How Are New Construction Homes Appraised?
An appraisal is part of the home buying process, but how can appraiser give a value to a home that hasn’t been built yet?
With a typical appraisal, an appraiser uses a ‘Sales Comparison Approach’ and identifies recent comparable home sales, usually within the same neighborhood. However, these comparables for new construction homes in new subdivision developments are often not listed in the Multiple Listing Service (MLS) and are more difficult to locate and verify the sales data.
It is often necessary to utilize homes that are not new and make adjustments based on the accrued depreciation. It is also important for the appraiser to include sales of similar homes from competing builders to demonstrate marketability of the home.
While comparable sales and the direct sales approach are still the most important and reliable, appraisers have other data sources to help them determine values.
The developer typically provides lenders with the following information they can pass to the appraiser:
The more detailed these documents are, the greater the accuracy of the analysis will be.
Using these documents, the appraiser is able to determine what will be built and provide an opinion of value. In the appraisal of new homes there are typically two methods utilized. The first is the Sales Comparison Approach and the second is the Cost Approach which takes into account the cost of total replacement.
An appraiser is likely to consider both approaches to determine value, the Sales Comparison Approach and the Cost Approach.
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