Valuing New Duplex Build in Refinance

[Austin L Miller]

Hello all,

I am in the process of building/acquiring my first investment property. I am looking at the possibility of building a new duplex, but have some questions/concerns to the appraised value after completion.

I have a family member, that is looking to invest, and has shown interest in funding the construction of this duplex. This would be a short term loan, and I would need to refinance upon completion to repay this loan. I have a background in construction management/construction accounting, so I would be acting as the GC for this build. I have found a very affordable lot for $20,000 (This is actually two lots and could support a second duplex). I believe the construction cost would come in around $200,000. This loan will likely be structured with little/no interest, with full repayment upon completion. In exchange for a low interest rate, the lender will get a portion of the ownership of the property. I will need to cash out approximately $220k-$230k to repay the loan. With an 80% LTV cash out, the property will need to be valued at roughly $290k.

I am concerned about the value during an appraisal for the refinance. Are these appraisals generally done using comparable sales, or CAP rate? What would be a typical CAP rate used in this scenario. At an estimated NOI of $19,500 and a 6.5% CAP, the value of the property would be roughly $300k. If the appraisal is done with comparable sales, I am concerned at the availability of recent comps. This build would be in a small town, and there are very few/no recent sales of comparable multifamily homes. The only recent sales are 60-100 years old and very outdated. These are very different than what I am looking to build. The sales prices for these have fallen between $140k-$180k. If these are used to appraise my proposed build, it would drive down the value significantly making a cash out refi very difficult or impossible. I don't want to take on too much risk so need to be very sure of the ACV prior to entering into this deal.

Thank you in advance for you help.