New Construction Upgrades??

[jason rhoades]

Hi all-

I have an assignment for a new construction property. This home will be the first closing in tract, is a model home, includes all furnishings and is in escrow for approximately $50k over all other model match pendings and listings. (and I'll bet YOUR license that it is probably a builder bail out purchase - as they haven't completed the offsites).

Now, when I used to be a staff appraiser for a national bank, our guideline would have been to value the upgrades at the average value that buyers are putting in to the homes they are purchasing. In this instance their average is about $10K the sales agent says this home has about $40k.

Anyway my questions are these: 1) How do you typically handle upgrades?? 2)Am I way off by taking an in tract average?? 3) Would you write the report "subject to" completion of the offsite improvements??

Thanks for all of your help.

 

[Pat Butler]

If it's a viable subdivision with a decent amount of sales then it's possible that the market might show the upgrades to be worth their actual cost. That's what happens in our very busy market. If the builder doesn't negotiate their price then ALL of the buyers are paying full price for the upgrades. Again, it has to be a busy market with lots of houses in the subject's subdivision where the subject's subdivision is its own market.

The problem we have in our market is that many builders will indeed negotiate on the price of the upgrades or throw things in at no charge. I really have to interview the builder's rep to understand the history of their pricing scheme and be able to verify those trends with market data.

I find that the contribution of the various upgrades diminishes over time, and especially once the subdivision starts to experience resales of existing houses. But so long as the subdivision is still selling new houses then many times the cost of the upgrades can equal their contribution.

The big issue with your property is the personal property that needs to be deducted from the value.

 

[Ultraviolet]

Also, will the home continue as a model and is there a lease involved? Make very, very sure.

I once had a LO and builder send me a "special" copy of the contract that looked like a straight purchase. It was actually an investor getting an individual construction loan to finance the model, with a $50,000 leaseback.

CYA, CYA, CYA!

 

[George W Dodd]

Typically custom upgrades do not contribute value on a dollar for dollar basis to cost. The market may or may not recognize these upgrades. Most builders I know require that the purchaser pay for upgrades when the changes are made, because they know this is an area where they are exposed to risk.
How much upgrades contributes depends on the market. If someone upgraded the height of the doorways and doors by 4 inches to accomodate thier height, the expense might be significant but the value zero. Hardsurface countertops and upgrade cabinets and appliances in the kitchen might have contributory value equal to its cost.
Cost is not value.

 

[J in Florida]

A builder I did some work for (through my lender client) told me he builds in about 50% profit margin on the upgrades. He does this partially to offset losses in case he or his salespeople mess up and they have to rip them out and put in new stuff. He also does it because it adds nicely to his profit margin if all goes well.

 

[cgjerdetu]

1) How do you typically handle upgrades?? 2)Am I way off by taking an in tract average?? 3) Would you write the report "subject to" completion of the offsite improvements??

I typically handle upgrades through market reaction. Are there any other model homes that have sold recently in the area from competing builders? Does this builder have any other model homes that are currently under contract or have sold.

Do you think the furniture is contributing to the sales price?
What are the resales doing? Sometimes a resale may be a better comparable than a new home if the model home has more extensive landscaping, window treatments, etc. In my area it is not uncommon for resales (homes under 10 years old) to sell for slightly more than newly constructed homes.

I would not make the report subject to completion of offiste improvements, your city or county will not give the final CO until the conditions are satisfied.

If the subdivision does not look to be complete, I would definitely ask about a lease back to the builder.