Comps for New Construction

[DJBanas]

So I'm doing an appraisal on a new construction in a development. According to the FHA guidelines I cannot use any comps within the project if the builder was involved in the sales transaction. Of course, that's all of the sold units in this project. However, the guidelines also state that he best comps are usually in the same development as the subject.

What's the best way to handle this? Comps 1-3 in the project and 4-5 outside? Or do I use outside for comps 1-3 and use the comps in the project for 4-6? The comps outside are not new and are not as good of a comparable match as the ones inside the project.

Any advice/suggestions welcome.

 

[David Beasley]

So I'm doing an appraisal on a new construction in a development. According to the FHA guidelines I cannot use any comps within the project if the builder was involved in the sales transaction. Of course, that's all of the sold units in this project. However, the guidelines also state that he best comps are usually in the same development as the subject.

What's the best way to handle this? Comps 1-3 in the project and 4-5 outside? Or do I use outside for comps 1-3 and use the comps in the project for 4-6? The comps outside are not new and are not as good of a comparable match as the ones inside the project.

Any advice/suggestions welcome.

I think you could give them 1 in the subdivision, but you should try to find 2+ others outside the subdivision and likely also from different builders. That's fairly standard methodology for all residential appraising, not just FHA. I do this (go to competing subdivisions) even when there are 4-5 builders operating in the same subdivision as the subject - which is common here.

And I would find other new construction products though, distances away be-darned. Forget the FHA, most *underwriters* aren't going to accept existing homes against new construction today (they view it as a red flag, moreso than some distance IMO). And if your market is like my market, new-homes and existing-homes often are readily identifiable and separate submarkets, even within the same subdivision.

There's almost a measurable "stigma" here when an existing home sells in a market predominantly made up of new-construction sales...Think of it this way, why pay the same money for a "used home" when you can get a brand new one for the same money, even if the existing home is only 2-3 years old? This is one of the reasons why appreciation has been stifled here for a long time - which is itself also why we didn't "crash" over the past couple of years like other parts of the country. We continually have 2-3 y/o homes competing in the same subdivisions with model-matched new construction homes. This is because of the transient nature of our buyer base (Ft. Bragg = soliders = transferred at the drop of a hat) Moral: Compare Granny Smith apples to other Granny Smith apples and not Golden Delicious apples, because it is hard to extract the value difference sometimes between said apples species. lol

 

[NC Appraising]

DJ,

What kind of builder comps are you using?

Are the sales that they will post in the MLS as "for comps only"?

Have the builder sales been reasonably exposed to the market as defined in the definition of market value in the URAR?

Many appraisers will use these build to suit sales, but I do not. Some one who goes into a tract built home and picks out the upgrades and finishing materials represents cost value, not market value. Why even order an appraisal if every single upgrade equals value?



I understand where David is coming from, but my market is slight different. In my market, builders just stop building spec homes and are just building mostly build to uit homes. Re-sales that Have been reasonably exposed to the market should be the best indication of market value, because these sales can be verified better, less affected by seller concessions, and has been exposed to the market.

In my market area, these build to suit homes are always higher than the builder spec homes that were exposed to the market.

 

[Mike Garrett RAA]

We have had this discussion before. FHA does not say you can't use new construction sales in the same subdivision. What is preferred is that they not all be from the same builder. Notice I said..."preferred". There are some situations where there might not be other sales that are truly comparable.

The ideal situation would be one sale from the same builder, same model would be great. One sale from a competing builder, same style and amenities. One resale, could be same or a competing builder.

The first rule of real estate is..."location, location, location". Saying that another subdivision or marketing area is preferable defeats the first rule. Too often, I see appraisers going to different subdivision just to find higher priced sales while sales exist within the same subdivision. We all agree this is wrong...so why wouldn't it be in the case of new construction?

Are builder homes exposed to the market? You bet. In fact, at least in my market, they typically get MORE exposure. A model home is exposure. The new home market is a niche market in most areas. Appraising new construction requires an appraiser experienced in understanding those markets.

Do existing homes typically compete with new construction? Maybe, maybe not. It's like comparing buying a new car vs a used car. They just aren't the same. Advantages to buying new...selecting the features you really want and having something that hasn't been lived in. Many builders are offering incentives an existing home seller can't.

Advantages of buying an existing home...getting a location you want and having mature landscaping...as an example.

The are two totally different markets...in my opinion.

 

[NC Appraising]

Mike,

Do you use builder sales where the subdivision is a typical tract home subdivision, the buyer has chose a lot, chose a floor plan, and went in the builder showroom and picked out the upgrades? Do you use these types of sales?


or

Are the builder sales that you use have been finished and exposed to the market via the on site agent or MLS?

 

[Mike Garrett RAA]

IN MY MARKET there are very few spec homes for tract builders so the sales are usually where the buyers go to a model, select model which will usually determine which lot, and the options wanted. Time from contract to completion is usually 3 to 5 months depending on the time of the year.

 

[EDWARD BERRY]

Interview, Interview.

And If Possible A Comp Outside Sd.

Good Luck.

 

[DJBanas]

Thanks to all for their input/suggestions.

What I finally did was:

2 comps outside the development. Actually, these were very good although 1 settled date was 8 months old.

3 comps in the development, out of the 7 the builder gave me. There was only 1 builder involved so I couldn't use comps from another builder. I was able to get the front page of each AOS and the upgrade sheets. I already knew the model floorplan for each. All 7 were good physical matches. However, when I verified the closed sales prices with the County Clerks office I discovered that 3 of the builder comps were actually sold for less than the face value of the AOS. Eliminated these from consideration. Used 3 of the other 4 and left one off because it's original contract date was about 5 months older than the other 3 and the contract dates of the outside comps. When I checked back with the sales agent she told me that there were probably addendums to those 3 that reduced the final prices as buyers sometimes realize they really can't afford all the "bells & whistles" they originally ordered. Verification is a good thing!!!!

 

[NC Appraising]

IN MY MARKET there are very few spec homes for tract builders so the sales are usually where the buyers go to a model, select model which will usually determine which lot, and the options wanted. Time from contract to completion is usually 3 to 5 months depending on the time of the year.

That sounds more like "cost", or "market price", not market value.

HUD:
MARKET VALUE AND MARKET PRICE. A distinction is made between market value as defined above and market price. Market price refers to the amounts that buyers actually pay. Market value refers to the probable prices properties will bring in a competitive open market.

DISTINCTION BETWEEN COST AND MARKET VALUE. A distinction is also made between cost and market value. Value depends on the extent of utility in the future, while cost depends upon outlays for land, labor, and materials which depend upon conditions that do not necessarily deal with factors which create value.




-If one uses these types of sales, how do you make market based adjustments? Or do you make adjustments on a mechanical scale, cost for cost? If a buyer goes in a chooses $30,000 in upgrades, and you use this sale as one of your comparables, the only way to adjust is for dollar for dollar, on a mechanical scale. Unfinished attic $11,000. Market value $11,000? I don't think so.


-Why even order an appraisal? Cost equals value. If the buyer went in and chose the lot, chose the model and chose the $30,000 in upgrades, that market value. m2: (no, the $30,000 in upgrades have not been exposed to the market, that's market price.. see above). It's no different than a custom home builder taking buyer to the Depot and having a shopping spree).



In my opinion, this methodology leads to new homes being over valued.

This down market has confirmed this.

When the market started softening in late 2008, a tract home project with one builder caught my attention.

They would always list home in the MLS for "comps only", and when the home was finished, marked it a sold in the MLS. The buyers went to the on-site agent, picked the lot, picked the model and picked the upgrades.

This was a fairly large project, and re-sales were starting to come to the market. As prices were starting to decline, I started noticing a distinct price difference between builder sales that were not exposed to the market and normal re-sales. The difference was about 15-20%.

Why?

The meeting of the minds were about 6-9 months prior to what the MLS closed date was. The meeting of the minds took place under totally different market conditions, even though it closed escrow a month ago. The only thing the appraiser cares about is that it closed 9/2009.

Cost doesn't equal value. The market wasn't paying for 100% of the upgrades. I sure felt bad for those buyers, and for the bank who lost big time...

When the builder did build a spec home, it always sold below what the other "non-adequately exposed" homes sold for.

 

[Mike Garrett RAA]

Yep....just like cars, drive it off the lot and it's worth less than what someone will pay for it new. With that logic...nothing is ever worth what someone is willing to pay for it.