How Do Mortgage Companies Value a Property That Hasn't Been Built Yet?
It's easier to picture the process of estimating value on an existing property in a neighborhood that has a history of home sales, than it is to estimate the value of a home that is to be built. The task of determining the value on new construction projects does pose some challenges. Appraisals on homes that haven't been built yet generally require the contractor and homebuyer to supply complete plans and specs, detailing exactly the finishes of the home to be built. So there is more documentation required about the home in order to get a more accurate estimate of the property's value.
For some, building a new home can be both exciting and overwhelming. Watching a project transform from idea to completed home with a front yard, white picket fence and a custom red front door is a rewarding experience. Even if you are paying attention to all of the information from the beginning, there are still several details that have a tendency to catch even experienced builders off-guard. Decisions have to be made to determine every detail such as cabinets and corners lining up differently than the initial drawing plans could show.
What Does an Appraiser Need for New Construction?
Plans -
The plans or construction drawings are usually done by your builder or architect. It lays out the floor plan of your home, sizes of rooms and square footage of your home. The plans should include a floor plan layout, front elevation, real and side elevations, mechanical and electrical details.
Specifications/Descriptions of Material -
A "spec" sheet has the type of construction materials you will be using. Will your home be built with standard 2 x. 4's or 2 x 6's? Will the countertops be a laminate or granite? These details will be on the spec sheet. The spec sheet also contains the type of insulation, roofing and exterior products that will be used in the construction, as well as floors and appliances for the inside dressing.
Cost Breakdown -
This document breaks down all of the costs associated with the construction, including land, building materials and labor.
Plot Plan -
Shows where your home will sit on the site, any accessory buildings, well and septic locations, and the finish grade elevations and direction of the drainage. Once the lender has obtained the above information from you, they will forward a copy to the appraiser. It is the appraiser's job to determine what the future value of the home will be once it is completed, per your plans, and the cost breakdown.
Even though an appraiser will use the cost approach in the appraisal report, it is not the value that will ultimately be used by the lender. The market approach to value, which uses existing sales of homes similar in size, quantity, construction and location, is the most common approach that lenders want for new construction. The more complete and detailed your plans, specifications and cost breakdowns are, the more accurate your appraisal will be.
Once your home is complete, the appraiser will be asked to go out and inspect the home. They will report back to the lender to confirm that your home was completed according to the plans and specifications originally given and if the value is the same as originally given in the report. Sometimes the value has to be adjusted due to changes that were made during construction, which may have affected the value of the home.
Frequently Asked Questions:
Q: Where can I obtain a set of plans?
A: The plans usually come from an architect or the builder. Builders have basic plans they work from and make modifications specific to their clients' needs. When building a custom home, it's generally a good idea to work with a reputable architect.
Q: Is there a form I can use for the list of specifications?
A: The Specifications form is usually provided by the architect or builder. However, HUD has a generic form that most lenders can use and it will give the appraiser most of the details they need to complete your appraisal. Anything not listed on this form can be added by you separately on an additional sheet.
Q: Can I use my contract with the builder for the cost breakdown sheet?
A: In most cases, the lender will accept the contract, however, they will want the builder to provide a cost breakdown to ensure that the builder has accurately bid your home.
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