New Construction Appraisal Reviewed

[Don Clark]

While that maybe 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.

Agreed. Lots of new construction in my market. Have not seen any so called "straw buyers" for some time now. But, it is critical to use as many sales outside the new home subdivision as are necessary to provide a real analysis of the market.

 

[Terrel L. Shields]

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.
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Looks to me like the fannie mae answer is to provide at least 1 comp from the development and 1 from outside...even if it violates their other requirement that the appraiser

is responsible for determining which comparables are most appropriate for the assignment.

Fannie speaks out both sides of their mouth...as usual.

 

[Tim Hicks (Texas)]

I have heard 60+ year old appraisers in VA appraiser meetings ask the same thing as the OP. Has nobody read the Fannie Mae Selling Guide regarding appraisals in this business? It has stated pertty much the same thing on this topic since the first time I read it (mid 1990s).

 

[CANative]

I have heard 60+ year old appraisers in VA appraiser meetings ask the same thing as the OP. Has nobody read the Fannie Mae Selling Guide regarding appraisals in this business? It has stated pertty much the same thing on this topic since the first time I read it (mid 1990s).

That's what I was wondering. I only go back 10 or 12 years but it's always been "one in, one out, and one in or out." Did everyone forget this?

 

[J Grant]

Even if the Fannie selling guide did not state that, it would be defiicient to only use builder sales from same builder, if one were developing a MVO appraisal.

When a SC price from builder and builder sales prices are supported by resale competition and outside development competition, then all is good...no discprency between price and value. But unless an appraiser tests the builder sales against an open and competitve market, they never know.

Some appraisers don't want to know MV, they set out to support the SC price. They will add one token outside comp, searching till they find one that supports the SC price.

Nothing wrong with a builder getting high prices, if they can be sustained in the market. There are of course instances where they are, and in the boom, of course, new homes appreciated (only to lose it all later).

The fact is, a lot of newer homes lose value at a rate faster than comparable resales, even in a good market. This proves they were sold above MV as new homes. Why does this happen, assuming no shoddy construction or other problems? Often, newer communities that are any substantial size are built in outlying or less desireable locations.

Much of the prime land near beaches and town is already built on. The only large tracts to build on are further out. Thus, after the new allure fades, the next wave of buyers are not so keen to spend $ to drive an extra 30 minutes to work . There is also an oversupply, as the community gets built out. Once the builder is gone, suddenly, there sit 500 homes, half of them identical to each other. With in several years, it is typical for some buyers to start to sell. These homes, so much alike, often have no way to compete except for price. Add in the fact that many overpaid to begin with, and the prices start falling. And this is not even talking about REO or short sales.

Given enough time to "Season", get absorbed by the market and mature into the greater community, which sometimes grows around it, new homes will sometimes regain value slowly over a 10 year period. But they often lose substantial value the first 1-5 years out.

 

[residentialguy]

The fact is, a lot of newer homes lose value at a rate faster than comparable resales, even in a good market. This proves they were sold above MV as new homes.

No, it proves that the market places value in new C1 verses a previously owned C2 home. You always like to look at what it's worth in the future, but right now...which is what you are appraising to, it's worth more and the most probable price the subject as new would bring in the market right now is what all the other new homes like it are being sold for right now.

 

[CANative]

zzzzzzzzzzzzzzzzzzzzz

 

[J Grant]

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.

They do compete with other builders. And one can use other builder comps, however, new home sales in outside communities are subject to same influences as in subject community...new home hype, overpriced lot and upgrade premiums, contracts including concessions, cash back at closing , upgrade credits worth 20k , and so on. Therefore, the appraiser should include 1 but preferably 2 or 3 recent resales, in subject community and out, much as you don't like the idea.

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....

A defect scenario aside, #1 and #2 are hardly distress situtions. They are within the realm of range of typical seller reasons, inlcuding divorce and other motivations. not all sellers have forever to sell and are only selling because they want to move and don't need to .

Why would someone sell a new home in the first year of two, or three? Many reasons, inlcuding the fact that some investors buy in new communities . So, we have a range of seller motivations, perhaps, per your scenario, extra motivated sellers the first year. fine, but You ignored the buyer side of it. Why are they paying so much less?

If the new homes have good market appeal, they should only be worth less due to depreciation , and perhaps sell for 3-5% less. Rgardless of seller motivation. When they hit the market, they should sell at a decent price . But, often, they don't. What we see is recently built homes selling for far less, usually 10-30% below new builder homes. Some are selling as steeply discounted as 40% less.

Why? The homes are almost identical to the new, often the same model. Some of the recent resales have not even been lived in. If the VALUE was there, why aren't they selling well?

Many reasons...builder hype and allure...remember touring the fancy decorated model and the slick sales center... a resale does not have that. Think the builder model and sales center STIMULATED prices above MV? Maybe. Then there are the buyers. Resale buyers are often local, and have a lot to choose from, including other new developments. New home buyers are often from out of area, who buy from national advertising or a website, sometimes sight unseen. These same buyers are not going to shop MLS/resales.Then there are the builder contracts, with preferred financing, concessions, prepaids, decorating allowances of 30k, etc. A resale buyer can't compete with that.

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

Not necessarily, see above. And even if a home becomes a short or distress sale, it is first put on the market a normal exposure time..why isn't the home commanding a good price from the buyers?

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

The problem is not a mere 2%, the problem is many newer home resales lose as much value as 10-30%, and before they turn into distress sales, they were on the market as normal sales and could not get the price paid, and THAT is why they turn into distress sales.

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.

If lenders shared this view, they would not hire appraisers. The SC price would be the value.

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

See above comments...finding MV by testing outside of builder sales is not just a Fannie or FHA mandate issue, it is an appraisal practice issue.

 

[residentialguy]

There is always an extra reduction on new homes. Everything in them has gone from being new to second hand.

 

[J Grant]

No, it proves that the market places value in new C1 verses a previously owned C2 home. You always like to look at what it's worth in the future, but right now...which is what you are appraising to, it's worth more and the most probable price the subject as new would bring in the market right now is what all the other new homes like it are being sold for right now.

If lenders buy into this simplistic idea, then why are we hired? Why wouldn't a lender agree, a new home is new, therefore buyers pay more, so who needs an appraiser? The SC price is value!

The above the market "places value", on a C1 vs C2 home does not withstand all the tests of MV development, including, what a property would bring on the open and competitive market (as stated in the MV definition). The new builder sales are not an open and competitive market, they take place in a controlled, maniuplated sub market.

If a new home has value, and the only difference is C1 allure, then a C2 of same model should sell less only per depreciation, maybe 2-% first year. Then how to account for the fact that in some new home communities, a never lived in or barely lived in resale sells for 10-20%, or less, then the same model from builder?

Some reasons, besides C1, that new homes sell for above market...sales concessions, preferred financing, cash backs at closing, decorator allowances worth 30k, etc. Then the stimulation of how the sales occur, after touring a builder model decorated by professionals, a sales center touting the great new amenities, etc. Many buyers are later disappointed in the "real" community, which does not look like the pristine models...the "real" community has kids running around making noise and homes too close together and homes rented by investors and noise from the traffic on that main road ...none of which was forseen when picking out a lot in the slick sales office.