Construction Lenders Rely on What is known as a Future Value Appraiser.
Construction loans, just like purchase money mortgage loans require an appraisal report. But clearly there must be a difference as there is no property per se to appraise. This article attempts to explain how appraisal reports are prepared and the detail that matters when appraising for a construction loan.
An appraiser report consists of a number of sections, most important of which are:
- The general specification of the property and the area where it is located.
- The replacement cost analysis; which is a calculation of the total of lot cost, construction cost of the main structure and the construction cost of the out buildings.
- The comparative sales analysis; where the subject property is compared to similar sales in the area.
Starting with the general specification page the most important factors that a construction loan underwriter is looking for are things like functional utility and zoning.
Some lenders will make a loan in an area where the zoning is not residential but the majority of the properties are residential. Some lenders will only allow residential zoning.
The replacement cost analysis is very important in construction loans guidelines as this cost is compared with total cost of construction presented in the line item cost brake down of the project. The normal variation in the cost allowed is around 15%, beyond which the underwriter needs to be provided with an explanation as to why.
In the comparative sales analysis section the appraiser will use sales data from the immediate area, usually within 5 miles, and compare with the property that is going to be built according to the plans provided.
Construction loans use the same standardized appraisal report that all mortgage loans use, except they are prepared "Subject To" as oppose to "As Is", where the subject to caries the explanation; Subject to Plans and Permits.