Market Conditions Adjustments While Under Construction?

[Wasatch]

Hey all,
I've been making myself dizzy trying to reconcile this, and looked through the earlier posts for an answer, with no luck. So, I'll just consult all of you appraisal wizards.
I'm doing a refi appraisal for an executive home that just got its CO last week. There's only a small punch list left and they can move in. This is a one-off home in an established neighborhood (1970's homes), built after a larger lot was split. My comps, however, are all development homes on virgin land. These are developments of 20-50 new homes in each development. My issue is this: the comps all contracted early in the construction process and closed 6-8 months later when they were move-in ready. You can probably guess where this is going. Should market conditions adjustments (in this market they can be shown to be 0.75 to 1.0% monthly over the past 12 months, from multiple sources) be applied to these new homes while they are under construction? Or only from when they were complete? Or some time in between? I have a hard time justifying the extra 5-6% value they would get by applying the adjustment from the time the builder broke ground. Your thoughts?

 

[DWiley]

Market condition adjustments should be made based on contract dates, not closing dates. This is addressed in various texts as well as in the Fannie Selling Guide.

 

[J Grant]

Hey all,
I've been making myself dizzy trying to reconcile this, and looked through the earlier posts for an answer, with no luck. So, I'll just consult all of you appraisal wizards.
I'm doing a refi appraisal for an executive home that just got its CO last week. There's only a small punch list left and they can move in. This is a one-off home in an established neighborhood (1970's homes), built after a larger lot was split. My comps, however, are all development homes on virgin land. These are developments of 20-50 new homes in each development. My issue is this: the comps all contracted early in the construction process and closed 6-8 months later when they were move-in ready. You can probably guess where this is going. Should market conditions adjustments (in this market they can be shown to be 0.75 to 1.0% monthly over the past 12 months, from multiple sources) be applied to these new homes while they are under construction? Or only from when they were complete? Or some time in between? I have a hard time justifying the extra 5-6% value they would get by applying the adjustment from the time the builder broke ground. Your thoughts?

Imo you need to look at sales and market condition's in the open market for similar quality/location/size sales. The gap between a low builder price contract date 6-8 months ago to today's builder prices is specific to the builder. sales only. I cant speak for your area, but my area and others has slowed in appreciation since interest rates went up.

I am a little confused though..normally the CS price builder /buyer negotiated X months ago is the same price at closing price later...unless option or upgrades were made, so where is 5-6% increase coming from? How were they a lower price 6-8 month ago vs what they closed for?

 

[Michigan CG]

The meeting of the minds was when the contract was signed.

 

[Wasatch]

I am a little confused though..normally the CS price builder /buyer negotiated X months ago is the same price at closing price later...unless option or upgrades were made, so where is 5-6% increase coming from? How were they a lower price 6-8 month ago vs what they closed for?[/QUOTE]

Right, the price hasn't changed. But if I adjust from the date of contract, then what the seller paid for at closing has now appreciated over the construction period, and its value on the date of closing would be higher than the price paid at closing.

 

[Mr Rex]

Was it a cost plus contract? Costs are increasing, but only an idgit would sign a cost plus contract unless they are a government entity using other peoples money.

 

[J Grant]

I am a little confused though..normally the CS price builder /buyer negotiated X months ago is the same price at closing price later...unless option or upgrades were made, so where is 5-6% increase coming from? How were they a lower price 6-8 month ago vs what they closed for?Right, the price hasn't changed. But if I adjust from the date of contract, then what the seller paid for at closing has now appreciated over the construction period, and its value on the date of closing would be higher than the price paid at closing.[/QUOTE]t.

That would be true of any past sale where market conditions appreciated since the contract date- the value would be higher if you apply an upward time adjustment.

What are you basing your time/market condition adjustment on since the 6-8 month old contract date ? Either the market has appreciated since then, or it has not.

RE, what did you mean by "virgin land"...these were not contract to build on a lot sales I trust? ( we can;t use those as comps) We can use builder sales where new construction home and lot were sold together

 

[Wasatch]

That would be true of any past sale where market conditions appreciated since the contract date- the value would be higher if you apply an upward time adjustment.

What are you basing your time/market condition adjustment on since the 6-8 month old contract date ? Either the market has appreciated since then, or it has not.

RE, what did you mean by "virgin land"...these were not contract to build on a lot sales I trust? ( we can;t use those as comps) We can use builder sales where new construction home and lot were sold together

My argument is along the lines of the Time Value of Money: If I contract a builder for a home that I expect to receive in 6 months, then when I get the keys I expect that the value of what I receive is the price I paid at closing, NOT the price plus 6 months of appreciation. My expectation is that the future value of what I receive (the property) is my contract price, because I can't use what I'm paying for until 6 months later.

 

[J Grant]

My argument is along the lines of the Time Value of Money: If I contract a builder for a home that I expect to receive in 6 months, then when I get the keys I expect that the value of what I receive is the price I paid at closing, NOT the price plus 6 months of appreciation. My expectation is that the future value of what I receive (the property) is my contract price, because I can't use what I'm paying for until 6 months later.

?? A market condition adjustment (sometimes called a time adjustment is made to a past contract date sale price is based on what OTHER properties are experiencing in the MARKET , if the market shows either appreciation or decline in prices since the contract date. Of course if market has been stable since then we would not adjust.

The time value of money for a borrower /or their future expectation back when they signed a contract has nothing to do with it. .

 

[Wasatch]

?? A market condition adjustment (sometimes called a time adjustment is made to a past contract date sale price is based on what OTHER properties are experiencing in the MARKET , if the market shows either appreciation or decline in prices since the contract date. Of course if market has been stable since then we would not adjust.

The time value of money for a borrower /or their future expectation back when they signed a contract has nothing to do with it. .

Yes, I've been talking about the buyers of the comps. I respectfully disagree with the opinion in your last sentence.