Buy Downs - Are You Adjusting to Cash Equivalency

[Terrel L. Shields]

So, who is adjusting for the impact of those interest buydowns on property sales. Are any appraiser NOT ADJUSTING to cash equivalent value (C.E.V.) or are you just ignoring the FACT that such buydowns are allowing an inflated price to be listed as "sold" and I am not talking about concessions - a separate issue.

New construction sales are offering these buydowns in an effort to not lower prices which would be bad optics on prior sales or future potential sales. But offering below market interest rates, even for a short term are distorting prices. So, who is adjusting for Cash equivalency and how?

So, if you ignore it, obviously you are allowing these values to inflate (which is what I am seeing in new construction.) It's not a mistake. It is a deliberate act made by many appraisers who apparently have nary a clue how to make an adjustment.

 

[TerryRohrer]

I think the bulk of new construction appraisals have just become Property Data Collection (PDC) reports to ensure that the GSEs have the data as housing stock is added. I have lost track of the threads and comments by appraisers that clearly reveal that builder concessions, lot premiums, and "upgrades" are simply reported as market actions without any analysis of the completed dwelling in comparison to market transactions that don't involve builders. I doubt that 1% of appraisers completing new construction are even slowing down to consider that subsidized interest rates might affect prices. After all, if the appraiser doesn't take the expected route, they will get more questions to answer and will get fewer requests for new construction assignments.

 

[glenn walker]

NO.

 

[J Grant]

MV definition references sold for cash or financing at comparable terms, and a price unaffected by special or creating financing.

Is the price unaffected? If a builder's price is within the prevailing range of other prices with a buydown, then the price is not affected, and there is nothing to adjust for. Most of these so-called buydowns are nothing but a percentage point taken off the first 2 or 3 years of the loan, and then the interest rate reverts to normal.

I would only adjust if I saw a measurable impact on price - which would reflect a real buydown, not this buydown lite nothing -

 

[Terrel L. Shields]

If a builder's price is within the prevailing range of other prices with a buydown, then the price is not affected, and there is nothing to adjust for. Most of these so-called buydowns are nothing but a percentage point taken off the first 2 or 3 years of the loan, and then the interest rate reverts to normal.

It is still calculable and 3 years of discounted interest for 90% or more loans can amount to five figures and would you not adjust for any other 10,000 plus adjustment? And is it the "prevailing price" for new? Or, are all the other new also carrying similar discounts. Just because everyone is doing it, doesn't mean it doesn't need to be adjusted for.

What about the ones where the seller is carrying a second mortgage for 5 years at 10% or higher interest rates? Doesn't that impact the net sale price? Sure it does.

 

[expo77]

I really hope this conversation continues. I'm currently adjusting dollar for dollar for these concessions. My data supports it but I'm definitely getting pushback when not hitting contract prices... Having some difficulty finding grouped paired sales data that solely accounts for concessions and not other upgrades or C1 vs C2 when comparing new construction with 2-3 year old homes...

 

[Mike Ault]

I think the bulk of new construction appraisals have just become Property Data Collection (PDC) reports to ensure that the GSEs have the data as housing stock is added. I have lost track of the threads and comments by appraisers that clearly reveal that builder concessions, lot premiums, and "upgrades" are simply reported as market actions without any analysis of the completed dwelling in comparison to market transactions that don't involve builders. I doubt that 1% of appraisers completing new construction are even slowing down to consider that subsidized interest rates might affect prices. After all, if the appraiser doesn't take the expected route, they will get more questions to answer and will get fewer requests for new construction assignments.

Got a revision request this week on a new construction appraisal I did where I adjusted all the concessions out to cash equivalency and included a comparable from a competing subdivision (along with comparables from competing builders in the subject subdivision as there was no resale activity) and for my effort the underwriter replied…"Per Branch/UW - Appraisal corrections: advise why comps > 1 mile from subject property were used on an urban zoned property; provide at least 1 closed comp with similar sales/financing concessions to support/bracket across the board downwards adjustment" (my reasoning for including a comparable from a competing subdivision and methodology for dealing with seller concessions was well explained, my subject had a $6000 concession and she presumably expected me to include another comparable to bracket that amount so it could be adjusted either zero or upwards). This indicates to me that most appraisers in my market aren't properly accounting nor adjusting for those concessions and aren't following GSE guidance for appraisals in newly developed subdivisions. Sigh.