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Construction Loans: The Myth of the “Future Appraisal”
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| Author: |
Craig Higdon |
One of the most common phrases I hear when dealing with a construction loan is: "The Future Appraisal." This is usually used in the context of making sure that the property will have sufficient value for us to get the loan needed to complete the structure. Unfortunately, it's impossible to appraise something "in the future." You can only appraise value in the "now" because you only have comparable information "now." It's a common misconception because you're trying to arrive at the value of something that doesn't exist now, but in the future. And therein lies the solution to the dilemma!
What actually happens is that the appraiser is asked to pretend that the building exists now (per the plans provided by the developer) and compare it to recent sales. This is the only time in lending that we get to work with something that hasn't happened, yet! This can be a very powerful tool in a sales situation when you're dealing with a run-down or funtionally obsolescent property. With a set of plans, you can literally create value from nothing, as most successful developers know.
So perhaps a better term would be: "The Let's-Pretend-It's-Built Appraisal!"
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