New Construction Appraisal Reviewed

[swapp]

An appraisal I performed recently was reviewed with the value being significantly lowered. The reviewer states that none of the comps I used are
suitable for valuation as they are from within the subject new development. The reviever states that builder sales are not reliable indicators of value due to unknown upgrades and incentives.

With the exception of 1, my comps closed within the last few months, also
within a close range. I spoke with the developer and had information regarding amounts for upgrades and incentives on all comps. We ask questions so that those are not "unknown."

I realize that not using a sale from outside a new development is either
frowned upon or unacceptable, depending on how you look at it. I've attempted to find a clear answer on this and am not coming up with one other than for Fannie Mae it is only unacceptable.

The reviewer went several miles away to find short sale comps that are older.
I don't have a precise question, but would appreciate any helpful experience
you may have with appraisals such as this. I suppose my question is am I wrong to believe that 3 model matches with very slight differences resulting in minor adjustments (net/gross below 3%) sold within 90 days from the appraisal date located on the same street as the subject support the subject contract and value? Or are older distressed sales completely outside the area a better indicator?

Thank you for reading.

 

[Meandering]

If your comps were all built by the same builder as your subject, your report is reflecting the builder's business model and not market value. That's why Fannie says this is unaccpetable

 

[Rlong]

Your both wrong : )
I would prefer one or more arms length (not builder sales) from within the development; one or more new sales from a competing development; and one or more RESALES from within or without the development (within is better). I try to get at least one of each on every new construction appraisals THEN I include the builder sales as additional support.

I don't buy the reviewers choice either if it is as you say. However if there actually is NO support for the builder sales; (resales; competing builder arms length sales) then there might be a market/value issue.

Bob in CO

 

[J Grant]

I tend to use 2 builder sales, one or two resales within development (if they exist), and 1 or 2 outside competing sales, most often recently constructed resales , which are better value guides then a new builder home, but that could be a comp from competing community, but that is a possiblity too.

I always search for resale listings within subject development. Did you search the resale listings in subject community? Did you search for resales by owner or on MLS of homes in subject development?

Fannie regs state an appraiser can't rely only on builder sales. Builders make up their own lot and upgrade premiums that often don't hold up on the open market. In some new home communities, the first few builder "sales" are to straw buyers, to set the price of the first few comps the developer hopes the appraiser will use.

The MV def states the most probable price a property would bring in an open and competitive market . The builder community is not an open and competitive market, which is why the builder sales alone are not reliable for the value opinon. I do use them and will weight them , but never rely on them solely for value.

 

[J Grant]

I suppose my question is am I wrong to believe that 3 model matches with very slight differences resulting in minor adjustments (net/gross below 3%) sold within 90 days from the appraisal date located on the same street as the subject support the subject contract and value? Or are older distressed sales completely outside the area a better indicator?

The above questions makes me ask if you are new to appraising, or appraising on your own, and what kind of training you had. Your approach seems "mechanical"...3 sales on same street within 90 days with min adjustments...perfect!! The fact that they are all from the builder escapes you.

Also, do you think it is your job to "support the subject contract and value"?? (not sure what you mean by that phrase)

We are supposed to appraise homes for value, not "support" the contract price by rubber stamping it with builder sales. Of course builder sales will, most time, support the SC price. So what? The builder feeds the "appraiser" 3 comps, the appraiser puts them on the form, they support SC price! That is not an appraisal. It shows no market analysis, no analysis of resales or listings in subject subdivision, no comparison to outside market and competition.

What is the history of your subject subdivision? How many years old is it? Almost fully built out, just starting, etc. What is the history of similar new developments in area? Are the homes holding value, or 6 months to a year later, showing up as short and REO sales, because the owners can't resell them for what they bought them for? Is your new home developlment likely to follow the same path, or is it nice enough or unique enough that homes will sell for what purchased for.

Low interest rates are spurring buyer demand, which should help the whole market. Only you have access to your market area, how built up it is, how much new and recently built construction inventory out there that competes with your subject. All these elements factor into value, not just the 3 builder homes that sold on the same street.

 

[hastalavista]

Did you review the HUD-1s for your builder sales (that is what Fannie wants)?
If so, did you state that in your report?

I agree with Marion: using all, newly constructed homes from within a single-builder controlled development does not provide a reliable indication of value.
The builder-controlled environment of the new development where the sale exists needs to be tested against outside-sales which are not within the builder's control.

Either the sale price of the newly constructed home makes sense when tested against outside homes or it doesn't. If it does, the appraiser (and user) can be confident about the value opinion. If it doesn't, the appraiser and user will probably not be so confident.
But without that "test", I'd have no confidence; one-way or the other.

 

[Mr Rex]

Simply put, a builder controlled market is not necessarily market value, without proof from outside the builders control.

 

[Terrel L. Shields]

single-builder controlled development does not provide a reliable indication of value.
The builder-controlled environment of the new development where the

I've always been curious why the builder is such an island of control that he /she does not have to compete with other builders...? Just curious.

Let me guess. There are no other builder developments with new sales nearby. There are a paucity of new sales in the MLS. So we use a USED house as a comp and that "resale" is supposed to set market value...Why would you sell a "near new" house...say one that is 1 or 2 years old.????

The house has defects that the owner wants to escape
They discover it is more house than they can afford
They have to move due to job change or loss....

So a nearly new house sale is (almost always) a short sale or a distressed sale.

So the builder price is too high.... The nearly new sale has SOME depreciation 2% or whatever...AND likely was a distressed sale.

It's a choice. Common sense tells me that a NEW house will sell for what the builder and buyer will negotiate short any superadeqacy or inadequacy that the builder/buyer have included in the construction.

I don't give a hoot what Fannie or FHA mandates...they may set the rules, but they don't make the market...

 

[CANative]

B4-1.4-16, Appraisal Report Review: Sales Comparison Approach (06/30/2010)

Selection of Comparable Sales

The appraiser must perform a neighborhood analysis in order to identify the area that is subject to the same influences as the property being appraised (based on the actions of typical buyers in the market area). The results of a neighborhood analysis enable the appraiser not only to identify the factors that influence the value of properties in the market area, but also to define the area from which to select the market data needed to perform a sales comparison analysis.

The appraiser is responsible for determining which comparables are most appropriate for the assignment. Fannie Mae expects the appraiser to account for all factors that affect value when completing the analysis. For example, if the appraiser believes a foreclosure sale or a short sale is an appropriate comparable, then the appraiser must identify and consider any differences from the subject property, such as the condition of the property and whether any stigma has been associated with it. The appraiser cannot assume it is equal to the subject property. A foreclosure or short sale property may be in worse condition when compared to the subject property, especially if the subject property is new construction or was recently renovated. The appraiser must conduct the proper research in order to complete the assignment and provide an accurate opinion of market value.

When appraising new construction, the appraiser may need to rely solely on the builder of the property he or she is appraising to provide comparable sales data in accordance with the requirements stated in Properties in New or Recently Converted Subdivisions, Condos, or PUDs, below, as this data may not yet be available through typical data sources, such as public records or multiple listing services. In this scenario, it is acceptable for the appraiser to verify the transaction of the comparable sale by viewing a copy of the HUD-1 Settlement Statement from the builder’s file.

By using the HUD-1 to verify a recent sale of new construction not yet available through other data sources, an appraiser may be better able to comply with the requirement that he or she must provide at least one comparable sale from the subject’s subdivision or project. The appraiser must also select one comparable sale from outside the subject subdivision or project and one comparable sale from either inside or outside the subject subdivision or project, provided it is a good indicator of value for the subject property. Both of these sales must be verifiable from reliable data sources, other than the builder. The appraiser may also provide additional recent comparable builder sales from competing projects that are not presently available through traditional data sources as long as the appraiser verified the sale through the applicable HUD-1. Additionally, the appraisal must include discussion and analysis of sales concessions and upgrades for the subject property relative to concessions and upgrades for each builder sale.

 

[residentialguy]

If your comps were all built by the same builder as your subject, your report is reflecting the builder's business model and not market value.

While that may be be true, it also may not be true. Their sales may be reflective of MV. I would strongly argue that they are probably more reflective of MV than those short sales in other neighborhoods several miles away that the reviewer choose.

OP should have included other market sale support. Water under the bridge. At this point, OP can fight the review by discrediting his reviewer's poor choice of distressed short sales by finding non-distressed market sales for his rebuttal. Hopefully those will prove that the builder sales are reflective of market value and not the short sales.