RE: FNMA: Loan to appraisal value (construction cost timing)
From: Jim_Snyder-Grant . LOTUS (Jim_Snyder-Grant.LOTUSCRD.lotus.com)
Date: Tue, 21 Jun 94 08:11 CDT
Rob said something that led me to want to explain a bit about how New View is 
doing house pricing:

"The scary part of all this is that often you won't know the actual unit cost 
until it is mostly built and you will be working with estimates before then.  
It really pays to have a contracting company that has a good track record for 
project estimation and this is something to ask about when you hire them."

New View is planning to deal with some of the uncertainties in unit cost by 
writing a construction contract that has the builder work on a fixed price. We 
do have estimators & appraisers working with us to make sure that we are 
pursuing a course that is economically practical (for both us & the builder), 
but we hope that most of the cost fluctuations disappear during the period 
right before construction starts (right after we get by the twin gates of 
permitting & construction financing).

Apparently this sort of construction contract is quite standard -- the builder 
gets to hope for a profit in exchange for taking on the risk on fluctuations, 
and we get to reduce uncertainty early enough in the process to be able to do 
something about it. The price fluctuations after the construction contract is 
signed happen when the architect/builder communication breaks down or when the 
members decide to make changes. That's a lot more managable than being tied to 
rises in plywood prices.


New View WILL have an overage, unless we invent some cool-o funding mechanism 
such as a separately  funded common house construction financing mechanism. Our 
target now is that the construction costs will be 5% over the sum of the house 
appraisals, ignoring individual house menu items (gold doorknobs...) but not 
ignoring site-specific appraisal factors (so far, that list is two-fold: view 
premiums & premiums for being able to build a walk-out basement). We have a 
semi-elaborate formula that basically distributes half the overage equally to 
all households & the other half in proportion to appraisal & adds some 
adjustments for fairness (so that, for example, someone can't buy a smaller 
unit, build it our to a larger unit, & avoid their fair share of the overage).

Because the overage goes pretty directly to people's down payment requirements 
(since the bank lends only on the basis of the appraisal), and down payment 
ceilings are pretty tight for many people in the group, we want to set the 
formula in motion as soon and as accurately as possible.

We hired the same appraiser who will be working for the construction-loan bank 
to make preliminary appraisals based on our construction plans & advise on what 
factors will impact appraisals. This same bank will be attempting to capture as 
much of our end-loan (mortgage) business as possible, with some financial & 
logistic incentives, so for those households that go with the construction-loan 
bank for their mortgage, the final appraisals people will get will match as 
closely as possible to the way-early appraisals we have in hand now that we are 
using to guess our house prices.

We will run the latest appraisals & construction cost figures through our 
formula as either one changes. In particular, we hope to have good-enough 
numbers to help out with the house-location selection process that Nancy Wight 
has been polling this group about how to organize. House price will play a 
significant factor in many households location choice.

Current schedule (oh, we have heard & been disappointed by so many of 
these...): Permits complete during the summer/early Fall, construction starts 
this fall, houses complete in phases over next Spring, Summer & Fall.

Some good news: The bank has agreed that because we represent so many presold 
units, they will lend up to 85% of sum of appraisals during the construction 
process. That basically removes the fear we had that we would need to continue 
to come up with lots of cash during construction: our line of credit from the 
bank will now be able to cover our anticipated maximum draw.

-JSG
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