School Me On "Builder Incentives"

[Metamorphic]

I'm working on my first Builder Sale appraisal.

There is a "Preferred Lender Incentive" addendum to the sales contract. The addendum basically says that "Upon approval with....the "Bank".... the seller will credit Buyer a total of $15k towards Buyers allowable closing costs and/or options and upgrades as Incentive."

I can see several ways this can go down. The buyer can take use the incentive for $15k of upgraded whatever to the Real Property. That the lender should have no problem with since its additional value in the collateral. However, if an "allowable" closing cost is $15k off the sales price, that's big hunk of the buyers down that's effectively not being paid. Thirdly, it appears that this is what the builder is doing right now, so the comps that I'm using will have settled under the same conditions so its no difference. Dont really like that last one.

My plan is to go down and hash this out with the guy in the sales office tomorrow, but I want to make sure I've got my ducks in a row first so I'm asking here first.

 

[hastalavista]

I'm not exactly sure what your question is?

This is what I read you describing:
A. New development and the developer has a preferred lender.
B. If the buyers use the preferred lender, they are given a credit that they can use to pay some of the costs of their loan or use for upgrades.
C. I presume if the buyers use an outside lender there is no similar credit.

The above affects the appraisal process two ways:
1. You need to analyze the sales contract and report the analysis including the credits if the subject is using this kind of financing.
2. You need to consider if any of the comps have similar terms, consider if this represents a concession and, if so, determine what kind of market adjustment should be made to reflect concession.

From reading some of your other posts, I think you already know all of the above. What else, specifically, are you curious about?

 

[Restrain]

If you know that the builder comps have the $15K concession (the builder is making money off of the lender side - that's how it's done), then you better adjust the sales down for the $15K, especially if you have competing sales showing lower prices without the concessions.

 

[Lloyd Bonafide]

I'm working on my first Builder Sale appraisal.

There is a "Preferred Lender Incentive" addendum to the sales contract. The addendum basically says that "Upon approval with....the "Bank".... the seller will credit Buyer a total of $15k towards Buyers allowable closing costs and/or options and upgrades as Incentive."

I can see several ways this can go down. The buyer can take use the incentive for $15k of upgraded whatever to the Real Property. That the lender should have no problem with since its additional value in the collateral. However, if an "allowable" closing cost is $15k off the sales price, that's big hunk of the buyers down that's effectively not being paid. Thirdly, it appears that this is what the builder is doing right now, so the comps that I'm using will have settled under the same conditions so its no difference. Dont really like that last one.

Whether it's $15,000 in free upgrades, or a $15,000 credit for closing costs, etc. - either way it is a seller concession, and should be adjusted for in the comps.

In some developments, a surprising number of buyers don't use the builder's preferred lender, because the $15,000 is built into a higher interest rate or other fees, and sometimes after buyers shop around for other loan options, they go elsewhere, and maybe they still get some credit from the builder.

I don't really like doing new tract appraisals, because they can be so time-consuming. Sometimes APNs and Doc. numbers are not available through public records, and some builder reps are not forthcoming about giving you all of the information you need. Some will not give you all of the comparables, or will not give you all of the information they have on every recent sale.

Occasionally I will run into one who is really great - where they will give you a spreadsheet of all of the properties in the tract, complete with their plan numbers, original base prices, lot premiums, upgrade amounts, lot sizes, APNs, and financing details. Builders that provide all of that information for recent closed sales and pending sales can make your life very easy.

 

[Metamorphic]

1. You need to analyze the sales contract and report the analysis including the credits if the subject is using this kind of financing.
2. You need to consider if any of the comps have similar terms, consider if this represents a concession and, if so, determine what kind of market adjustment should be made to reflect concession.

From reading some of your other posts, I think you already know all of the above. What else, specifically, are you curious about?

I'm just trying to figure out where the $15 k is going.

The sales contract shows a "Base Purchase Price" of 250k.

I've confirmed through public record that same size properties in the development are being sold at that price. Of course pub rec gives me no clue about what upgrades were included.

There is a "Options to be added" line that's "TBD".

They have it set up for a 225k loan, 24k from the buyer with 1 k already paid.

Separately, not part of the contract, I recieved a page for the subject that lists a bunch of "Section 1 -customer option requests", each with an associated amount that sub total to about 20k , and a second section of "upgrades" with line items for "Blinds", "CTI", and "Others", but no dollar ammounts, and a "Grand Total of All Upgrades" that's $0.00. The end says ""Base Price, 250k", and "New Purchase Price, 250k" "Buyers to received $15k lender incentive to be used toward additional upgrades closing cost and or rate buydown."

My problem is that this is not very transparent. If the builder is selling these things for $250k (an public record says that they are) and throwing in 10 or 20 k of upgrades, depending on the market, to close the deal, that's fine; I'm comfortable appraising it for 250; that plus or minus on the upgrades is not an atypical level of uncertainty in the appraisal process. What's not clear to me is that at escrow close the buyer wont show up with a $25k down payment check, and leave with a $15k "incentive" check after declining to spend it on upgrades. In that case its pretty clear that the house is really worth $235k and it calls into question what kind of checks the purchasers of the comps actually received.

I'm just trying to figure out the lay of the land on these types of deals so that I know I'm not over appraising by including a kickback in the sale price.

 

[The Bob]

The buyer can take use the incentive for $15k of upgraded whatever to the Real Property. That the lender should have no problem with since its additional value in the collateral.

Really? Cost equals value?

Most "upgrades" are just a clever marketing tool for the builder. Nothing wrong with that, but not every upgrade will add an equal amount to the value.

 

[Metamorphic]

The buyer can take use the incentive for $15k of upgraded whatever to the Real Property. That the lender should have no problem with since its additional value in the collateral.

Really? Cost equals value?

Most "upgrades" are just a clever marketing tool for the builder. Nothing wrong with that, but not every upgrade will add an equal amount to the value.

Point is it goes INTO the collateral, not into the buyer's pocket. The dollar value the market actually puts on it is not material in this case as long as its an apples-to-apples with the comps.

 

[CCAAMO]

You need to get a terms breakdown sheet for the subject and the comparables to determine if there were builder rebates, concessions etc. and how much they were. Many times the upgrades are included in the sales price and need to be adjusted for but there are time that they are not included in the sales price and are payed for seperately which would not require an adjustment.

You need to be very careful these days with new home sales. The builders do not want to lower the price so they will so a sales price of say $400,000 but kick back $30,000 to the buyer at close of escrow or pay for all or part of the upgrades.

Some times they kick the money back by indicating an amount for closing costs with is way above the typical amount being paid by sellers in the area.

You are trying to get at the cash equivalent price for the subject and comps. Don't be afraid to made concessions adjustments.

 

[Ross (CO)]

Have you ever seen those clever jingles where the viewer is asked to.....follow the bouncing ball ?......and the song plays on.

This scenario you are facing with this assignment is another one of those follow-the-bouncing-ball moments. The ball....is the real and true price being paid for the house+land. What ensues now is all the incremental measures of give-and-take that occur as things are gifted and granted and the original purchase documents and accompanying loan documents get pulled and flexed and changed and added-to. Your task.....is to follow all those actions and thus the outcome when it is finally your chance to "review and comment on the sales contract" for the subject property.

I would advise that you simply hold off on scrutinizing and reconciling those documents until the very END of your appraisal process. Focus first on your scrutiny and reconciliation of any and all concessionary influences upon the sold transactions of that final set of comparables that you bring into your report ! Make sure that you understand all of those details, make adjustments accordingly, and apply your Fannie-granted "best judgment" to recognize exactly where "free-money" is being awarded and adjust an amount that reduces that positive number down to a break-even or zero amount. Your freedom to apply judgment in that process is the ultimate leveling of the playing-field.....even if all of the other parties rankering for maximal profits are screaming and crying over your decisions.

The game.....is to portray the "price" of the subject property as high as possible, wherever such a price can be stated, written, or formally posted within some archive like an MLS system or the county assessor's database. This recording process ends up being where all too many unsuspecting lenders got creatively duped during the boom years (and, guess what, they didn't really care about that, anyway....until that property goes into default !)....and where it may appear (smoke-and-mirror) that the buyer was putting 20% down-payment into the deal they actually may only have been putting 14.5% down, or any other such % less than what appeared on the loan docs. All the tricks and hooks were then in place to deceive. And, some are so fast to say that it is "appraisal fraud" that brought the market down. What then lapped-up and absorbed all those "over-inflated values" ?....the AVM's and BPO's that others thought were adequate.

The zealots of the Fannie form pre-printed text will soon come forth to explain that "market reaction" dictates just how much concessionary dollars you decide to adjust. Follow the bouncing ball, and see exactly how the final posted "prices" for your COMPARABLES were played-out. Expect to phone both sides of the sales, start with the buyer's agent ! Their word is more reliable than the seller side. At the bottom of your grid columns you reconcile the final adjusted market value of your subject, and put that number in its field on page 2. THEN,......look over the provided purchase contract for the subject and add your comments into the report for standard and basic info that YOUR CLIENT SHOULD ALREADY KNOW. When you receive the purchase contract from...whomever, be sure that it is dated accordingly and has all necessary signatures, and simply ask that provider...."Is this the FINAL contract that you have to give me, because it does not make much sense for me to have to receive another contract in a few days and have to "re-visit" my report to make subsequent comments on that contract. This is the final one, yes" ? Shut up, and wait for their answer.

The market value of the subject is derived by studying the market, and hopefully there are a few very young homes among your selected comps that have re-sold to a second owner for these become the truer demonstration of market value.....not the first-time sale of new construction. Once all parties get up from the closing table when your subject property has formally transacted it becomes an existing property in that market...kind of like the analogy of what occurs when buying a new car and driving it off the parking lot and into the main road for the trip home.

If the appraiser is doing their due diligence, and performing the research and verification tasks expected of them.....it is impossible to be a "deal killer" in a free and open marketplace. Thick skin, ever heard of it ? Your client is supposed to "care", and your service to them is supposed to matter. Amazing how that trust relationship had become so deteriorated as the national marketplace was eroding during the "creative lending" years of 2005, 06, 07 and then the collapse in late summer of '08. Heh, how's all that hope and change working out ?

Perhaps your report conclusions will cause no problems and all numbers will fall into place in a reasonable and copasetic fashion, and life goes on. I will wish that for you.

Igneous,.....when you say these words (below) at the end of one your postings....it tells us that you are already "on" to the big con. Hang tough.

........."In that case its pretty clear that the house is really worth $235k and it calls into question what kind of checks the purchasers of the comps actually received.

I'm just trying to figure out the lay of the land on these types of deals so that I know I'm not over appraising by including a kickback in the sale price."

 

[Metamorphic]

Well, after reading everything here, talking to my Dad (broker/realtor for the last 40 years), talking with my supervisor, and studying the contract closley, it seems that the contract is ambiguous.

It is possible that some of the 15k has gone or will go into the improvements, which would support the 250k value. Its possible that the 15k could turn up in the buyers pocket leaving them with a 10k down in a 235k house. I'm going to drive down and brace the sales agent to see if he can show me where I'm wrong. Otherwise I'll be appraising it with an EA on how the incentive is disposed.

Of course this brings up the question of what was done on the comps I'm using, but I think I'll just have to take them at face value since there's no way to independently verify the upgrade status and if the builder is pulling a fast one any confirmation I get form them would be suspect.

Dang, you'd think this little conforming tract house would be easier than the 1970's cabin on Tahoe I did last week but that's not turning out to be the case.