An appraisal for a residential tract development must meet the minimum appraisal standards outlined in Chapter 3. Appraisals must reflect deductions and discounts for holding costs, marketing costs, and entrepreneurial profit. In some circumstances, the Bank may rely on an appraisal of the individual unit(s) to determine market value for calculating the loan-to-value (LTV) ratio.
The Bank may exclude pre-sold units to determine whether an appraisal of a tract development is required. A unit is considered pre-sold if a buyer has entered into a binding contract to purchase the unit and has made a substantial and nonrefundable earnest money deposit. The Bank should obtain sufficient documentation that the buyer has entered into a legally binding sales contract and has obtained a written prequalification or commitment for permanent financing.
The appraisal should reflect a market value upon completion of construction of the home(s) and the market value of any other collateral, such as lots of underdeveloped land. The appraisal must also consider an analysis of appropriate deductions and discounts for unsold units, including holding costs, marketing costs, and entrepreneurial profit. For loans to purchase land or existing lots, “value” means the lesser of the actual acquisition cost or the appraised market value.
An appraisal of a tract development must analyze and report appropriate deductions and discounts. However, there are circumstances when the structure of the proposed loan mitigates the need to obtain an appraisal of a tract development.
If the Bank finances construction starts on an individual unit basis, the Bank may be able to use appraisals of the individual units to satisfy appraisal requirements and as a basis for computing the LTV ratio. In this case, the Bank should be able to demonstrate, through a feasibility study or market analysis conducted independently of the borrower and loan production staff, that all units collateralizing the loan are likely to be constructed and sold within 12 months. For LTV purposes, the value is the lower of the market value of the collateral or the borrower’s actual development and construction costs. The borrower should maintain appropriate levels of hard equity (for example, cash or unencumbered investment in the underlying property) throughout the construction and marketing periods.
If an institution finances a unit’s construction under a revolving line of credit in which a borrowing base sets the availability of funds, an institution may be able to use appraisals on the individual units to satisfy the agencies’ appraisal requirements and as a basis for computing the LTV ratio. This is the case if the institution limits the number of construction starts and completed, unsold homes included in the borrowing base and if the institution satisfies the conditions described in the preceding paragraph. If the borrowing base includes developed lots or raw land to be developed into lots, the institution must obtain an appraisal of the collateral that reflects deductions and discounts.