Preconstruction Appraisal Process

Today, I noticed a "horror story" posted on one of the PCBDaily forums regarding an investor, who purchased a preconstruction unit in the Origin building at the Towne of Seahaven in PCB. Apparently, when it came time to get financing for the loan, the bank(s) wanted additional equity due to a decline in the appraised value of the unit. The investor's unit appraised for only 62% of the contract price. I've posted the link below:

http://pcbdaily.com/phpbb2/forums/showthread.php?t=50

Anyone out there know what happens when an appraiser estimates the value for a preconstruction unit going to closing? Does an appraiser consider the contract prices for all similar units in the building, or focus on sales of existing properties?

Little Fish

Interesting read and costly lesson to learn.

The bank loaning the money can use anything they want to appraise the value...if 'John Smith' doesn't like the number, he can just go to the next bank, and the next, and the next. Welcome to the "New World of Credit" John!

Today, I noticed a "horror story" posted on one of the PCBDaily forums regarding an investor, who purchased a preconstruction unit in the Origin building at the Towne of Seahaven in PCB. Apparently, when it came time to get financing for the loan, the bank(s) wanted additional equity due to a decline in the appraised value of the unit. The investor's unit appraised for only 62% of the contract price. I've posted the link below:

http://pcbdaily.com/phpbb2/forums/showthread.php?t=50

Anyone out there know what happens when an appraiser estimates the value for a preconstruction unit going to closing? Does an appraiser consider the contract prices for all similar units in the building, or focus on sales of existing properties?

Little Fish

On pre-construction or new construction, an appraiser does an appraisal off the plans originally, but then has to recertify the value prior to closing, if the appraisal is older than 4 months.
An appraiser must always use sold properties.
I have seen them add contract sales price to support the comps, if in line with the sold comps, but not as a basis for the value.

Further, if recertifying, they can not in good faith recertify a property at it's original value if they know that in the time difference between the two there has been a large % drop in value.

Here's an interesting quote from <apparently> the developer's shill:

"One thing that the appraisers can’t take into consideration when doing their appraisals is the fact that every condo (yes, even the studios) comes completely furnish and rental ready. This means couches, tables, sheets, dishes, silverware, everything. The buyers have to buy nothing to get their condo ready for the rental program or whatever they intend to use it for. One more value that many overlook is the fact that everything is already in the condo. Not only do you not have to purchase furniture, but you don’t have to move it in either. You don’t have to put the dishes away, make all the beds for the first time, arrange everything, etc. You spend a weekend moving $25k worth of furniture up stairs/elevator and tell me how fun it is. It’s great you don’t have to do it here."

So there's your answer John....now pay up.

It's a small price to pay

.....for a gulfview like this: http://pcbdaily.com/images/101207_seahaven/lg/11.jpg

.....our multi-million-dollar Toon-town model: http://pcbdaily.com/images/101207_seahaven/lg/16.jpg

....and our primed and professional around-the-clock rental/sales staff: http://pcbdaily.com/images/101207_seahaven/lg/2.jpg



.

.

the old contractual "specific performance" issue here...

Developers who delivered everything they promised except a market value product...how many words rhyme with litigation?

Mango:

Using the example of John Smith at Origin... If John Smith had postponed his closing date so other comparable units closed prior to his, would the appraiser use the comps from Origin closings to determine value?

Obviously, Shelly has a good point about shopping until you get what you want, but I'm wondering if he had other options.

Little Fish

Mango:

Using the example of John Smith at Origin... If John Smith had postponed his closing date so other comparable units closed prior to his, would the appraiser use the comps from Origin closings to determine value?

Obviously, Shelly has a good point about shopping until you get what you want, but I'm wondering if he had other options.

Little Fish

If they are going conventional loans the appraiser has to use comps that have sold within a certain radius of said property and can only use comps up to twelve months old.

Obviously, Shelly has a good point about shopping until you get what you want, but I'm wondering if he had other options.

I think the Mortgage Brokers with their Appraisers on speed dial that will 'Hit the Number" have pretty much closed up shop too.


.

Interesting read and costly lesson to learn.

The bank loaning the money can use anything they want to appraise the value...

this is simply not true - the bank does not use anything to value the property - they request the services of a qualified 3rd party to value a property. their are strict guidelines related to banks & independent property valuations - particularly know that the secondary mortgage market has largely fallen to pieces.

A property appraiser will first use recent comparable sales to value a property - initially this will include closings which have occurred within the most recent 6 months (ideally) & is within reasonably close proximity to the subject property (in our market about 5 miles; in others say rural this can vary greatly). additionally, a good appraiser should also look at current listings...if a property within the same/comparable complex is listed for much less than your original pre-construction contract...well your purchase price is not really supported by the data. & why should it be...you could simply default on your contract & purchase the newer listing.

in today's market getting good appraisals is extremely difficult. an appraisal is nothing more than an opinion of value based on a set of assumptions which is in turn based off of empirical data. so, the value is only as good as the data driving the assumptions...in this market comparable sales data are very limited; in terms of both quality & quantity. exacerbating this problem is that now appraisers are CYA & may take an ultra conservative approach to avoid any potential exposure to liability.

Mango:

Using the example of John Smith at Origin... If John Smith had postponed his closing date so other comparable units closed prior to his, would the appraiser use the comps from Origin closings to determine value?

Little Fish

yes, developers will typically close as many "cash" sales as possible to support provide comps. but see my prior post - a prudent lender will also require comparable sales from competing projects.

If you put a 20k binder on a pre-sale 300k condo a year ago.....and now your condo is finished with a closing date, and the same or comparable condo is selling for 200k now, you have in effect just lost your 20k binder. Or if you're naive enough to pay 300k for a 200k condo you could just go ahead with the purchase and now you've lost 100k instead of 20k.

Note: A prudent lender will not loan you 280k to buy a condo now worth only 200k. This situation is very common in our market at this time, thats why people are walking away from 100's of thousands of dollars of good faith binders.

Most of the Panama City Beach appraisals in the pre-con of the last few years used the OTA method of appraisal. When something is increasing in value 50+ percent a year "out of thin air" is the only applicable method. Seriously, are you sure you can't get out of your contract with all the delays and underperforming aspects of the development? I would talk to a lawyer who is at arms length about the situation.

Note: A prudent lender will not loan you 280k to buy a condo now worth only 200k. This situation is very common in our market at this time, thats why people are walking away from 100's of thousands of dollars of good faith binders.

exactly. they will actually lower the loan to value b/c the property is in a "declining" market. so where you could at one time get 80% of the lower of the loan to cost or loan to value; you now may be able to get only 75% or even 70%. so now instead of borrowing 80% of 300k you are looking at 75% of 200k with you covering the shortfall.

other thing to consider - if everyone is looking to get out of their contracts & they only close x% of the units - who is going to support the HOA due shortage - the developer will be required to, until they go bk.

HOAs are not profit centers but necessary to upkeep the complex.

Pirate, what are you speaking of when you say "delays and underperforming aspects" of the development? If the sellers have not done what they promised in their contract that would be an out, but by and large this is not the case. Just because the market underperformed is certainly not something that is in any contract. If the project were delayed that is another matter. So forfeiture is the most prudent act here. Just walk away.

The project is well behind schedule and a fraction of the scope that was sold. That is what I am referring to.

Most of the Panama City Beach appraisals in the pre-con of the last few years used the OTA method of appraisal. When something is increasing in value 50+ percent a year "out of thin air" is the only applicable method. Seriously, are you sure you can't get out of your contract with all the delays and underperforming aspects of the development? I would talk to a lawyer who is at arms length about the situation.

So the choice is to leave the $20,000 with the developer, or pay out the $20,000 to a lawyer....isn't that a sticky wicket.

.

Most of the Panama City Beach appraisals in the pre-con of the last few years used the OTA method of appraisal. When something is increasing in value 50+ percent a year "out of thin air" is the only applicable method.

They did the same on Wall Street with Mortgage Backed Securities....but they called it "Mark to Model." Both pretty much are going to end up the same way.

...Toe-mato....Tah-ma-to.

.

in today's market getting good appraisals is extremely difficult. an appraisal is nothing more than an opinion of value based on a set of assumptions which is in turn based off of empirical data. so, the value is only as good as the data driving the assumptions...in this market comparable sales data are very limited; in terms of both quality & quantity. exacerbating this problem is that now appraisers are CYA & may take an ultra conservative approach to avoid any potential exposure to liability.

That's why Fannie Mae tightened up the process (for qualifying mortgages) which puts more pressure on the lender to ensure the appraiser does his job correctly. They produced this Q & A sheet entitled: Collateral Valuation Practices and Declining Markets http://appraisalnewsonline.typepad.com/55596_Ann.07-11-FrequentlyAskedQuestions.pdf

"An accurate value for the property securing a mortgage loan is important in all markets, but the value becomes more difficult to evaluate when the subject real estate market is experiencing a decline in property values (“declining market”). Recent trends indicate that certain markets are experiencing a decline in property values. One of the potential problems in a declining market is the overstatement of property values in appraisal reports. This may result in the borrower not having an accurate property valuation, and overvaluation of a property could increase loan losses should the mortgage loan subsequently default."

.

.

So the choice is to leave the $20,000 with the developer, or pay out the $20,000 to a lawyer....isn't that a sticky wicket.

.

PCB board post says 55k-180k. If the contract is questionable and you can get a lawyer with multiple clients there it would be well worth it... for me anyway. I won't leave 100k on the table here and there.;-) But then again, I wouldn't have been involved in such a deal.

yes, developers will typically close as many "cash" sales as possible to support provide comps. but see my prior post - a prudent lender will also require comparable sales from competing projects.

Exactly dude, and it will be noted on the appraisal as well whether it was a cash deal or not. (The underwriter will be examining that like a hawk)

Most likely I would bet that every other appraiser, (if the comp used that closed in the last 6 months) obtained a conventional loan, that the appraiser most likely had to come in lower than the original purchase price.

Thought I'd update all with my recent experience with an appraisal on my new condo in PCB. Although the initial post on this thread led me to believe that appraisals today were coming in much lower than 2004-2005 preconstruction contract prices, my experience was the opposite.

My appraisal came in just above my contract price. My lender used an appraiser from Destin, who appeared to do a very thorough job. According to my realtor, all units had appraisals that came in at, or above, initial contract prices. The sole exception was one client who used an out-of-state lender. In this case, they contracted for a 2/2 and the appraisal came in $60K less than what they initially contracted back in 2005. The buyer contracted for their 2/2 for around $550K, meaning the appraisal came in roughly 10% lower than the contract price. The buyer switched to a local lender and then received a higher appraisal on the unit.

Since so many units received favorable appraisals, I am wondering whether or not 1) the appraisers aimed at "hitting the numbers", or 2) Values have not dropped significantly in PCB over the past two years. I wonder which is closer to the truth? Any thoughts?

Little Fish

there are 2/2 's in tidewater closing at pre con prices under $300K...
there are 1,2,3 year old condos resales dropping below $400K with nice rental history...and there are several forclosures getting $350K or so...
If you are looking at $490K to $550K and up meeting appraisals they must have something "special" in the mix...SQ footage or superior upgrades?
Island Reserve has prices you describe with over 1700 ft or so space which is 300 or 400 more than most 2/2's...

The sole exception was one client who used an out-of-state lender. In this case, they contracted for a 2/2 and the appraisal came in $60K less than what they initially contracted back in 2005. The buyer contracted for their 2/2 for around $550K, meaning the appraisal came in roughly 10% lower than the contract price. The buyer switched to a local lender and then received a higher appraisal on the unit.

Since so many units received favorable appraisals, I am wondering whether or not 1) the appraisers aimed at "hitting the numbers", or 2) Values have not dropped significantly in PCB over the past two years.

Little Fish

some of the local appraisers may simply not want to bite off the hand that feeds them; i.e. the local lenders, nobody makes money for a transaction not closed.

additionally, comping a pre-construction condo at the purchase price is pretty easy when you will undoubtedly have folks who will close simply b/c they can't find it in their heart to give up an emd...& voilah you have recent closed comps @ the purchase price.

also, sometimes the data omitted from an appraisal is much more relevant than that included. appraisals are certainly part science part art - so you will always have varying opinions.

i'm not familiar enough with the PCB condo market to answer your question definitively....but would be shocked if prices across the panhandle & across most property types have not fallen.

Thought I'd update all with my recent experience with an appraisal on my new condo in PCB. Although the initial post on this thread led me to believe that appraisals today were coming in much lower than 2004-2005 preconstruction contract prices, my experience was the opposite.

My appraisal came in just above my contract price. My lender used an appraiser from Destin, who appeared to do a very thorough job. According to my realtor, all units had appraisals that came in at, or above, initial contract prices. The sole exception was one client who used an out-of-state lender. In this case, they contracted for a 2/2 and the appraisal came in $60K less than what they initially contracted back in 2005. The buyer contracted for their 2/2 for around $550K, meaning the appraisal came in roughly 10% lower than the contract price. The buyer switched to a local lender and then received a higher appraisal on the unit.

Since so many units received favorable appraisals, I am wondering whether or not 1) the appraisers aimed at "hitting the numbers", or 2) Values have not dropped significantly in PCB over the past two years. I wonder which is closer to the truth? Any thoughts?

Little Fish

LF,

If you purchased a $0.5M condo to live in full time and enjoy for the rest of your life, and if you had no intention of making any kind of profit on the sale for years and years to come---AND have the money to comfortably pay the PITI + condo fees month after month after month...what does it matter if the appraisal is right or wrong?

However, if you feel as like these folks in this article (http://www.naplesnews.com/news/2008/feb/02/lawsuits-rising-pre-construction-buyers-want-out-d/) then you may want to dig a bit further and maybe secure a lawyer.

.

Shelly:

Very interesting article. I have no worries about carrying my mortgage and have no need to get out of my contract. I am closing shortly and am excited about finally owning in the area. I simply thought it was interesting that in a declining market, all units appraised for the original contract prices. If my unit appraised for much less than contract price, then I would be concerned about having to put up more cash.

All is good.

Little Fish

Thought I'd update all with my recent experience with an appraisal on my new condo in PCB. Although the initial post on this thread led me to believe that appraisals today were coming in much lower than 2004-2005 preconstruction contract prices, my experience was the opposite.

My appraisal came in just above my contract price. My lender used an appraiser from Destin, who appeared to do a very thorough job. According to my realtor, all units had appraisals that came in at, or above, initial contract prices. The sole exception was one client who used an out-of-state lender. In this case, they contracted for a 2/2 and the appraisal came in $60K less than what they initially contracted back in 2005. The buyer contracted for their 2/2 for around $550K, meaning the appraisal came in roughly 10% lower than the contract price. The buyer switched to a local lender and then received a higher appraisal on the unit.

Since so many units received favorable appraisals, I am wondering whether or not 1) the appraisers aimed at "hitting the numbers", or 2) Values have not dropped significantly in PCB over the past two years. I wonder which is closer to the truth? Any thoughts?

Little Fish

I am a local appraiser and I can assure you that ALL property values in PCB have declined significantly since 2005. If the units are appraising for 2005 prices, the appraisers are definately "hitting the numbers". I see this a lot. Our firm has lost very large amount of business because we provide supportable values based on proper appraisal procedures and analysis.

Our firm does residential and commercial appraisals. I personally only do commercial work. Recently that has included several bulk appraisals of significant numbers of units that developers have been stuck with due to buyers defaulting on overpriced preconstruction contracts.

Some developers are renegotiating prices based on the new appraisals rather than loosing the buyers. Some are sueing for Specific Performance but a judge can't force you to buy a unit that you can't get financed if you do not have the cash for the value difference.

By the way, out of state lenders use local appraisers.