Comp adjustment for builder paying closing costs?

[Webbed Feet]

<.....snip......>The problem I have is that these other units were financed through FHA as well, and an FHA certified appraiser was able to justify the sales price based on market data.

Please explain how it is that you know the above to be a fact? You post upset about an appraiser making assumptions, then you seem to. For the record, appraisers do not justify sales prices. And, I would bet you are not privey to what went on at closing regarding those sales you mention above.

Also, the appraiser did note in my appraisal that sales prices have not decreased in my area over the past 12 months.

Today with AMC's selecting only the appraisers that can burn and churn reports in 24 hours or less, it's very easy to find all sorts of incorrect boiler plate comments in appraisal reports. Sad, but true.

To comment on another point you made, there was a cash sale comp in the appraisal that was the exact same unit as mine and at a higher sales price, but there was an erroneous $20,000 negative adjustment on it due to an incentive that appraiser thought the buyer received. I was provided documentation by the builder that proves there was no $20,000 concession.

That was the HUD 1 huh? ... Oh well, one sale does not make a market. We do that to help stem the tide of straw buyers in new construction that has gone on.

And to Lobo Fan, if you were to do an appraisal and use only MLS resales as comps, do you know if the seller paid closing costs for the buyer and would you also make a downward adjustment in that situation?

Typically, yes I would know and yes I would make the adjustments.

Again, I feel that closing cost concessions are a tool to allow more people to qualify for financing, not necessarily a tool to allow sellers to overprice their homes.

Ok, so riddle me this. If not offered, by your own admission, less buyers are going to qualify for financing. So, what is it you think sellers would then have to do to find a qualfied buyer? Less qualified buyers to purchase the same, or expanding pool of properties, available for purchase typically is going to do what to sale asking prices in competition to get the few remaining qualified buyers?

So attempt to explain, again, how it is creative seller paid financing concessions do not affect the sales prices? When I know what you have to answer to that is that the total lack of such concessions would mean fewer buyers and therefore mean lower prices.

The area where I am buying is all relatively newly developed, without many resales at this time. My builder does not list any of their homes on MLS, meaning that an appraiser would have a hard time getting an accurate picture of the market by using mainly MLS data.

Yes, well unfortunately, due to all the new construction builder fraud that happened during the boom and right after, we don't get a very "accurate" picture approaching the builders for "comps" either. The little fact the builder will not so much as hire someone under limited representation to at least enter the sales into the local MLS kinda speaks volumns about the unwillingness to disclose. Or about a view point that disclosure is not needed to use for market data by anyone else. It becomes hard to trust builders when they want to 100% control all the information about their project sales.

Also, if nobody is selling their home and the only MLS listings are a few short sales or foreclosures, but there are dozens of new construction purchases every month, MLS would give a skewed vision of the market as distressed sales could account for a much smaller percentage of total sales in reality.

Please explain then how keeping a choke hold on that information, by not getting it on the local MLS, then benefits these builders?

I apologize that my two threads are now covering some of the same topics, I am just anxious to get some answers and obviously this is a very stressful and emotional time for a first-time homebuyer who was supposed to close in five days...

Yes, buying is stressful. So why do buyers distrust the appraisers, yet seem to put their faith in builders that often are very typically less than forth coming to those same appraisers? Sure, it could just be very rushed AMC work. With you having been in the industry why would I have to explain that one to you? On the otherhand, every good appraiser I know would have asked the builder's staff if they cared to present comparable. But yet when we ask them to document what they are saying, they most often get all offended and refuse to do so. If you had any idea how many appraisers have been, and are now, getting sued over new construction sales due to misleading information on builder provided comps.... you'd not be wondering about the situation.

 

[Doug Meyer]

If there is a good supply of foreclosures in that market then the REO dwellings could be "establishing" the market value for resales. I am sure those folks tried to sell their homes before they went into foreclosure but could not sell. Why? They may have been overvalued in the market when they were originally sold to them by the builder and the market rejected their homes, which is why your builder is offering a 10% discount. The $10,000 seems very high in the market considering that FHA only allows 6% discounts.

 

[jennifire]

Please explain how is that you know the above to be a fact? You post upset about an appraiser making assumptions, then you seem to. For the record, appraisers do not justify sales prices. And, I would bet you are not privey to what went on at closing regarding those sales you mention above.

You are correct, I was not at the closings, so I do not know for sure what took place. However, I do know for a fact that many of the other sales were FHA because I can see the documentation in my county's public records, along with the FHA case number and endorsed FHA mortgage documents. I misspoke when I said that the prior appraisers were able to justify the sales prices, I agree that is not the job of an appraiser. Since I have seen all the endorsed HUDs, I also know that no additional concessions, rebates, or reductions of price were made in order for those closings to take place. I also know that a lender is not able to extend an FHA loan if the appraised value is less than the contracted sales price, so I connected the dots and came to the conclusion that the previous appraisers were able to find market data to arrive at a true market value of the subject properties which supported the sales price agreed to by the builder and buyer.

Today with AMC's selecting only the appraisers that can burn and churn reports in 24 hours or less, it's very easy to find all sorts of incorrect boiler plat comments in appraisal reports. Sad, but true.

I agree that this is a sad, unfair practice, and would have happily paid more for a local appraiser who would have taken the extra time needed to potentially come to a more accurate conclusion of my market. Unfortunately, that was my lender's call to make, and you are completely right, maybe the appraiser did arrive at a correct market value, even if I have discovered errors within the report.

That was the HUD 1 huh? ... Oh well, one sale does not make a market.

Yes, I have the HUD 1 form for 6 or 7 other sales. One of which was the one used as a comp in my appraisal with the inaccurate adjustment, and the rest were for other recent (less than 90 days) closed deals that were not included in the appraiser's report at all. Again, I am not an appraiser, so I don't know if they were omitted purposely, but with the knowledge that I have, they all seem to be legitimate comps.

Ok, so riddle me this. If not offered, by your own admission, less buyers are going to qualify for financing. So, what is it you think sellers would then have to do to find a qualfied buyer?

Excellent point, I had not thought this through to arrive at this conclusion yet. I did mention that my market area was noted as not having declining prices over the past year, but you address this later on in saying maybe a template was used and certain changes weren't made to be applicable to my subject property. That is too bad, another by-product of AMC's demanding next-day turnarounds and taking a chunk of the appraisal fee, I'm sure.

Yes, well unfortunatly, due to all the new construction builder fraud that happened during the boom and right after, we don't get a very "accurate" picture approaching the builders for "comps" either. The little fact the builder will not so much as hire someone under limited representation to at least enter the sales into the local MLS kinda speaks volumns about the unwillingness to disclose or view that it is not needed for access to use for market data by anyone else. It becomes hard to trust builders when they want to 100% control all the information about their project sales.

Again, a valid point I had not thought of. I had just figured MLS wasn't necessary because the development was advertised through several other avenues and the builder was not struggling to find qualified buyers. You also should not assume every builder is out to skew the market or rip off the buyer and lender. I know that it does happen frequently, but let's not presume them guilty just yet.

Please explain then how keeping a choke hold on that information by not getting it on the local MLS then benefits these builders?

If I were a builder who was selling homes at an acceptable rate and the market was supporting my asking price without many hiccups, I would think hiring somebody to input MLS listings may be an unnecessary expense. Again, I had only viewed MLS as a tool to connect prospective buyers to properties, not necessarily THE information database that can make or break a real estate market. I realize that MLS is a useful tool, but if other good comps were available through another source, wouldn't they be used? If not, wouldn't there need to be a very strong explanation as to why the listed comps were the absolute best to be found?

Yes, buying is stressful. So why do buyers distrust the appraisers, yet seem to put their faith in builders that often are very typically less than forth coming to those same appraisers?

I don't distrust appraisers at all, I have stated before that I don't think my appraiser is necessarily a bad one (besides the adjustment for concessions that did not exist), just that some information was excluded that could have changed the end result of the research.

Oh the otherhand, ever good appraiser I know would have asked the builder's staff if they cared to present comparable. But yet when we ask them to really document what they are saying, they most often get all offended and refuse to really do so.

I do know that the builder's representative did offer many comparables to the appraiser at the time of inspection. However, only one of them was used, and there is no indication that the other five in the report are "better" or more valid comps than the others that were presented.

I guess my ultimate question is this: if this appraisal is accurate based on the comps used, but there are higher priced comps that I provided to my lender, what chance do I have that the appraiser will adjust their value estimate in an amendment and I can close on this home?

 

[jennifire]

If there is a good supply of foreclosures in that market then the REO dwellings could be "establishing" the market value for resales. I am sure those folks tried to sell their homes before they went into foreclosure but could not sell. Why? They may have been overvalued in the market when they were originally sold to them by the builder and the market rejected their homes, which is why your builder is offering a 10% discount. The $10,000 seems very high in the market considering that FHA only allows 6% discounts.

Good point, but then I feel that there are two separate markets being discussed here. The definition of market value:

"The most probable price (in terms of money) which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus."

Therefore a foreclosure and/or short-sale, although they may be somewhat more common these days than in the past, do not qualify as market value transactions because the sales price IS affected by undue stimulus. A knowledgeable buyer in an open, competitive market, would not consider a foreclosure or short sale as an acceptable alternative due to unknown condition defects, a long, complicated approval process and the involvement of third-parties, when a brand new home from a builder with a warranty can be had at a fair price.

However, there is a separate market for distressed sales. The buyers in this market are looking specifically for a short sale or foreclosure, and are would not consider a brand new home an acceptable alternative. Comps, if I am correct, should be homes that the buyer of the subject property would consider an acceptable alternative. These two markets do not necessarily intersect.

Now, if a short sale or foreclosure were to be used as a comp, which I am not against, I would expect strong comments regarding the absence of positive adjustments to bring the sales price more in line with the open market price. If EVERY home sold within six months was a distressed sale, than maybe that is the only market in that area. However, if informed buyers are still buying properties from sellers in an open, competitive market, where price is not affected by undue stimulus, then a short sale price does not represent the open, fair market value of a real estate transaction, and an adjustment would be necessary.

OK, flame suit on, pick apart my logic! I really appreciate all the advice I am receiving, please keep it up!

 

[jennifire]

The $10,000 seems very high in the market considering that FHA only allows 6% discounts.

Also, after looking at properties for around six months prior to this purchase, it seems that closing cost concessions are a very common practice in my market at this time. Also, the $10,000 the builder has offered is less than 6% of the sales price of the home, which does not seem excessive or unusual in this market at all.

 

[Webbed Feet]

You are correct, I was not at the closings, so I do not know for sure what took place. However, I do know for a fact that many of the other sales were FHA because I can see the documentation in my county's public records, along with the FHA case number and endorsed FHA mortgage documents. I misspoke when I said that the prior appraisers were able to justify the sales prices, I agree that is not the job of an appraiser. Since I have seen all the endorsed HUDs, I also know that no additional concessions, rebates, or reductions of price were made in order for those closings to take place. I also know that a lender is not able to extend an FHA loan if the appraised value is less than the contracted sales price, so I connected the dots and came to the conclusion that the previous appraisers were able to find market data to arrive at a true market value of the subject properties which supported the sales price agreed to by the builder and buyer.

Ok, so you are telling me that a buyer is prohibited from making up the difference between an appraised value versus a sale price with the buyer's cash if FHA insurance is involved? Do you mind posting a link to the FHA/HUD rules on that one? I've never seen it. More, I bet you've no idea how often appraisers find out that things like the original asking list prices were recorded as the sale price, or an original buyer's sales contract price was recorded as the sale price, instead of the actual final sales contract price being recorded.

Also, I'm going to have to ask a Florida appraiser to speak up here. No, I am not up to speed on Florida, but in my area and all over this forum from appraiser complaints, there is no public access to HUD 1s or items such as the specific sales contracts regarding additional concessions, rebates, or reductions in price. Again, you've no idea how often additional addendum to sales contracts are withheld from appraisers and others. So much as getting copies of even portions of the sales contracts for the subject of the appraisal that have been actually signed by anyone is often a struggle for appraisers. Sometimes we cannot get them at all. So I am certainly curious how it is you claim to be obtaining them for all sales under the sun in Florida that appear to have been FHA insured.

I agree that this is a sad, unfair practice, and would have happily paid more for a local appraiser who would have taken the extra time needed to potentially come to a more accurate conclusion of my market. Unfortunately, that was my lender's call to make, and you are completely right, maybe the appraiser did arrive at a correct market value, even if I have discovered errors within the report.

We both agree here.

One small matter I am personally persnickety about. Fannie Mae put that darn word "Accurate" all over her forms. She did so while completely ignoring the small overwhelming fact that there is absolutely no such thing when it comes to real estate appraising. The standard of our industry is "Credible" not "Accurate." "Accurate" is for launching missiles or knowing 1 + 1 = 2. There is no such thing as an "accurate opinion." An appraisal is an "opinion."

Yes, I have the HUD 1 form for 6 or 7 other sales.

Again, nice trick. What? You're the builder's brother or sister or the loan officer involved with all these sales? If HUD1s are publicly recorded in Florida... wonderful! If not, I'd like to know how a member of the public is obtaining them when we have many appraisers on this forum that have to do battle with Odin himself to get them half the time.

One of which was the one used as a comp in my appraisal with the inaccurate adjustment,

Again, even adjustments are opinions. They are not accurate or inaccurate. They are credible or not credible. Real estate is a funny thing. There is no such thing as taking real estate sales data and mathematically calculating perfect adjustments.

and the rest were for other recent (less than 90 days) closed deals that were not included in the appraiser's report at all. Again, I am not an appraiser, so I don't know if they were omitted purposely, but with the knowledge that I have, they all seem to be legitimate comps.

Operative words underlined above.

Excellent point, I had not thought this through to arrive at this conclusion yet. I did mention that my market area was noted as not having declining prices over the past year, but you address this later on in saying maybe a template was used and certain changes weren't made to be applicable to my subject property. That is too bad, another by-product of AMC's demanding next-day turnarounds and taking a chunk of the appraisal fee, I'm sure.

LOL... you are way too knowledgeable. Cough it up! Who are you? Dr. Manhatten? (Forum joke) You've either been reading this forum for weeks, you're involved deeply in a real estate profession, or I missed a posting statement that explained how it is some person involved in a loan situation can come up with all of this.

Again, a valid point I had not thought of. I had just figured MLS wasn't necessary because the development was advertised through several other avenues and the builder was not struggling to find qualified buyers. You also should not assume every builder is out to skew the market or rip off the buyer and lender. I know that it does happen frequently, but let's not presume them guilty just yet.

I apologize to the honest and innocent builders and real estate project people of the world. But any appraiser today that likes being a real estate appraiser, eating hot food, living indoors, not getting the pee wadding's sued out themselves, absolutely must hold all such people guilty until proven innocent. It's a real bummer, I know. You know what thing "happens." But all these people might as well join all us honest and innocent appraisers when it comes to be judged guilty first and having to prove ourselves to be innocent copiously over, and over, and over, and over, and over yet again.

If I were a builder who was selling homes at an acceptable rate and the market was supporting my asking price without many hiccups, I would think hiring somebody to input MLS listings may be an unnecessary expense. Again, I had only viewed MLS as a tool to connect prospective buyers to properties, not necessarily THE information database that can make or break a real estate market. I realize that MLS is a useful tool, but if other good comps were available through another source, wouldn't they be used? If not, wouldn't there need to be a very strong explanation as to why the listed comps were the absolute best to be found?

Oh my.... You come across as so knowledgeable, yet here you are posting as if you've not heard a thing about all the new construction and mortgage fraud that was a driving force behind the market boom and in reality was highly to blame for the market crash we are in! Why is it you think so much of the so-called "equity" gained from 2003 to 2007 went "Poof!~" ?

If builders today wish to get credibility back for their trade, they had darn well better comprehend the need for taking on the business expense of proving it. Unfortunately, any appraiser at this point that has failed to learn to NOT trust new construction sales is an idiot. You have no idea how many times bunches of us have caught builders building their first three or five homes to a quality standard higher than everything else that followed, lying about it, and wanting those sales used for comps for the inferior grade homes that followed. OR.... selling those first five to the nephew of their mother's cousin or their own partners back and forth a couple of times. If you can't understand why so many appraisers now place most consideration on MLS resales, and why lenders want to see those resales as well, please now do.

Oh, by the way, Florida was one of the hot beds of all the fraud. I know you have to know this. Most all of the fraud hot beds are the specific locations that have crashed the very most in real estate values.

I don't distrust appraisers at all, I have stated before that I don't think my appraiser is necessarily a bad one (besides the adjustment for concessions that did not exist), just that some information was excluded that could have changed the end result of the research.

I do know that the builder's representative did offer many comparables to the appraiser at the time of inspection. However, only one of them was used, and there is no indication that the other five in the report are "better" or more valid comps than the others that were presented.

I guess my ultimate question is this: if this appraisal is accurate based on the comps used, but there are higher priced comps that I provided to my lender, what chance do I have that the appraiser will adjust their value estimate in an amendment and I can close on this home?

Your last question cannot be answered. If I were the appraiser? Very little chance as very rarely does any typical member of the public have access to better quality information than I do, nor has any of them the research skills or knowledge I've already applied to the situation. Rarely, can they produce anything I did not already consider and know about. It can happen. I feel most good appraisers with twenty or more years of experience will count on one hand the times they reconsidered and agreed they were too low in the last fifteen of those years. Then there are the "other" appraisers that cave in to pressure when they should not.

Then presently you have the AMC herd of appraisers that a substantial part of that herd are being so poorly paid, so highly pressured for incredibly negligent turn times, that the only question left when everyone involved from the lender on down knows it, is what does the world expect? Simple question for you, how many hours do you personally have into all the research and running around you have done so far on this? Divide those hours into $125 to $350, run a independent business on that, and imagine yourself doing it within 24 hours after the first time you walked through what you are buying. Now, after that, also include all this time you've spent posting here as a poor and inadequate substitute for having produced a report in that same 24 hours.

Yes, we are supposed to have standards. We are supposed to meet them no matter what. Well, so are politicians that are supposed to be representing We the People. All we prove is systemic failure of systems people are to rely on is epidemic in this country. Perhaps when the public tires of football games and Ithingies, wakes up, the pubic could pressure the real culprits of all this to fix what our trade cannot.

 

[hastalavista]

Good point, but then I feel that there are two separate markets being discussed here. The definition of market value:

"The most probable price (in terms of money) which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus."

Therefore a foreclosure and/or short-sale, although they may be somewhat more common these days than in the past, do not qualify as market value transactions because the sales price IS affected by undue stimulus. A knowledgeable buyer in an open, competitive market, would not consider a foreclosure or short sale as an acceptable alternative due to unknown condition defects, a long, complicated approval process and the involvement of third-parties, when a brand new home from a builder with a warranty can be had at a fair price.

(my bold)

There is no unanimous agreement on your "therefore...".
We debate that point all the time on this forum (for example, I do not come to the same conclusion that you do).
In my opinion, a better position to take is
if such sales are used [REOs and shorts], then they should be analyzed to determine if the market reacts to their listing/selling status; and, if so, that market reaction should be considered in the valuation process
This gets you out of the weeds of "is it or is it not" an arms-length sale, and gets you to the significant point of "if it is used as a comparable, are there market reactions to its status that warrant an adjustment?"

I don't want to turn this into a is it an arms-length sale thread.
I am suggesting that it may be more productive for you to argue with your lender that if such sales are used, they should be analyzed to determine if a market adjustment for their status (REO or short) is warranted.

 

[NC Appraising]

Jen,


Since you work at a a bank here are some guidelines on the issue, and I hope it helps you out. The first post concerns REO sales. The second post is Fannie's Guidelines on seller contributions.


Sales Comparison ApproachTypically, the Sales Comparison Approach is the most applicable approach to estimate the market value of a REO property. Appraisers may utilize sales comparables from other REO transactions only when such sales are deemed to be the best available for the market area and they meet all of the following criteria: · located in the subject neighborhood or reasonable proximity · comparable property subject to reasonable adjustment· sold with a willing buyer and seller· exposed to the market for a reasonable period Appraisers are reminded that an explanation, as well as support, must be provided for any adjustments to the sales price of comparable sales that exceed the guidelines set forth in Revised Appendix D: Appraisal Protocol, pages D-31, D-68, D-98 and D-127, attachment to Mortgagee Letter 2005-48. Inclusion of vacancy rates, rates of foreclosure and a discussion of foreclosure sales in the subject’s market area may be used as additional support for reliance on sales of other REO transactions. Do not use distressed sales such as Sheriff Sales. These sales do not involve a willing seller nor are they exposed to the market under normal conditions. The resulting value indication derived from the use of such sales is not consistent with the definition of market value.

 

[Smokey Bear]

All of this discussion begs the question as to why the appraiser is using a builder sale in the first place? Builder sales can be dorked in so many ways that we should NOT be using them, we should be using similar resales outside of the subject's development. There are often upgrades that are paid for outside of escrow, and other kickbacks, bonuses, special deals etc. that make buider's comps not reliable. With 6 total comps, if I was reviewing, I'd probably not even consider the two builder's comps in my value.