New Construction Appraisals: What Are They And How Do They Work?

7 Min Read
Updated Oct. 25, 2023
Front porch of a house with lights on in the house.
Written By Victoria Araj

There are times when a “traditional” appraisal just isn’t feasible. Perhaps the home is under construction or has been gutted for renovations. Either way, your lender will need to order some kind of appraisal to figure out the estimated value.

In this article, we’ll explain what a new construction appraisal is and how it works, so you can better understand this part of the home buying process

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How Do Appraisals Work For New Construction? 

With a home appraisal for an existing structure, the appraiser bases some of their valuation on the sale prices of nearby comparable properties (also called comps) that have recently sold. However, if the house is under construction or undergoing major renovations, then the appraiser will need to use a slightly different method.

A new construction appraisal is created by using a comparison between the house’s blueprints to already built and sold homes that have a similar square footage and floor plan. Once your mortgage lender has scheduled an appointment with a licensed appraiser, they’ll use the following steps to determine the approximate post-construction appraised value:

  1. Get a copy of the spec sheet and cost breakdown. The appraiser will need to have information on the specs, construction materials and building plans to figure out the prospective size and quality of the completed home.
  2. Choose how to calculate the post-construction value. The appraiser will choose a method of estimating the future market value of the home. They can use a cost approach, value comparison or income approach. 
  3. Gather comparable homes or additional data. If the appraiser is using the value comparison method, they’ll need to find similar home sales to compare to the subject property. If they’re using the cost or income approach, the appraiser will need to collect data on the prices of materials or the rental income for nearby properties.
  4. Fill out the Uniform Residential Appraisal Report (URAR) The appraiser will fill out a a form 1004 created by Fannie Mae to document how they estimated the value for the existing or new construction home. Your lender will then use the completed appraisal report to finalize the loan amount for your mortgage. 

Of course, these steps may vary depending on the lender, appraiser and type of real estate being purchased. For example, an investment property’s appraised value would most likely be calculated by using the income approach. Or an appraiser might use the cost approach to add up the cost of the land and building materials if there aren’t enough comparable sales to use for the report.   

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Types Of Appraisals Used Before Construction

Depending on the home you’re purchasing and where it’s at in the construction process, your lender could use a few different types of appraisals. 

As-Is Appraisal

An “as-is” appraisal is fairly common, and just as it sounds, it’s an appraised market value for a home in its condition during the time of the appraisal. This type of appraisal is ideal if you’re purchasing a home and have finished some repairs or have no intention of doing any improvements before the loan closes.

“There could be elements of condition like rooms that need paint or carpeting that the buyer plans to do after the close,” explained Stephen Wagner, president of the Appraisal Institute, the nation’s largest professional association of real estate appraisers. “The appraiser will interpret the value much the way other market participants like buyers do, taking note that the property may have some deferred maintenance issues.”

If you’ve done improvements to the property, it’s recommended that you meet with the appraiser to explain the improvements – don’t expect them to wiggle down into your crawl space and notice you’ve put in new duct work. 

Subject-To Appraisal

A “subject-to” appraisal is used when a home hasn’t been constructed yet, will have an addition built or be heavily renovated. The appraisal value is based on a hypothetical condition of the home after construction.

This type of appraisal can take place before or during construction or renovation. In both cases, a loan can be made for a home that isn’t in immaculate living condition under the pretense that work is done to fix its faults and the value will improve. In other words, the appraisal is created using the home’s after-repair value (ARV).

To complete a subject-to appraisal, the appraiser will visit the site, often a platted lot, and take photographs. They’ll then use specifications and plans to understand the additions and changes, so the value of the home listed in the report is based on the condition that all construction or renovations will be completed.

“As long as the appraiser has adequate blueprint plans and specifications, they can provide a subject-to-completion-per-plans-and-specification value,” Wagner said.

Certificate of Completion

Banks that allow appraisers to do a subject-to home appraisal will likely also order a “certificate of completion,” which is basically the appraiser returning to the property once all improvements are finished to verify the work.

It’s like your appraiser is saying, “Okay, your house will be worth this much once you finish your kitchen remodel, so here’s an adjusted home value for the additional work.” Meaning that the value is only valid once work is complete.

According to Fannie Mae, which purchases loans from lenders once they’ve closed, certification of completion must be obtained to verify the work was completed and must:

  • Be completed by the appraiser.
  • State that the improvements were completed in accordance with the requirements and conditions in the original appraisal report.
  • Be accompanied by photographs of the completed improvements.

Once those conditions have been met, the loan can close. 

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New Construction Appraisal FAQs

No matter if you’re a buyer or homeowner, it’s a good idea to understand this type of appraisal process. Read the following questions and answers to learn more about new construction appraisals. 

What do appraisers look for in a new construction home?

Using the spec sheet, blueprints and plot plan, an appraiser will determine the level of finishings and square footage of the completed home. From there, they can estimate the future value like they would for an existing house. They count the number of bedrooms and bathrooms, assess the layout of the rooms and calculate the added value of design features.   

How long does an appraisal take for new construction?

A new construction appraisal usually takes a few days to a couple of weeks, but it could be longer if the home builders are slow to send their plans and budget to the appraiser. If the construction site is in a remote location, it also increases the amount of time required to complete a report. 

Can I use a new construction home as an appraisal comparison? 

If you’re creating your own competitive market analysis (CMA), you might wonder if you can use a home under construction as a comp. Thankfully, Fannie Mae designed the URAR to give appraisers the ability to consistently estimate a house’s value, no matter if it’s completely built or still unfinished.

That means, in theory you could compare a new construction home to your own. Keep in mind that it should still be similar in size, type and style. 

The Bottom Line

Buying a home that’s under construction or one in need of major repairs can add additional stress to the home buying process. Fortunately, your lender and appraiser understand your situation and know that a new construction appraisal is the most efficient way to estimate the future value of your property.

If you want to learn more about renovations and real estate values, you can read about the best home improvements to make for resale.

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