Builder Presale A Valid Comparable For Appraisal?

[Meandering]

One builder I told to run in 2007 informed me he had 12 under construction and 10 of them "pre-sold". In the end he closed on 2 after renegotiating the price. Six weeks later he filed bankruptcy. Lost his home within a year.

We had a builder who sold pre-sales. Turned the money into coke that went up his nose, and didn’ Complete any of them before he went to jail. Lots of lost money but no real estate sales.

.

 

[Terrel L. Shields]

Turned the money into coke

Ditto here, only crack or math. Once an executive for Tyson. This was his half built home..lost it & a nice river ranch.

 

[residentialguy]

W
Builders frequently place presales in the MLS expecting appraisers to use them in appraisals for that development. In my 25 years of experience, I have always found the presales to be somewhat inflated because they encompass many upgrades that may not be found in the standard house, and many of those upgrades might not translate into value in more typical sales. I would consider adding a presale in as a 4th comp if I had no other sales from my subject neighborhood, but I just don't view them as reliable market indicators in comps 1-3.

Never a problem using them...you just have to verify the upgrades and their contributory value.

 

[Doug in NC]

Never a problem using them...you just have to verify the upgrades and their contributory value.

I disagree because presales aren't exposed to the open real estate market. The whole reason I brought this issue up is because I was considering doing a review on a property that had used 3 presales (all indicating zero days on market) and one sale that was on the market for something like 200 days as the 4th comp. The appraiser concluded a value of somewhere around the $335K range while comp 4 came in at only $314K. It seems obvious the appraiser was compelled to use presales to get to the sale price. Admittedly, despite doing a fair number of reviews myself over the past 25 years, I have never seen an appraiser use any presales in a report that I can remember. Maybe this is one of the reasons the investor backing this deal wanted a post-closing second opinion on the value.

 

[Doug in NC]

In my opinion, "exposure time" is the key. Here is an excerpt from a past issue of a report from the NC Appraisal Board on choosing comparable sales:

" What is a true comparable sale?
In looking at a sale to see if it may be used in an appraisal, the
appraiser must make sure that the sale reflected an arm’s length
transaction. There are generally five elements of an arm’s length
transaction.
1. The buyer and seller are typically motivated.
2. Both parties are well informed or well advised, and each
is acting in what they consider their best interest.
3. A reasonable time was allowed for exposure in the open
market.
4. Payment was made in terms of cash in United States
Dollars or in terms of a financial arrangement comparable
thereto.
5. The price represents the normal consideration for the
property sold unaffected by special or creative financing
or sales concessions.
If any of these tests are not met, the sale may only be used with
appropriate discussion and adjustment. A client may have
additional requirements, such as that the sale must be less than 6
months old or within a certain distance from the subject. It is the
appraiser’s responsibility to be familiar with and comply with
those guidelines."

 

[J Grant]

Why do you keep calling these sales pre sales? They are closed sales sold from the builder's office. I argue here frequently that in a new construction appraisal that to develop credibly supported MV, appraisers should use at least two re sale comps (meaning properties not sold through builders office), , and analyze the resale market, not just use all new from builder sales. That said, I do believe new home sales from builders are also god comps and in many cases necessary to develop th eMV, and see if the market is paying the premium builders charge or an equivalence after adjusting for C 1 .

I therefore typically in a new home appraisal include at least 2 of what you call "pre sales", aka sales from a builder's office. Which is not the same as saying their price is the market value, it may or may not be, but they are still viable comps .

As far as open market exposure, builder sales may not have the same exposure as resales from private owners, builder sales do have open market exposure. While the date on MLS might a 0 or 1 for DOM, ( date to contract), these homes were available on the open market prior to that during the time the builder sales office was open.

I am surprised to see that in your reviews you never see appraisers use new home sales from builders... ( unless by pre sale you mean something else)

 

[J Grant]

I disagree because presales aren't exposed to the open real estate market. The whole reason I brought this issue up is because I was considering doing a review on a property that had used 3 presales (all indicating zero days on market) and one sale that was on the market for something like 200 days as the 4th comp. The appraiser concluded a value of somewhere around the $335K range while comp 4 came in at only $314K. It seems obvious the appraiser was compelled to use presales to get to the sale price. Admittedly, despite doing a fair number of reviews myself over the past 25 years, I have never seen an appraiser use any presales in a report that I can remember. Maybe this is one of the reasons the investor backing this deal wanted a post-closing second opinion on the value.

You may be right that the price is over valued...or not. I always approach each review with an open mind ( though usually there is a reason it ends up in review. ) I would hate to disagree with the value based on one comp alone ( comp 4). How much older is comp 4 than the subject, and what differences or similarities are there between subject and comp 4, and for that matter between subject and comp 1, comp 2, and comp 3? What are the listings doing in the subject subdivision, and what other sales are out there that might be comps and what are their prices...reviews where you might end up doing your own appraisal due to a possible disagreement in value can be time consuming, and imo we as a reviewer have to have good support for why "our value" is more credibly supported and indicative of subject ranking in the market.

 

[Doug in NC]

Why do you keep calling these sales pre sales? As far as open market exposure, builder sales may not have the same exposure as resales from private owners, builder sales do have open market exposure. While the date on MLS might a 0 or 1 for DOM, ( date to contract), these homes were available on the open market prior to that during the time the builder sales office was open.

I am surprised to see that in your reviews you never see appraisers use new home sales from builders... ( unless by pre sale you mean something else)

I don't know why they are called presales exactly (maybe it is because they are sold before they have begun construction or marketing), but that is what I was taught from the time I started training to be an appraiser. Also, I DO see home sales by builders in some reviews, but just not those of the "zero days on market" variety. I have no problem with comparable sales that have spent some time on the market before they were sold. Zero days on the market virtually allows no opportunity for a purchase decision other than by one specific buyer, who then custom builds that house to their own individual specifications via selection of all manner of unique design choices. The final sale price isn't actually determined until the house construction is complete and buyer has signed off on all the change orders that established that final purchase price. In my experience, the final sale prices of these presale homes always appears to be higher than the houses that had exposure to at least a few potential buyers before the purchase decision was made.

 

[residentialguy]

I disagree because presales aren't exposed to the open real estate market.

I don't necessarily agree with that, Doug. It is there for the market at all times. This is a different type of market with it's own set of buyers. Not to mention, your other sales will keep this in check.

 

[Mr Rex]

From a NC Appraisal Board newsletter August 2006 http://www.ncappraisalboard.org/bulletins/aug06.pdf

Appraisers know that they cannot use a land/home package as a comparable sale. The question often received by Board staff is: How do I recognize a land/home package?

Some land/home package sales are simple to recognize. A check of the public records may indicate that the property transferred was only a lot, but the HUD-1 (settlement form) shows the sales price of both the land and the home. If public records indicate that only the land transferred, this is a land/home package sale and cannot be used as a comparable sale.

In other instances, what may look like a land/home package is actually a legitimate sale. In the past several years, more developers have been building subdivisions and advertising the properties on MLS as presales. The buyer goes to a sales office, selects a lot, and then selects from a limited number of the developer’s floor plans to be built on the lot. There may be a limited list of custom features available that adds to the cost of the package. When the home is finished, both the lot and the house convey as one unit, which is reflected in the public records.

If, however, the buyer goes to a developer and buys a lot, then selects his own builder who builds a home customized to the buyer, this is not a legitimate sale to use as a comp. The key is that the combination of the lot and home has not been exposed to the market and negotiated between a willing buyer and seller.

There are some instances where real estate agents report a land/home package sale on MLS. There are some red flags that could indicate such a sale. Some agents will make a remark that the sale is for information purposes only and is not to be used as a comp. Other agents may state that the sale is for comp purposes only. The property may show that it was only on the market for one or two days. Even if the sale is reported on the MLS, that does not always make it a legitimate, arm’s length transaction. It is the appraiser’s responsibility to verify the legitimacy of the sale.

Remember, Standards Rule 1-4 of USPAP requires that you collect, verify and analyze the data used in the report. For example, if you collect comparable sales information form MLS, you then verify the information by calling the listing or sales agent, the tax office, or another source. If there is any discrepancy between these two sources, you must continue to research the sale until you are confident that the information you will use in your analysis is correct. This is especially important if you receive verbal information or a HUD-1 that conflicts with public records.

You should also be careful to correctly identify both your data source and verification source, and to keep in your workfile a copy of the information relied upon for the appraisal. For example, if you use MLS as your data source and tax records as your verification source, you should have a copy of the MLS sheet and tax record in your file. Sometimes you may receive information orally, such as from the listing broker over the telephone. You should make a note for the file of your conversation, including the name and telephone number of the source of information and the date, as well as a summary of the information received.