Buy Downs - Are You Adjusting to Cash Equivalency

[Terrel L. Shields]

Concessions are adjusted for when they impact the price

All concessions impact the price. It is pretending otherwise that is the issue. I cannot wait for the "bass boat in the garage", or the "six months maid service" or the "New car" incentive etc. to come back like it was in 2008. Many lenders were blind-sided when people got their free boat or trip to Cancun then defaulted on the loan. The lender had no idea that the house would sell for 10s of thousands less once back on the market while the house next door was offering $30,000 worth of bennies just so you'd borrow more than the house was actually worth.

 

[J Grant]

All concessions impact the price. It is pretending otherwise that is the issue. I cannot wait for the "bass boat in the garage", or the "six months maid service" or the "New car" incentive etc. to come back like it was in 2008. Many lenders were blind-sided when people got their free boat or trip to Cancun then defaulted on the loan. The lender had no idea that the house would sell for 10s of thousands less once back on the market while the house next door was offering $30,000 worth of bennies just so you'd borrow more than the house was actually worth.

First of all, the free car or trip to Cancun is not common - if it happens, then one can easily adjust for it .

More common are thel bread and butter pre paid closing costs, and then there is everything else - builder contracts the menu of incentives noted, then for other sales a cash for down payment or repair allowance and so on.

Did the concessions impact price compared to THE OTHER SALE PRICES without the CONCESSION?
That is the way we measure whether to adjust or not. If the price is similar/equivalent to other prices, then what the heck are you adjusting for? ( MV definition says adjust for market reaction - if the prices are equivalent, there was no market reaction to the concession ) The concession can impact days on market - in a tough sales environment, often a concession is offered simply to move the property faster or make it stand out, but the price is not really affected compared to other prices.
That said, usually adjusting for a cash concession such as pre-paid $ for $ often narrows the price range vs comps without the concession, and that is the reason for it in a comment.

 

[DWiley]

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.

Large builders often have "forward commitments" with lenders. This is an agreement/contract between the builder and a lender where the builder commits to delivering a specific amount of loan volume to the lender at a certain interest rate. This is especially important to consider when that rate is significantly less than current prevailing rates. In many cases, the loan buydowns seen today are the result of a forward commitment that was made when rates where lower. And, yes, it can definitely influence the purchase price.

Of course, the financing of the subject property has no effect on its value. So, the real issue is verifying if the sale price of a comp was affected by a forward commitment, and adjusting that comp as necessary. The challenge is that forward commitments and concessions are often not disclosed in MLS, increasing the effort required to verify transactions.

 

[Terrel L. Shields]

if it happens, then one can easily adjust for it .

In the new construction of 2008, the appraisers were not told about these concessions, only the $5000 or so assistance. It was NOT in the MLS. It was not even in the contract of sale - those personal property or non-realty items were promised in a separate document. If you picked up one of the brochures in a box in front of the house it MIGHT mention these gifts.

 

[J Grant]

In the new construction of 2008, the appraisers were not told about these concessions, only the $5000 or so assistance. It was NOT in the MLS. It was not even in the contract of sale - those personal property or non-realty items were promised in a separate document. If you picked up one of the brochures in a box in front of the house it MIGHT mention these gifts.

In 2008 those gifts were still rare - mostly old school instructors had a one off tale about it

The bubble of prices 2006-2008 was due to low interest rates, teaser rates, no income doc etc etc.

 

[Terrel L. Shields]

n 2008 those gifts were still rare - mostly old school instructors had a one off tale about it

I would bet for about a year, 90% of new construction in NW Arkansas had such incentives, especially Bentonville, Rogers, and Fayetteville.

 

[DWiley]

I would bet for about a year, 90% of new construction in NW Arkansas had such incentives, especially Bentonville, Rogers, and Fayetteville.

I do not know if it is 90%, but I do know that rate buydowns are VERY common right now in new construction.

 

[J Grant]

The fact is that builder prices can be inflated for a variety of reasons - rate buydowns, ridiculous lot premiums, a "free" upgrade package, a concession and so on. If all the prices have one of those elements present but the prices are similar, how are you going to separate any of it out? See if prices were impacted vs prices of new build sales that sold without using the builder's preferred lender. Usually, the sales office can answer the question, or if it was a cash sale.

The acid test for comparison is that appraisers should analyse the resale market and use resale comps, sales, and listings, not just new builder sales. Some appraisers drop one resale in as a token because it was required instead of including more than one and analyzing. When the resales support the market value opinion, it makes it a much stronger appraisal. If the resales don't support it, then the appraiser has a decision to make -

Builder prices are their own world since the sale contract can include numerous pages of change orders or line item upgrades like carpet level, insulation, door handles, etc. rung up cash register style to arrive at a total. Which we know is not how prices are negotiated on the open market sales.

Then factor in that in a strong market, the builder will announce. "Phase 2 has just opened with a 5% price increase." Well, did the market jump up five % overnight? No. Or the opposite - a builder is ready to close out and sells the remaining models cheap.

 

[Terrel L. Shields]

I do not know if it is 90%, but I do know that rate buydowns are VERY common right now in new construction.

Yep, but they were never on the order of $30k like in 2008 or so. We even had a banker trying to get Realtors and appraisers to pony up money to advertise that the market was fine and prices wouldn't drop. Well...how did that work out? I mean, Baghdad Bob couldn't do better. That bank ended up under FDIC control within 2 years and was merged.

Another banker I know told me she had stopped at one open house, and they had given her a list of 'free' things if they'd pay list price regardless the lender. I don't recall all the options, but I know it was choices that included either a bass boat, free maid service or six months (or maybe a year?), a world cruise, first six months payments made by seller, or a Hummer. There may have been other options. Anything to keep from dropping the apparent price. These were local builders. At the time we didn't have Lennar, Horton, or Toll Brothers around...none of the national builders.