Cash Sale Vs Conventional Financing

[Tom McNall]

The appraisal assignment is the appraisal of a new twin home in a new twin home development. There have been 20 twin home sales in the neighborhood within the previous 12 months. 60% of the sales had conventional financing. The remaining 40% were cash sales with no lender involved. All of the cash sales purchase prices are being sold at a discounted rate of an estimated 6% . When using these sales as comparable sales how would you reconcile of the differences between the cash sales and financed sales? Some of comparable sales used were cash sales and some had financing. Everything else being equal, where would you put the most weight and why?
Thanks,
Tom

 

[glenn walker]

There are more issues than just the 6% cash sale discount because you want to use the sales most similar in size and location which is normally more critical than the 6% concession - BUT- with that said I would start by gridding out the 6 most recent and similar closed sales in the development and use 3-that were financed and 3-that were cash sales with the 6% discount, and start by making a full full 6% on those comps in the concession cell-grid. I would then adjust for the gross living areas ,locations, views , upgrades etc and then look at my 6-adjusted sales to see what effect the concessions had on the final bottom line ?

When done with your preliminary adjustments it should be fairly straight forward on what effect the 6% concessions had on overall prices. In the final reconciliation I think I would use a mix of both the cash and financed sales and since your making the seller paid concession adjustments any reader-user-reviewer can see how you arrived at your final opinion of value.

As far as the most weight I would place it on the two most similar comparable's and hopefully there is at least one financed and one cash sale that fit's into that equation.

 

[Tom McNall]

I probably did not give enough information. All the units are identical. All carbon copies of each other with exactly identical ages, materials, size, etc. Lots sizes are the same also. There clones in a development. What I trying to resolve in my mind is which sales best reflect the market value. Cash sales or financed sales. There may be no answer clear answer what true market value is until there are resells but I'm kind of thinking cash is a sales concession and is 40% making conventional sales(60%) the majority and therefore the weight would be put on the sales that had financing. Does my logic make sense to anyone other than me?

 

[J Grant]

I probably did not give enough information. All the units are identical. All carbon copies of each other with exactly identical ages, materials, size, etc. Lots sizes are the same also. There clones in a development. What I trying to resolve in my mind is which sales best reflect the market value. Cash sales or financed sales. There may be no answer clear answer what true market value is until there are resells but I'm kind of thinking cash is a sales concession and is 40% making conventional sales(60%) the majority and therefore the weight would be put on the sales that had financing. Does my logic make sense to anyone other than me?

Makes sense...cash is not a concession, rather if it is a builder they are selling less to cash buyers faster closing or such. Is the builder kicking in a concession or "free" upgrade package to the financed buyers? I always, as in always use some recent resales in the open market when doing new construction for this very reason, to compensate for and test in open market sales away from builder influence and any odd things associates with it..since there is not normally in the resale market such a clear and distinct consistent discount of cash vs financing. Most probable price...if 60% are financed it is more probable price but not 100% so, dig deeper find some resales , reconcile as you see best at end.

 

[glenn walker]

Agree typically cash is not a concession BUT in this case the builder offered buyers a 6% discount if they paid cash- So in my opinion it is now a seller paid concession or inducement and should at least be considered similar to any seller paid concession. BUT in the end it may have had no measurable effect on sales anyway because you either have the cash or you get a loan- A zero sum game in the end

 

[ucbruin]

Why was the builder giving a discount for cash buyers?

 

[J Grant]

But if it were a seller concession, you would have to minus the concession from the price..in this case the price is already low, the perk for cash has already been taken out price by the builder. An odd incentive never seen it before...are a number of the cash buyers related or LLC instead of individuals?

 

[Terrel L. Shields]

What I trying to resolve in my mind is which sales best reflect the market value.

C.R.E.A.M. - cash rules everything around me.
Cash equivalence is in the definition of Market Value.
Therefore, Cash is not a concession.
In agricultural classes there is a lot of class time on C. E. V. - cash equivalent value, because many farms are financed with more than one lender, commonly with a second mortgage at a higher rate. In reality, perhaps we should be deducting secondary market financing from any financed sale for the simple reason it is a crutch without which these people could not buy the property. So what is the "cash" price when Market Value is supposed to be "equivalent" to cash. Your situation may demonstrate that financed property is possibly not equal to cash sold and financing is, in reality, a "concession".

In your case however, I would suggest that the issue could revolve around a discount for a direct cash sale which might eliminate the agent or financing charges perhaps?

 

[Terrel L. Shields]

Why was the builder giving a discount for cash buyers?

Because he can close in 7 days and not two months as borrowers attempt to get the lender going while the lender attempts to get the borrower to give them what they need, the title company does not drag their feet, and the process may ultimately depend upon a favorable appraisal.

 

[ucbruin]

Because he can close in 7 days and not two months as borrowers attempt to get the lender going while the lender attempts to get the borrower to give them what they need, the title company does not drag their feet, and the process may ultimately depend upon a favorable appraisal.

If that were the case I'd be reluctant to purchase from a builder who couldn't wait 2 months (just an example of time saved) to get 100% of the money....