Most Weight Given Resales

[Charlotte Dixon]

I performed an appraisal last week on a new construction townhome. Two current townhome resales approximately 2 yrs. in age in the same subdivision were located. I cited those on the grid, plus another townhome sale in a similar townhome community. The two resales in the subdivision were very similar to the subject in style, possibly the same model, and similar sq.ft.living area. The estimated value came in a little less than $2,000 short of the contract price. There were very few adjustments needed. The builder has asked why I didn't utilize new construction sales which would bring the value up to what he's selling this unit for. I'm sure the appraisal will be appealed/challanged. The lender and builder don't understand why I didn't ignor the resales, use at least one new construction sale, and let it fly at the contract price, leaning on the new construction. I think that closed resales are a better indicator of market conditions. I could add a 4th comp, which would be a closed new construction sale in that subdivision, but it wouldn't change things in my way of thinking? What do you think, and how can I best explain this to them?

 

[airphoto]

Charlotte,

Based on the securitization of the loan (that's a mouthful, isn't it?) you are correct. Like a new/used car, that property (if repo'd by the lender) will be a 'resale.' Should the current purchaser have to sell, that's the value you're arriving at today. IMHO that's the value that you're providing the lender .. 'what can they reasonabley expect it to bring on the open market, blah, blah, blah ..'

If I were valuing a 'used' or resale property and having to use first time sales of newly built properties I would reduce the sold value of the newly-built by some nominal amount as the purchaser received a spotless property built to his specifications (presumably) and without the need to repaint/clean to bring to his needs ..

 

[Ray Ohler]

Charlotte, you didn't mention what price range the subject is in, but say if it is $100,000, $2,000 is only 2%. As far as comparing resales to new construction well, MY take is that if the resales were WAY below the new ones, there could possibly be something worth digging into. However, don't forget that the resales are two years old now and the new IS new. Resales in a newer subdivision also have built-in competition and any buyers have to take the previous owners "options and upgrades" which may or may not suit their tastes and if there isn't an "enticement" such as a sizeable savings, then the buyer will probably say "I'll buy new".

 

[Tom Hildebrandt]

Charlotte

Your question specifically points to a real problem with new construction lending.

There are two markets, one is from a builder to new home purchaser, the second market is from the first owner to the second. Depending on market conditions and home improvements made after construction by the new owner, there may or may not be a significant value difference and the difference could be positive or negative.

In my market, I am of the opinion that in a subdivision or project where new sales are continuing and homes are being resold, that most buyers would prefer new construction as there are built in concessions in the form of color and floor schemes, builder upgrades and option and special financing incentives. The resales do not have these. Seldom do the owner improvements in these new homes make up the difference.

Lenders and builders do not like to hear this as you note. The question for the lender must address is "If the loan is to determine value if you take the property back, who will be the buyer?" You need to make the point that in this scenario it will not be the builder selling to a new buyer, but it will be the bank (or distressed owner) selling to the resale market in direct competition to the builder. Ergo, the resale comps are the best market indicators.

Told that to a lender once on a high end, custom built home ( I felt the value new was about cost at $600,000 but the resale was about $530,000 or so). Lender did not like the idea, told me if all appraiser felt like I did, there would never be any new sales. I recieved no new jobs from that guy.


Regards

Tom Hildebrandt GAA

 

[George Hatch]

This would appear to revolve around the principle of substitution. If a buyer can find the same unit in your project for a lower price, they should be buying it at that lower price. New units in an existing project with slightly older, but otherwise identical, units is one thing; new units in a new project are another. The quantity of sales activity and overall supply/demand issues might have some play in this question, too.

I'm hoping you made a slight upward adjustment for your new unit vs. the 2yr old ones in the same project, because buyers (generally) do like new units. However, that adjustment would have to be developed from identifiable market reactions. I'm also hoping your builder doesn't have three other pending sales of your (new) model at the higher price. Missing a sale price by $2,000 is pretty gutsy unless you are absolutely sure you have all the facts. I don't know about your general market and that particular market segment. If the market segment is in decline and there's a downward trend in value you might be able to make that case. If values are on the rise and the $2,000 doesn't represent a 5% or greater increase, you might be better off assigning greater weight to the pending sales agreement as being part of that trend.

As for a $2,000 discrepency killing a deal, I dunno about that. To me, an appraisal that comes in $2,000 low is the same as one that comes in $2,000 high or right at the contract price. If the borrower is strong or your lender is stable, an LTV can always be slightly modified. It's easier than changing an appraisal.

 

[Charlotte Dixon]

Contract Pr. of Subj. $101,650 No closing costs

Comp 1 current resale 98,500 seller pd. cc $1,478
same subdiv. same unit

Comp 1 current resale 95,000 No closing costs
same subdiv.same unit

Comp 3 current resale 100,000 No closing costs
bigger,better unit

Adjusted Values: Comp 1-$100,022, Comp 2-$100,000, Comp 3-$100,500
My est.value:$100,000
Appears to be a textbook appraisal to me.
---------------------------------------------------------------------------------
New Info Received Today
From Builder

Comp 4 new const $102,300 tore off cc on setlmt sheet-not MLS

Comp 5 new const $108,900 tore off cc on setlmt sheet-not MLS

I asked for full settlement sheets, details regarding interior, upgrades, & sale contracts. Builder doesn't multi-list units.

 

[Charlotte Dixon]

Sorry, that was Comp 1, Comp 2, & Comp 3
Mistake: two (2) comp 1's

 

[Mountain Man]

George, I tend to agree with you. Research all market data and look at pending sales. A development that does not have some appreciation in prices with reduction of supply for the demand is a little worrisome. Is it stagnate?
Mell.

Man, you resond too fast. I was typing and you posted twice!

 

[Dee Dee]

I'd throw in a comp 4 with the new construction sale and make it fly, if the builder can verify it.
If it were a greater stretch then I'd worry, but it would seem perfectly normal that the prices would escalate somewhat for the builder since the first two sales, which would in turn be reflected in the sales price. If every subcontractor raised their prices 25-cents an hour you could account for the difference from when the first two comps were sold.

 

[airphoto]

Charlotte,

My final remark here:

Twenty percent downpayment on an extra $2,000 is $400.00.

Requires an additional income of about $700.00/year to finance the additional $1,600 of loan ..

If the buyers are this close to the margin, the lender's already in trouble!