Concessions on New Construction

[J Grant]

Upgrades and concessions are two different things. I think the confusions when people start referring to "free" upgrades or lot premiums from a builder as an incentive and then mutate that incentive into being a concession.

If buyers really have been paying 40k for an upgrade package, and suddenly builder "gives" that same upgrade package for free to the next wave of buyers. The free upgrades acted as an incentive to purchase but they cant' be subtracted from the price.

If all the new homes in a community are offered with the same "free" upgrade package or waiving of lot premium ,the builder is not dumb...they priced the base model price high enough to cover the cost of the upgrades they are supposedly "giving". .Buyers have no idea what things really cost a builder . If a builder charges a buyer $12,000 for a granite package, that granite may only cost builder 3k due to buying in bulk from wholesale sources,having a crew on salary etc.

If a builder "gives" an upgrade package they claim is worth 40k, it may really cost the builder only 15k. They factor in that 15k into the price of the base model to cover it. ( fine they can do that). Which still leaves us with concessions, if they are offering it as well.

 

[Deleted member 134708]

Builders don't give concessions, they give credits. They designate where these credits go. The credits reduce the builder MSRP into a final sales price.

Just like a new car.

Or I list a house for $400K and I'm giving $10K in seller credits for closing costs, and $20K credits for being human. We go into contract for $400K and $30K in seller credits that I designated where they went. Into adjusting the bottom line. Home closes and records for $370K.

If seller closing costs are adjusted for, or if any credit is adjusted for, I'd say that a double adjustment.

 

[J Grant]

Upgrades and concessions are two different things. I think the confusions when people start referring to "free" upgrades or lot premiums from a builder as an incentive and then mutate that incentive into being a concession.

If buyers really have been paying 40k for an upgrade package, and suddenly builder "gives" that same upgrade package for free to the next wave of buyers, it acted as an incentive to purchase but it cant' be subtracted from the price.

If all the new homes in a community are offered with the same "free" upgrade package or waiving of lot premium as an "incentive", the builder is not dumb...they priced the base model price high, added in upgrades that don't cost them much, then subtract the upgrades out as an incentive .Buyers have no idea what things really cost a builder and that is where builders can make money, If a builder charges a buyer 12,000 for a granite package, that granite package may only cost builder 3k due to buying in bulk, buying from wholesale sources,having a crew on salary etc. If a builder "gives" an upgrade package the builder they claim is worth 40k, it may really cost the builder only 15k. They factor in that 15k into the price of the base model to cover it. (which is fine they can do that). Which still leaves us with concessions, if they are offering it as well.

Builders don't give concessions, they give credits. They designate where these credits go. The credits reduce the builder MSRP into a final sales price.

Just like a new car.

Or I list a house for $400K and I'm giving $10K in seller credits for closing costs, and $20K credits for being human. We go into contract for $400K and $30K in seller credits that I designated where they went. Into adjusting the bottom line. Home closes and records for $370K.

If seller closing costs are adjusted for, or if any credit is adjusted for, I'd say that a double adjustment.

You are figuring it differently than I was taught or have seen. If a house is listed for a price of 400k and the builder credits closing costs of 30k, that means at closing table the builder paid 30k in closing costs (costs buyer would normally pay), and the house sold for 400k. The 400k was the sales price with 30k concessions paid by builder (concessions could consist of closing costs, or a combination of closing costs and loan points paid or closing costs and 10k cash back etc ..)

IF a builder discounts a home price by 30k, and it closed for 370k instead of 400k, that is not adjusted for because it was not a concession, it was a discount off the sales price.

 

[CigarDad]

From the Fannie Mae Selling Guide; Adjustments to the comparables must be made for special or creative financing or sales concessions. No adjustments are necessary for those costs which are normally paid by sellers as a result of tradition or law in a market area; these costs are readily identifiable since the seller pays these costs in virtually all sales transactions.

 

[Deleted member 134708]

This is from a different builder than previous and easier to read version. That $11,202 was for "closing cost credit." I just looked up this sale on tax records, sold for $370K. So did the builder take off the final sales price and then again go pay $11,202 for closing costs? If so, I can save that builder a lot of money by doing their accounting correctly.

If you do the math, this is how all new construction is done and is nothing like existing home sales.

 

[CindyR]

Actual:

Look at the second sale with the pen lines. Base price + lot + options = $456,048. Has ($42,058) builder incentives. Sold for $413,990. So go ahead and take off another $42K and let me know where that subdivision is.

View attachment 25375

This is one builder. Other builders will have different accounting terms but is all the same outcome net-net. Incentives in new construction is already taken off the final sales price. New construction incentives v. existing homes is very different.

You don't seem to be getting a lot of agreement here. Maybe it is a west coast thing but that is the way it works in AZ too. Just had a spreadsheet from a builder with a whole page that looked just like that.

 

[NachoPerito]

The OP needs to find out if the price of $367k already reflects the $13k in concessions or not. Is the net price to the builder $367k or $354k.

If I was talking to the builder regarding the $370k above from nottrav I would make sure the closing costs weren't already taken out. Is the contract price $381,202 or $370,000. If the contract price is $370,000 then the closing costs were already given. In the end the builder will need to clarify this.

 

[Rlong]

I concur closing costs and upgrade credits should be handled differently and won't get into the CC debate as the horse is well beaten.

But I was reviewing a builder contract recently (several) and the "upgrade credit" is misleading because those upgrades had about 100% profit in them, so the builder "giving" $15,000 credit, was really just a sales tool to sound generous, and if everyone gets them... It's just smoke and mirrors.. (Ive been a GC and friends are still building customs)

My 2 cents on upgrade "credit"
Bob in CO

 

[J Grant]

I will use above example, 11k rounding of builder "adjustment. "

If a builder is base pricing a house at 355k, and then crediting every buyer 11k, all the builder has to do is price the base model 11k over and they net the same. Maybe with no builder credit of 11k, the base model price have been 344k. We don't know; builder won't reveal that, and they can price as they wish.

If the builder is not paying buyer closing costs / cash back, it is not a concession,. The "credit", as Rlong said is a gimmick. A paper discount. Builder over prices a base model by 11k, adds up upgrades and lot premium, then "credits" the buyer by taking 11k off the total price.

If the "credit" is builder paid closing cost that buyer would normally pay, the 11k was a concession. Despite the builder minus 11k on paper off price, it was a concession. Smoke and mirrors.Builder bakes in additional 11k into base model price. Then, after upgrades and lot premium is added in, discounts the final price by 11k ( the closing cost credit). This is simply a paper statement to prevent appraisers from adjusting for concession and to make buyers think they got a good deal.

Maybe the final sales price was a good deal. Or maybe not. The appraiser has to find that out by comparing with other, outside sales ( and inside development resales)

No matter how it is structured on paper, ultimately, there is a final sales price at which a house closed. The builder provided a concession, or did not. If they provided a concession, appraiser has to determine if it affected the sold price. (MV definition is a price unaffected by special or creative financing , or concessions).

Even without a concession a builder sale price, like any other CS price, may or not be that which appraiser finds supported in market for the market value opinion.

 

[J Grant]

This is from a different builder than previous and easier to read version. That $11,202 was for "closing cost credit." I just looked up this sale on tax records, sold for $370K. So did the builder take off the final sales price and then again go pay $11,202 for closing costs? If so, I can save that builder a lot of money by doing their accounting correctly.

If you do the math, this is how all new construction is done and is nothing like existing home sales.

View attachment 25376

Rlong and I both addressed in above posts how a builder credit, "discounted" off final price (on paper) can be smoke and mirrors. It's not a matter of accounting or builder statements of how they arranged numbers to come out at X$ sale price. Yes, we look at builder statement, their base model price, charges for upgrades and lot premiums, discounts, credits, and determine what was a concession and what was not. The builder statement is to analyze the contract and sale price .

Which still leaves assignment to derive an opinion of MV for subject. The final sale price for your subject is X$. After you appraise your subject, is sale price X$ equal to opinion of market value, above or below it? ( we assume appraiser considers pending SC in the appraisal)

Was a builder concession included, and if so, in your judgment did it impact the final sales price? If it did, you must adjust. If you conclude it did not impact sales price then explain why and make no adjustment.