New Construction with a large incentive

[Mark Sargent]

I am brain dead today. I have a new construction one unit with builder contract. The contract price is #324, 000 with an incentive of $124,000 and final sale price stated as $200,000.

Try as i might i could not get an answer as to what the incentives were. I think i will get this guy to negotiate my next purchase, he is better than Donald trump

Anyway for the life of me I cant figure out if I report the contract price of $324,000 the on the concessions gifts etc section the incentives and other seller concessions of $8000 or if I report the final sales price of $200 with explanation and then the $8000 in seller closing cost concessions.

I know I have come across it before but i have successfully thought myself into a box. first my knees then hip and now the brain going downhill with age....

 

[Terrel L. Shields]

What 'incentive' are we talking about. So, what is the net to the seller?

 

[Tom D]

incentives are like concessions. like a free bmw incentive with the sale, which fannie had a lot to say about. what are they typical concessions in the area. you would adjust. seems like an attempt to inflate the value for the next sale. is this one of the 1st in the project tha the builder is now stuck with high mort rates and the need to sell.
i would think underwriter will have issue the the word incentive. maybe they are trying to see how high you will go, then adjust that concession. kinda curious as to what the loan amount is, can see on the agreement. tricky builder maybe being slick. does the $324 sale price look alright for the ground, construction and profit. if so i is as confused as you.

 

[sputnam]

You report what the contract says. In this case, $324,000 with $124,000 in unspecified builder incentives. The subject contract is irrelevant to your valuation analysis. It's a reporting requirement.

 

[Tom D]

i think it's relevant cause it's not typical and the large incentive question will come up with the underwriter. and if your value is off, it will come up. sorta like flipping over and over again. and if the value is fine, it will still create the perception of something amiss. we do have to analyse the contract, don't we. the known sale price creates a perception of value which is typically right, but in this case you need to dig deeper to cover you value.

 

[J Grant]

I am brain dead today. I have a new construction one unit with builder contract. The contract price is #324, 000 with an incentive of $124,000 and final sale price stated as $200,000.

Try as i might i could not get an answer as to what the incentives were. I think i will get this guy to negotiate my next purchase, he is better than Donald trump

Anyway for the life of me I cant figure out if I report the contract price of $324,000 the on the concessions gifts etc section the incentives and other seller concessions of $8000 or if I report the final sales price of $200 with explanation and then the $8000 in seller closing cost concessions.

I know I have come across it before but i have successfully thought myself into a box. first my knees then hip and now the brain going downhill with age....

Do not deviate from what the contract says- how can it be a contract price of 324k and a then a final sale price of 200k? it can't be both, but if it says both, then report both and note that it is typical.f


It says 324 k price with 124k as incentives, comment that you tried to find out what the incentives were, and the seller would not disclose it. Incenvives can mean cash to close, or free upgrades or other, since they never told you.

Then go on and appraise the property. In the end, if it turns out your appraisal market value opinion is lower than the SC price, you can point to the incentives as having inflated the price.

 

[Mark K]

Will that incentive affect your appraised value and if so, how and why? Disclose it in the appropriate section of the report and move on.

Now, if you discovered this incentive on a comp...that's a horse of a different color.

 

[sputnam]

i think it's relevant cause it's not typical and the large incentive question will come up with the underwriter. and if your value is off, it will come up. sorta like flipping over and over again. and if the value is fine, it will still create the perception of something amiss. we do have to analyse the contract, don't we. the known sale price creates a perception of value which is typically right, but in this case you need to dig deeper to cover you value.

I said... it's not relevant to your valuation analysis. Of course the Lender is going to want some sort of explanation... that's a reporting issue. Not a value issue.

 

[Tom D]

I said... it's not relevant to your valuation analysis.

in psychology it's called a subliminal suggestion. a door in your brain has been opened to that sale price, but maybe not the right door. i did a lot of new construction in my younger days. never saw a agreement structured that way. now i have to spend more time to prove my value. just seeing that wording, a concerned lender might ask for a review over a concern that you were compromised, unless you got perfect comps.

 

[J Grant]

in psychology it's called a subliminal suggestion. a door in your brain has been opened to that sale price, but maybe not the right door. i did a lot of new construction in my younger days. never saw a agreement structured that way. now i have to spend more time to prove my value. just seeing that wording, a concerned lender might ask for a review over a concern that you were compromised, unless you got perfect comps.

A door to your brain has been opened, then shut it again when you appraise .

There is a sale contract price and there is a market value opinion, and appraisers who are overly influenced by a sale price will be "compromised", as you put it above. A Sale price can be a relevant value indicator, or not, and we only know that after we finish our appraisal, at which point we have a perspective to revisit the SC price.

A sale price might or might not end up being the same as , or higher than, or lower than our OMV, so why is a sale price structured with incentives any different ? It just provided a possible reason, in the event our opinion of MV is different, why that is the case.

Why does an appraiser need "perfect comps", not to seem compromised to a lender? Just do a good appraisal with the best comps we have, which are rarely perfect.