Posted by Jonathan J. Miller -Sunday, October 21, 2007, 1:38 PM
In this series, I’ll focus on things that our readers probably know the answers to but want an outside perspective.
I’m a realtor in Las Vegas and a regular reader of Matrix and Soapbox. Thank you for both.
I’m writing in hopes that you may be able to address a question I have long had concerning appraisals of new construction…or could direct me to where I could find an answer.
During the boom, a builder would typically have several phases offered…phase 1 might be priced at $160 per square foot, phase 2 would jump to $180 PSF, phase 3 at $210 and so on.
My question is: how was an appraiser able to justify the purchase price of the first buyer in phase 2, when every single comp in phase 1 was so much less expensive? And how did the first buyer in phase 3 get an appraisal for a price substantially higher than all the comps in phases 1 and 2? It never made sense to me and I felt then (and still feel now) that the ability of developers to get appraisals to justify any price allowed them to create sales pitches based on appreciation rather then the intrinsic value of home ownership.
The reason I’m bringing this up now is because it’s happening on the downside as well.
Two years ago, a friend of mine signed a pre-construction contract to purchase a Miami condo for $500,000. Construction is nearing completion.
My friend would love to get out of the deal without losing her entire $100,000 down payment. She was hoping that the condo wouldn’t appraise, but of course it has…for precisely the amount stipulated in the purchase contract and despite the Miami condo market having been in a tailspin since the time she entered into her contract.
For the life of me, I am unable to explain to her how this is possible, so I’m sure I must be missing something. Any insight (or direction to another source) regarding the unique relationship between appraisals and new construction would be most appreciated.
Thank you in advance for any reply you may be able to provide.
Eric brings up a significant issue in the valuation process: appraising in new developments. Here’s a magazine article I wrote about the topic three years ago that may provide some additional insight.
Valuation in a new development project is actually difficult because the sales are not a matter of public record, the contracts are provided by the seller (developer) and not independently verified and there may or may not be comparable sales in the immediate vicinity outside the complex.
In the scenario you provide, the appraisals performed in later phases would only work in a flat market when using early sales, so therefore external evidence must be considered to be able to justify the first sale in a new phase, or a contract when the market is falling.
External influences should include contracts in other competing developments (contract dates as of right now) to show trends, current contracts of re-sales in the same or competing developments to show trends, current listings of similar properties in the new development to show trends. In other words, in a third phase where a re-sale of a phase one listing is less than your contract should be enough to prove the purchase price is above market levels (assuming its comparable).
The problem with appraisals done in new developments can be more about independence of the appraiser than the use of comps. If the developer arranges financing, they are likely going to own, hire or or have a financial relationship with a mortgage broker or local lender. The appraiser may have been offered a package deal to appraise these properties in bulk or more efficiently for the lender or mortgage broker. The act of saving the applicant $25 on an appraisal fee may also serve to remove independence from the process since killing a sale could cancel 100 future appraisal assignments. duh!
At the end of the day, the appraisal is supposed to reflect market value as of the effective date of the report. If the market is falling, it has to be evidenced by market data so its probably worth reviewing the report that was completed on the property. I don’t know the laws in those markets, but I suspect copies can be obtained before closing. If contracts were used to substantiate the value, they are only valid if the contract date is recent. Otherwise, they reflect a different period in time and are equivalent to using old closed sales.
The appraisal needs to reflect market value in place as of the effective date of the report, otherwise its just another silly form to fill out.