School Me On "Builder Incentives"

[Metamorphic]

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.

I've included a couple of the few resales in the tract but unfortunately its not cut and dried.

This tract has had a long build out time due to the economic down turn. It looks like they started selling in '05/'06, stopped building and just sold a house or two through '07-'08, and have just recently started building and again in ;09. So even though they're model matches, all the resales are 3 years old with 3 years of wear and tear, they're REOs (with the associated bank approval closing delays,hassles, and uncertanty), and of course the buyer doesn't get to choose colors and options like they do on new construction. All of that is certainly worth something in the market. Net effect is the resales are closing for $200k. Whether that differential also includes $15k of kick back is difficult to determine with the available data.

 

[hastalavista]

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 think you have focused in on the significant issue.

Here's a simple question to ask the seller's representative: Can the buyer use the $15k toward down the payment, or receive it as a $15k cash-payout at closing?
I'd say if the answer to the above is "yes", then I'd make it a dollar-for-dollar concession adjustment; it doesn't matter if the buyers used it to upgrade the unit or not; the credit is the same as cash.

If the answer is no, then it is a special upgrade incentive which may warrant an adjustment or not (maybe not dollar-for-dollar).

Good luck.

 

[Metamorphic]

I braced the sales rep. Got him to admit that typically buyers split the difference; some of the incentive goes to RP improvements, some going to closing costs or to buy down the rate(stuff that can't be forclosed). Also admited that the buyer has ordered nothing extra at this time.

I'm going to toss this to the client. Ask them if they want a 235k with a note that there is the potential for 15 k of upgrades that is not recognized in that number, or a 250 number with a HC that the incentive money will go into the real property. Presumably in the case of the latter there would need to be some sort of audit at close.

All this reinforces the idea that reviewing the contract is somehing the lender should be doing. The have the ability to follow this through escrow. We don't.

 

[hastalavista]

I don't think a HC is appropriate in the case you describe; there is no legitimate valuation/analysis reason to use one.

Remember that the comps are adjusted if they have the credit; the subject's credits need to be analyzed and reported as part of the contract review process, but the subject's credits do not impact the comparables. The comparables' credits will impact how each one is adjusted in the sales grid and, as a consequence, will affect the opinion of market value. :new_smile-l:

 

[jay trotta]

The preference should be to peek at the sales agreement and the Builders product breakout. If the house was priced with equal product and the concession is for a matter of choice or a credit (actually an "allownace") if they want to upgrade. The credit could also be in the form of closing costs, but you would need to view all the paper work.
Builder contracts are as diverse, as the attorney hired to represent the builder; they usually have an ample amount of background knowledge to write the language most interestingly. Don't bite off your nose to spite yer face.....check it carefully.

good luck

 

[Mike Garrett RAA]

Builder offers "Free basement finish"...is it a concession or a builder discount?

 

[Doug DeMars]

Denis nailed it on the head with post #14.

Furthermore, reviewing the Subject contract should be no more than a cut and dry summation of what is being offered. Builder incentives are very customary in almost any market...and it wouldn't (IMO) be irresponsible to try to make too much sense out of what back room deals are being made between the buyer and developer.

I've had new construction deals where cars and vacations are part of the incentive to buy...so what. I'm appraising real estate...not the ribbon that is found on the front door.

Probably the only caution I can argue for is NEVER use sales only in the development. I'm sure you can see why. UW and lenders (of yesteryear and back again) understand that only using builder comps can create a bubble of builder set "value" / or artifically high prices.

That said...who cares if they are "giving" away 50K in upgrades (yeah right...crown molding at $10/linear foot my @ss) or helping with closing costs (typical in many first time buyer markets).

My favorite pet peeve during the boom was "$200K in upgrades" for $600K "model" homes. REALLY? Of course, the same homes are now worth 300K. "Base price" is meaningless...unless you're a sales agent trying to sell "rust-guard" to a new auto buyer. Some builders contruct the most basic of homes and you wonder if it cost the new homeowner "extra" if they wanted hardware on the doors. Other builders have very snazzy "base models".

Final note...I'm not too crazy about making "shiny new home" smell adjustments. I will on occassion make and adjustment to reflect the "...premium a new home buyer will pay to select specific options and upgrades that is typically not associated with "re-sale" homes...". However, very often a relatively newer "re-sale" will have mature landscaping or similar items that offset this consideration.

Cheers

 

[Doug DeMars]

If it's "free" it's neither...of course, nothing is free.:laugh:

Builder offers "Free basement finish"...is it a concession or a builder discount?

 

[Metamorphic]

I don't think a HC is appropriate in the case you describe; there is no legitimate valuation/analysis reason to use one.

Remember that the comps are adjusted if they have the credit; the subject's credits need to be analyzed and reported as part of the contract review process, but the subject's credits do not impact the comparables. The comparables' credits will impact how each one is adjusted in the sales grid and, as a consequence, will affect the opinion of market value. :new_smile-l:

HC wasn't my first choice, I was just merely acknowledging that it was possible. If they really wanted the $250 value but had not got around to the upgrades, I think it would be reasonable to treat it in the fashion of a construction loan where you appraise the HC of a finished product then go back later to check.

I wasn't able to get the sales office to talk in any more than vague terms about the financials of the sales comps I was using. Really its just as well. If they are behaving badly, they could just feed me bogus statements, if they're behaving truthfully, their word on what the other deals were like is fine; either way I get what they want me to get. Until I get subpoena power and a degree in forensic accounting, this is it. The guy indicated that the other comps had incentives of similar size and that typically their buyers split the incentive up between upgrades and rate buy downs and closing costs. Given the totality of the circumstances I'm comfortable assuming a 10k concession, and appraising the subject on the basis of the resulting value.

 

[Metamorphic]

Furthermore, reviewing the Subject contract should be no more than a cut and dry summation of what is being offered. Builder incentives are very customary in almost any market...and it wouldn't (IMO) be irresponsible to try to make too much sense out of what back room deals are being made between the buyer and developer.

The problem was the contract was not a settled deal. How can you claim to understand the contract when there's a "TBD" in the included upgrades and the there's $15k of uncommitted funds floating around.

All this just confirms my prior opinion that tract homes are the work of the Devil.