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New Build Comps

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GaryDodd

Freshman Member
Joined
Oct 24, 2002
I'm just getting into the business, and have read some threads thus far that are Extremely helpful to us novice and "trying to be ethical" appraisers. My situation/question is this, I have a request to do an appraisal on a property that is near construction completion. The mortgage co sent me the purchase contract of the client. I WANT to use other recently built/purchased homes in this new subdivision, but there isn't alot listed in the auditors office yet since these properties are fairly new. I called the Developer (Dominion Homes), and they were gracious enough to give me recent sales of homes just down the street with the same floorplan. However, I don't know if they're the same elevation, sq ftage, etc. Assuming I could get this info from either the homeowner (not likely) or Dominion, can I use these comps?

Also, I saw other comps that are much smaller in public recs, but the sales dates are all listed as 2001, but the mortgage dates are within 2002. (I understand this means the contract signed in 2001, closing happened in 2002 after construction). The definition of Sales Date from my Real Estate Appraisal Manual is the day it CLOSED, so can I still use these comps even though I'm really using the Mortgage Date and not the actual Contracted Sale Date? Sorry for the rambling...
 

rtubbs

Junior Member
Joined
Jan 15, 2002
Gary, tread lightly. First, you're appraising new construction that is not complete; do you have plans & specs? You either appraise it "as is" or "based on plans & specs". Insist on some form of plans and specs. Second, don't be fooled to think that the developer is so gracious. You are asking for trouble by relying on info that the developer is supplying you (unless you can confirm through other sources). Third, I'm not sure what you are referring to when you say that there isn't a lot listed in the auditors office. Fourth, sales dates are sales dates are sales dates; you can't change that.

My advise is to associate with someone (reputable appraiser) in your area and discuss your situation.
 

Steve Owen

Elite Member
Joined
Jan 16, 2002
Professional Status
Certified General Appraiser
State
Missouri
Gary, the biggest red flag I see is this,

(I understand this means the contract signed in 2001, closing happened in 2002 after construction).

The implication is that these were "design-build" homes. If the builder constructed the home for the buyer and the home was never put on the market, then it is not a market sale and you should not use it as a comp. If, on the other hand, the builder started construction and put a for sale sign on it and exposed it to the market as a "speculation-built" home, then it's okay to use. The point is that you are trying to determine market value so you must use comparable closed sales that have been exposed to the market. Otherwise, the builder might be able to manipulate prices within the subdivision, or the buyer might design something that is not very marketable; without ever having any exposure to the market to know what the homes would sell for in a market based transaction you can't really know. If the comp was exposed to the market, the contract was signed on a certain date and closing happened on a later date, which is the date it became a "closed sale" and that is the date you would normally use.

If the deal is going to the secondary market, the underwriter will typically require that at least two of the comps be constructed by a builder different from the one who built your home. Depending on the lender, you may even be required to supply comps from outside the subdivision where your subject is located. The point here, again, is that if the builder is doing a lot of the work within the subdivision, they might be able to manipulate the prices. I usually use a comment like "Comp 1 was built by XYZ Construction, comp 2 was a resale, and comp 3 was built by Brown Construction."

You must have plans and specs sufficient to know what is going to be built if you are doing a hypothetical appraisal and should also have a cost estimate. These things remain in your work file.

If you have a local board of realtors, you should join. The price may seem high now, but once you start using MLS as a data source you will understand why it is worth it.

Good luck and welcome to the forum.
 

Stone

Elite Member
Joined
Feb 1, 2002
Professional Status
Certified General Appraiser
State
Wisconsin
Gary - Make sure you verify any sale that is listed in MLS with public records. Realtors will list land and construction deals as if they were open sales. I have appraised new construction custom homes that were later listed in the MLS. On one, the price listed in the MLS wasn't even equal to the combined total of the land and improvements. They list these specifically for appraisers and realtors to have comps for custom built houses. The problem is that they aren't what they say they are. My favorite part of these listing is the DOM. There will be an on and off market date listed, but if you do your research, you will see that the lot was purchased a year before. :roll: That is when you will know that there was no such sale. Not in terms that we can use, anyway. This is the hardest part of doing new construction. Good luck.

Michael

ps - always be wary of DOM data on MLS. Listings get taken off and re-listed, or go from FSBO to a real estate agent all the time, and a new listing date is always used.
 

Jo Ann Meyer Stratton

Elite Member
Joined
Jan 16, 2002
Professional Status
Certified Residential Appraiser
State
Arizona
Make a copy of Fannie Mae guidelines that was issued in 4/2002 and went into effect 6/30/2002. Access it though appraiser links on this website, go to the ADFINET source, register, it is free, then look (and print out) the Fannie Mae guidelines. Read Section 102.02 (which also comes in handy to fax to a loan officer or real estate agent by the way). Also Section 304, although it is about Factory Built housing it has some very applicable paragraphs about "created" sales which also occur with site built homes.
 

Mike Garrett RAA

Elite Member
Gold Supporting Member
Joined
Jan 14, 2002
Professional Status
Certified Residential Appraiser
State
Colorado
I hate to burst your bubble....new home construction, especially from plans and specs requires more experience. This is not something a brand new appraiser should just jump into. There are lots of pit falls.

Of concern to Fannie Mae and therefore many lenders is "Is the builder creating the market?" Ideally, you could use one comp from the builder, one from a completing builder, and one resale. This may not always be possible. If the product is unique or the subdivision is located in an area where there are no competing neighborhoods, you can use sales from the same builder but you need to disclose, disclose, and disclose some more.

Definition of the Best Comp....."The exact same house, next door, that sold yesterday". So what is the magic of having to use a competing builder or a re-sale? In many new subdivisions (we have lots because of rapid expansion of our market) a resale would not necessarily be a good comp. Could be a distress sale such as a divorce case.

Use of a competing builder could be a trap too in that it might be either well above the price and quality of construction of your builder OR it could be much smaller and of a lower quality. This is the reason an appraiser is better than an AVM...we have a brain and are expected to use it. You decide what is comparable and what is not.

Now to the comment about custom homes not to be used as comparables because they are not exposed to the market. That is non-sensical, in my not so humble opinion. We have areas where every home is custom built. Are you to say these can not be comps? Again, this just requires alot of additional documentation and research. A custom builder exposes his product to the market thru brochures, sales offices, and the real estate community. The buying public compares one builder to another and then selects the one what best meets their needs. This is exposure to the open market. There is nothing that says a property has to have a for sale sign in front of it or be listed on multiple listing. Re-read USPAP, especially Statement 6.
 

GaryDodd

Freshman Member
Joined
Oct 24, 2002
All,
Thanks so much for the info. Sounds like I want to avoid developer info and that I want to be sure that a comp represents an exposed to market sale, not a design build. I am appraising this as is, and have a copy of the purchase contract, but no plans. I inspected the property already, and it was very near completion (trim/carpet down). I've requested a list of standard options provided from the developer.

As for what I meant by "not a log listed in auditor office", I meant that there are not many parcels accessed/appraised in this subdivision because it is so new. I guess it takes up to a year??? to get this info. So, there aren't alot of comps I can use within the neighborhood since the info just isn't there yet. Based on what Steve said anyway, I probably don't want to use these comps unless (1) I've determined they were exposed to the market, and (2) the lender may want comps from different developers/neighborhoods anyway. I'll have to go perhaps 5 miles out, as this subdivision is in an old farm area turned golf course.

Lastly, I'm still a little confused on Sales Date vs Closed Date. Sounds like I must use the original Contract Signing date for the house, and NOT the Mortgage Closing date, which for the comps I was considering was always about 6-8 mos (time to build the house). True?

Thanks again!!!
 

Mike Garrett RAA

Elite Member
Gold Supporting Member
Joined
Jan 14, 2002
Professional Status
Certified Residential Appraiser
State
Colorado
Gary....Contract date for new construction is usually 6 to 8 months prior to the "closing date". Lenders what to know the actual date of closing. Some appraisers put both dates on the grid and time adjust the sales price on the grid IF sales prices are trending upward at a verifiable rate.

In my opinion, you should not do this home "as is" because it is not complete. Do it "subject to" and then do a final inspection when it is complete.
 

Steve Owen

Elite Member
Joined
Jan 16, 2002
Professional Status
Certified General Appraiser
State
Missouri
Mike:

Now to the comment about custom homes not to be used as comparables because they are not exposed to the market. That is non-sensical, in my not so humble opinion. We have areas where every home is custom built. Are you to say these can not be comps?

I didn't say custom homes can not be comps. I said you should not use design-build homes as comps. There is a difference in semantics. I suppose if you documented the exposure to market there might be some possibility of using a home in the situation you describe, but I would be very careful before treading there.

There may also be a difference in market. I have never seen an area like you are talking about - we have a lot of areas where all of the homes are "custom" but there are many within the subdivision that are not "design-build." In my market design-build homes are constructed on a lot purchased by a person who then gets a set of plans and hires a builder. This is not exposure to the market IMHO. Constrast that with a builder who constructs a house and then sells it on the open market. In the first instance you have no way of knowing that what the borrower is building will be acceptable to the market at the cost of construction.

A prime example is my wife's former boss. He built a house in an upscale neighborhood with six bedrooms and eight baths. The typical home in that subdivision had five or more bedrooms, but only about four baths. It sold when he moved at a considerable discount over what he paid for it. This isn't the only time I've seen this happen.

No thanks. I'll stick to actual sales and not use design-build cosntruction as though they were market based sales. (I even write a comment on these concerning the "sale price" listed on page one of the form when I'm appraising one of these "design-build" jobs.)
 

Jim Bartley

Senior Member
Joined
Jan 20, 2002
Professional Status
Certified Residential Appraiser
State
Virginia
Now to the comment about custom homes not to be used as comparables because they are not exposed to the market. That is non-sensical, in my not so humble opinion. We have areas where every home is custom built. Are you to say these can not be comps? Again, this just requires alot of additional documentation and research. A custom builder exposes his product to the market thru brochures, sales offices, and the real estate community. The buying public compares one builder to another and then selects the one what best meets their needs. This is exposure to the open market. There is nothing that says a property has to have a for sale sign in front of it or be listed on multiple listing. Re-read USPAP, especially Statement 6.

Mike,

I agree 100%. Few builders have inventory just sitting around waiting to be sold. Also, after the last debacle, builders wised up about having alot of unsold homes.

Sometimes you need to do a little investigating. A couple of situations I've run across.

1. I just did a N/C the other day. Had 3 comps in MLS with the same list data, pending data, and closed data. They looked like they didn't have any exposure. But when I talked to the agent, 2 of these sales were sold off the same plan on a different lot. Its just that the builder didn't have any unsold inventory.

2. Comps in MLS like above. Look like they were added just to be comps and didn't have exposure. Many builders will not give an exclusive listing. So the agent that sells the house has a lsiting agreement signed when the house closes. In fact the property was exposed to the market, it just wasn't in the MLS.
 
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