Excessive Builder Concessions

[jtrotta]

RS

Richard is on a roll; but we get similar situations here in new construction when the market becomes a little lack luster; but once one builder starts they generally all follow suit so they don't "mis the market". I've seen cars; pools; vans; house trading; and almost anything else you can think of; remember most builders that sustain long periods in their business have usually learned from family, they don't mis too much and this is nothing NEW; it actually dates back to the 1920's thru the 1930's and right thru the "great depression" era. Follow Richards thoughts and you'll know why this forum is one of the best around. Good Luck :!:

Wise men share; wiser men listen

8)

 

[Geoff Hatcher]

Market value is defined as the most probable price 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. Implicit in this definition is the consummation of sale as of a specified date and the passing of title from seller to buyer under conditions whereby:

• buyer and seller are typically motivated;

• both parties are well informed or well advised, and acting in what they consider
their own best interests;

• a reasonable time is allowed for exposure in the open market;

• payment is made in terms of cash in United States dollars or in terms of financial
arrangements comparable thereto; and

• the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

My interpretation if the builder is contributing 6% towards downpayment, closing costs, points etc., it's a 6% cash equivilant adjustment. Just because they have contributed on all other sales in the subdivision doesn't mean there is no adjustment.

Say purchase price is $106,383, with builder paying 6%, cash equivilant price is $100,000.

Geoff Hatcher
Hatcher Appraisal Services
Columbus, Ohio

 

[Richard Carlsen]

Respectfully disagree Geoff.

If the market has come to expect 6% from the builder in contributions then that is considered normal financing. Not making the 6% contribution when 20 other identical sales in the development had a 6% contribution would justify a comment that the property sold above the established market levels because no market expected builder contributions were involved in the sale.

 

[Geoff Hatcher]

What would the builder sell the property to the buyer for without adding on 6%? If the seller is willing to take $100,000 cash but will contribute 6% if it is added on to the sales price.

We presently have isolated problem markets from this practice. Homes that were sold new in 1999 on two or three year ARM's with the rates bought down by the builder in addition to Ameridream or Nehemiah downpayment assistance are now being foreclosed on as the lower short term rate is up and the owner's can't afford the new payment, cant refinance because they have insufficient equity.

Geoff Hatcher

 

[Richard Carlsen]

I submit that the 6% builder contribution is not an "add-on" but a cost of doing business and part of the sales cost of the house. If the market expects it and the builder provides it, it is not an add-on. What would the builder sell the house for if there were no 6% contribution? My guess is the same price he would charge if there were a contribution. That is unless the buyer requested a 6% reduction in price due to not having a 6% contribution. If that is the case and you had 20 identical houses in the sub that sold within the past year with a 6% contribution, I think this is one of those cases where, if you could, you would be justified in making a positive selling adjustment for no contribution.

As far as the Nehemiah and Ameridream people loosing their houses, as there is no equity available, this is not an appraisal issue as far as I am concerned. They bought the houses under this program voluntarily and were aware going in that they were getting more than 100% financing. It is their risk. Also, there is nothing guaranteed when buying a house that says the house has to go up in value. Too many people use inflation to create equity in order to bail them out of trouble. Just like the syndicators of the early 80's. Their motto was that it didn't matter what you paid for a complex. Inflation would make up for it in the long run.

 

[Caterina Platt]

Richard,

I would venture to say that your example of 6% concession in all sales in the subdivision is precisely why FHA does not want all three comparables from the same builder in the case of new or recent construction. The appraiser must prove the market value is there in consideration of other substantially equal substitutes. If Sivage Thomas homes all have a 6% builder contribution to the deal, fine. But it this creating a higher sales price for that particular development aside from the remainder of the market? That is your true test.

Now then, the Nehimiah/Ameridream thing:

These are not intended to be 100% or greater financing. The value is the value, period. What the seller does with part of his equity is what should make these programs work. They have evolved into 100%+ only because of inflated appraisals. In the case of these programs becoming the 'typical' in entry level homes in a market, shouldn't we apply the same litmus test as above? Use a third (or more)comparable(s) that sold without the gift program, and if the value is supportable, great. If not, it becomes time to adjust for concessions.

Just my .02.

 

[Richard Carlsen]

Point well taken.

 

[Pamela Crowley (Florida)]

I would assume (uh oh!) that these types of builder concessions plus appraisers that didn't take them into consideration are part of the reasons for the grossly inflated project in the Pokonos.???

 

[Mike Garrett RAA]

I would suggest that IF government loans are the NORM for your market and the builder is paying one or two discount points then this would not be considered a seller's concession. Now if the builder pays, say, four points to buy down the loan..then you would make an adjustment for two points.

It never ceases to amaze me that there are appraisers who ALWAYS deduct discount points and then wonder why they can never get to contract on new homes.

 

[Tater Salad]

Deciding what is the norm for the market has always been a bit confusing to me. Maybe someone can help me out.

Most of the areas that I work do not typically have financing concessions. These are easy.

A few of the urban areas here, however, have two kinds of sales--"as is" which are usually foreclosures, or rehabs by the usual suspects that almost always include concessions. Sometimes they sell for more than list, other times not. Either way, they are not cash transactions (usually FHA).

Since I am supposed to assume payment is a cash transaction or financing at a cash equivalent, wouldn't I have to reduce the price by the concession? If the buyer was paying cash, there would be no concession (at least not points). If I assume that the norm is to pay 3-5% in concessions, I feel that my appraisals would be inflated. Looking at the transaction histories of the foreclosures in these areas, this appears to be a part of the problem--financing more than the house would sell for in a cash transaction. Maybe I'm synical, but I don't think that any seller pays concessions out of the kindness of there hearts. All are netting at least what they would have if they sold for cash, IMO.

I may be talking myself in a circle, and I'm hoping someone can stop me from spinning and point me in the right direction! Thanks all.