the home. The plans come in the form of drawings and were initially created by the builder or architect. The floor plan, along with the sizes of rooms and dimensions of the structure, are detailed here. Any specifics relating to electrical components or mechanical features are also noted in the plans.
  • Spec sheet - Short for "specifications," this document describes the exact materials to be used in the home's construction. Any insulation, roofing material or other exterior details are listed here.
  • Cost breakdown - An analysis of the total expenses incurred during the construction of the home. This includes the cost of design as well as all materials and labor. This may prove the most useful document in determining value.
  • Plot plan - Essentially, a blueprint for the surrounding property. Accessory buildings as well as utility lines, septic systems and drainage are covered in the plot plan.

The more detailed these documents are, the greater the accuracy of the analysis will be. Once these four documents are all in the appraiser's possession, typically the cost approach to value is heavily weighted to arrive at the home's worth. This method, of course, takes into account the cost of total replacement. An appraiser is also likely to consider a market approach valuation. After the home is built, the appraiser may do a second analysis (1004D) to confirm the home actually constructed matches the appraisal plans and specs.

New constructionAppraising brand new homes presents some unique challenges to valuation experts.

What does Fannie Mae say?
The market approach to value can hit a snag if being performed in a newly developed subdivision or planned unit development. Fannie Mae outlines specific guidelines for appraisers to refer to in these cases. Newly constructed homes in a subdivision must not only be compared against similar homes in the immediate vicinity, but homes in the same subdivision itself. Fannie Mae's guidelines explicitly state that one comp must be selected from within the new subdivision and one outside it. The requisite third comp may be from either location, but should still function as an indicator of the appraised home's value. Resale comps may be considered, but with extra caution, to adequately reflect any premium paid for newly-built homes.

Since public records used to assess home values may not be available for brand-new properties, Fannie Mae advises valuation experts to rely on the builder-supplied settlement statement. This may be the only option for an appraiser in a new subdivision, since the home in question may not have actually been sold yet, or is at least not yet recorded as such. The appraiser must be sure to indicate this document was used in the process of determining the home's value on the appraisal report itself. As SFGate noted, Fannie Mae's Universal Residential Appraisal Report can be submitted in tandem with all of the above documentation as part of a complete appraisal on newly constructed homes.

New construction appraisals may have different key drivers of value than existing home appraisals. With good data and analysis, however, the appraisal will present the lender with a meaningful indication of market value, which may differ from construction costs.