Only Builder Comps Support Contract Sales Price?

[Mike Kennedy]

It's probably just me, but I cringe every single time I hear an appraiser fretting about supporting a contract price. The frame of reference just bugs.


This business would be a fair bit easier to navigate if the lenders were allowed to use appraisals that were based on "highest supportable mortgage value".

Not just you George. HSMV yields a target MTV ratio bullseye. No difference.

Bank " hi we need an independent, objective opinion of Market Value for Lending Purposes".

Appraiser "No problem. Thanks for your call!.

The property will be appraised based on the EA ("as-if") it was selling to arms-length, typical buyers, absent any concessions, buy-downs, etc. on the Effective Date in compliance with the USPAP.

The Def of MV will be (pick one) a. the US Treasury Definion or b. the GSE Definition.

Kindly send your order over confirming the assignment. Our A/R requirement is NLT 30 days from the receipt of the completed appraisal report. Hold on 1 moment, checking the local MLS...

Our MLS indicates the property has been listed for 120 days and reportedly under a contract. Neither has any bearing on the independent, objective opinion of market value, nor does the current, particular owner(s) identity or the identity of any particular, prospective buyer (if any).

MV is what the competitive market reports on other similar properties involving other sellers and other buyers as it should and must be (refer to the Principal of Substitution).

Thanks very much, we await your email. Have a nice day.

 

[J Grant]

The solution's is the appraiser to provide their market value opinion and allow mortgage lenders to decide whether to loan up or down a few percentage points from it. That way when the MVO is below a sC price, the lender can lend on the SC price if they choose to, rather than pressuring appraisers to "support the SC price".

I believe the lenders actually have some discretion now to lend over a OMV but rarely use it due to liability? Maybe someone has more insight into that end of the business.

 

[George Hatch]

The whole point of asking appraisers to stretch value or tell lies is to get the appraiser to assume the responsibility for telling the other intended users of the appraisal that the deal is safer than it actually is. It's to accomplish something these clients are either incapable or unwilling to do with their own discretion.

 

[J Grant]

Appraisers should be aware that in a number of developments, those first two or three "sales" are to an arranged "buyer", ( associate of builder) at the price the builder wants to set. These first few "sales", or pending contracts now provide the initial set of comps that builders hope appraisers use to make the value . THAT is why, among numerous other reasons, is we need to also provide sales that sold on the open market, not just builder controlled sales.

This arrangement is not always done, but it is done ...the other issue is that builder sales are priced by the base lot with the base model, then the builder cost items adds on line by line upgrades and lot premiums. This add up of cost is NOT how resale properties are priced/sold on the open market. So yes, builder comps are indicators of value and sometimes excellent indicators, but they also can be possibly skewed indicators, The requirement to use one sale outside development is a minimum and an often insufficient minimum,. I like to use when avail 2 builder comps, 2 resales in subdivision, then 1 or 2 outside. Whatever it takes as far as comps...new builder house or condo appraisals are often difficult assignments.

 

[George Hatch]

Back in 2007 I was doing outside reviews for a major big box lender on appraisals performed for their wholesale line. One of my assignments involved the first 3 sales of the model homes of a new "upscale" project that was surrounded by a project of new construction but smaller/inferior homes. The appraisals used sales of homes with superior location influences.

I had to prove the effect of the location on the subject units which actually took some doing, but by the time I got done with it I proved my case. Those sales all got re-written to the lower values, thereby costing the developer $1M up front for the first 3 sales plus whatever else accrued from the sales that followed. Obviously they were unhappy and appealed but their appeal didn't make a dent on my review.

It was only a 26-unit project but it took them almost 2 years to eventually sell out, obviously at pricing way below what they had originally attempted.

 

[LordofTexas]

biggest question I have is...Were those "comps" in the MLS spec homes exposed to the market or where they contract build jobs put in the MLS for no other reason than to provide "sales" comps? If they were spec homes exposed to the market, great! If they were contract jobs then you have some cost comps, not sales comps.

If the builder home was a typical model available to any typical buyer from their standard build plan portfolio, I would tend to consider it a Comp. It's when the buyer gets into customizing this and that with other special requests that have driven up the building cost and eventual sales price that I seldom if ever consider. I cringe at the use of any of those homes put into MLS as "For Comps Only".

 

[J Grant]

Now it's harder for builders to control who appraises even if they offer financing, but they used to offer financing from the sales office with an affiliate lender, who had a trained seal appraiser do the appraisals and of course make value on each and every sale. A number of those communities went down 40%-60% after the crash. Some have partially recovered, almost none recovered even now with market appreciation as the initial prices were so absurdly high. Nearly every listing that comes on the market from an original buyer in these communities is a short sale .

 

[Kim Whiting]

the problem with new construction is the sales price includes the builders profit (10-20%?). any existing sale doesn't have this. in my area, new homes lose 15%+ value the day the door is opened, like a new car. I've stopped even trying to do new construction unless I have all similar new construction-1st buyer sales.

 

[J Grant]

the problem with new construction is the sales price includes the builders profit (10-20%?). any existing sale doesn't have this. in my area, new homes lose 15%+ value the day the door is opened, like a new car. I've stopped even trying to do new construction unless I have all similar new construction-1st buyer sales.

Exactly. This is the problem with new construction, and to "solve" it, some appraisers rotely adjust C2 "up" in price to match the C1 builder sales, and presto, the SC price is made. Which tells us zip about the value. The reasoning of these appraisers is that since buyers are willing to pay more for C1, then C1 is worth more as a value increment Really....if the price of a C1 house can not be recovered after closing such as a C1 house buyer pays 300k, and tries to sell it the day after t without taking occupancy, and all they can get on the open market is 280k, how was the C1 worth more?. Are these buyers truly well informed, do they realize their purchase will drop in value and to what degree? Are they aware that the 40k lot premium they just paid for might only recover 10k when they go to sell? ( this loss of does not happen on all new construction purchases but happens frequently)

While I might adjust up for C1 in some appraisals, I don't do it by rote because sometimes there is no adjustment supported per the open market definition of MV. If I adjust up for C1, the value is there in the resale similar home prices, not just the new construction sales the builder office provides.

 

[J Grant]

Imo, builder sales are the reverse mirror of REO sales. REO sales may sell for less because they show poorly...vacant, a bit neglected looking, even if structurally everything is sound . Whereas Builder houses "show" fantastic due to buyers purchasing from the furnished model, staged and decorated to awe and impress. The REO has plain vanilla marketing...an MLS listings, a sign out front. The builder has marketing advantages beyond that of most sellers on the open market...glitzy professionally staffed sales office, national or international websites, media ads and planted articles in addition to regular MLS presence.

REO sold properties often gain in value right afer closing, builder sold properties often lose value right after closing.

The higher price of C1 is not just about new vs a 1 year old house depreciation, because depreciation is minimal. Yes, buyers may prefer brand new and be willing to pay more, but a market value opinion has to consider whether a buyer is well informed, acting knowledgeably etc. Many new home buyers are not knowledgeable about the after market value of lot premiums or line item upgrade costs. Not to mention whether there are new home concessions or credits/cash back to factor in.

The price difference of new vs recently built is , due in part to marketing. A builder typically has advertising and marketing advantages not present in most open market sales. Buyers of new construction arriving at price by adding on line item upgrades and lot premiums to a base amount set by builder is not how prices are arrived at in resales/ the open market .