Appraisals

If you will be getting a loan from a financial institution (bank) then the bank will require an appraisal by a certified residential appraiser on the value of your new home. An appraisal on a new home is slightly different then one on an existing home. One of those differences are that there is no home built yet. The bank will generally ask the appraiser for an average of two appraisal methods in determining the option of value of a new home. Keep in mind that an appraisal is only an individual's opinion of value. True value is only determined when a home is sold.

"APPRAISAL: (noun) the act or process of developing an opinion of value; an opinion of value. (adjective) of or pertaining to appraising and related functions—e.g., appraisal practice, appraisal services" (Source: The Appraisal Foundation)

"APPRAISAL METHOD: a specific process applied to develop an opinion of value." (Source: The Appraisal Foundation)

The appraiser will first appraise the property as a vacant lot using a standard comparable method of comparing similar lots and lot sales in the same area or community as your property is located. Then the appraiser will go through the building plans, building agreement, and specifications list and assign a value to each item. They do this by general knowledge of construction costs in your area. Using this information the appraiser will then give an opinion of the value of the new home. This is sometimes referred to as "cost method" of appraising.

The appraiser must also appraise the new home based on the value of the new home as if it were already built using a standard "comparable method". This is a process similar to that used in determining the vacant property (vacant lot) value. This can be a problem for some owners who are building in areas which have not had a new home or a home of like size in a long time.

EXAMPLE: Mr. & Mrs. Smith have owned a lot in "Happy Florida Sun Community" for ten years. Now after ten years they decide to build their dream home on the lot they own. They find a builder and sign a building agreement for a 2,500 square footage of living space home for $150,000. Then they find a lender and an appraisal is ordered. In the last five years only a few homes have been built in the community and of those homes built all are 1,000 square feet smaller then the Smiths' home choice. Using the cost method, the Smith's home appraises at $152,500. Since the appraiser must also appraise the home using the comparable method, the appraiser must use the homes which are closest in location to the Smiths' property in the community. These homes are much smaller and since the Smiths bought their vacant lot, lot values have dropped substantially. Even with making adjustments for the additional space and features in the Smiths' home the appraisal using the comparable method comes in at $142,000 for the Smith's new home. When you average these two appraisals, the final appraised value using both methods comes in at $147,250 or $2,750 less then the Smith's contract with the builder.

Did the builder charge the Smiths too much for the new home? No, but because of the location of the new home being built, the home appraises for less then the construction value. The reverse can be true if you buy in an area where you purchase a lot at a price lower then the appraised value. But in that case the bank does not give any additional value for appraised amount being more then the building agreement's price. In some areas this can be more common than you might expect.

How To Avoid This Problem

Don't buy property too many years in advance of building your home.
Build in an area which has home of at least your desired size and type.
Ask Realtors in the area you're interested in what their opinion is about the current resale values of your model (or ones like it) in the community you are planning to build in.

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Last Updated: August 06, 2005 09:01 PM