Buyer in Watercolor

Shel, do you personally know any appraisers that experienced this or are you citing what you read from the Senate testimony and maybe other on-line sources?

A bud of mine was a long-time Florida appraiser. During the early years of the bubble, he related some stories to me about how he was feeling pressured and started getting fewer jobs because he was asking too many questions. Then in 2004 he lost his home during Hurricane Ivan, and told me it probably was for the best. He said he wasn't comfortable with what was going on in Florida RE, and that he was close enough to retirement to move out of Florida and start fishing full-time up in South Carolina. We still keep in touch, and he still keeps in touch with some of his friends in the business in Florida. When I ask him if it is as bad as I hear about (inflated appraisals)....he just says, "It's worse."

Here's an article from Friday's WSJ Page One. I know this nationwide RE mess isn't just a figment of my imagination--:shock:--or maybe it is all in my mind and you all live inside my head, like an episode of "The Outer Limits":

http://online.wsj.com/article/SB119820566870044163.html?mod=googlenews_wsj


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Here's an article from Friday's WSJ Page One. I know this nationwide RE mess isn't just a figment of my imagination--:shock:--or maybe it is all in my mind and you all live inside my head, like an episode of "The Outer Limits":

http://online.wsj.com/article/SB119820566870044163.html?mod=googlenews_wsj .

This nationwide mess is a result of fraud in the stated income, stated assets area and mainly in the subprime, Alt A markets. Totally different animal altogether sometimes in the species of appraisers, attorneys and Banks utilized. The company cited in the article Bear Stearns at the height of the real estate industry had no business making these types of loans. The article even states that they were newbies and didn't have experience. They didn't have the proper fraud detection procedures in place. Quite a few Banks had access to MLS and market data, and if Bear Stearns had this in place, they wouldn't had made a loan on house worth excessively over market for the neighborhood. All they had to do was look up the comps to see that. They didn't even review the invoices submitted and verify them to see if the contractors were licensed, were they on letterhead etc. Even the banks that did have fraud detention procedures in place at times put pressure on staff to move loans along too to make the securitization in time and some things got by that shouldn't have.

The comment made in the article that appraisers were starving and willing to do anything to make a buck at the height of business in 2005 is not realistic. They were still busy. Now they are hungry, no doubt, but what do you think is happening to appraisals now when they come in to the underwriter. If they weren't ripped apart before (and quite a few were especially by out of state banks) they are even more so now, and the appraisers who are still in the game, most likely because they played by the rules and kept their backbone, are being even more cautious and conservative as all heck to maintain their good standing in this credit environment.

No, it's not a figment of your imagination, you're just seeing lots more of it because it was too darn easy to get credit with these prove nothing mortgages, but mortgage fraud is not a new concept. It's been going on for as long as I can remember in one shape or another. Oh gosh, I hope I don't need to live in your head. I more of a Trekkie than an Outer Limits type.

I'm sure your appraiser friend questioned much more in the Florida market being more speculative as opposed to mine, which is more of an end users market.

This nationwide mess is a result of fraud in the stated income, stated assets area and mainly in the subprime, Alt A markets. Totally different animal altogether sometimes in the species of appraisers, attorneys and Banks utilized. The company cited in the article Bear Stearns at the height of the real estate industry had no business making these types of loans. The article even states that they were newbies and didn't have experience. They didn't have the proper fraud detection procedures in place.

It wasn't just Bear Stearns that made questionable loans--everyone was in on the game. Fitch just downgraded $5.3 BILLION of Residential Backed Mortgage Securities on Friday night. If you look at the list you'll see ALL the players (Citi, WaMu, JP Morgan, Wells Fargo, Fremont, Option One, etc. etc.)
http://www.housingwire.com/2007/12/21/friday-night-lights-out/

Take a look at what is inside one of these beauties: WaMu's Apr 07
http://www.sec.gov/Archives/edgar/data/1397612/000088237707001364/p07-0615_424b5.htm

Even "high quality" mortgages accepted by Fannie are going down the toilet: http://www.housingwire.com/2007/12/...o-shrink-delinquencies-continue-upward-trend/



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I still don't understand why you don't include these sales because they're made "under duress".

It isn't as if Tony Soprano is holding a gun on someone, it's a sale price that reflects the current state of the real estate market and the economic situation in this country.

I certainly understand that you don't want to use an anomaly as the standard when appraising, but given how many homes are being sold at auction or "under duress" it needs to be taken into consideration.

Find it even more fishy that it shouldn't be used as a comp because it's a "builder reducing inventory", yet SJ says he knows the owner is lawyer! :angry:

It wasn't just Bear Stearns that made questionable loans--everyone was in on the game. Fitch just downgraded $5.3 BILLION of Residential Backed Mortgage Securities on Friday night. If you look at the list you'll see ALL the players (Citi, WaMu, JP Morgan, Wells Fargo, Fremont, Option One, etc. etc.)
http://www.housingwire.com/2007/12/21/friday-night-lights-out/

Take a look at what is inside one of these beauties: WaMu's Apr 07
http://www.sec.gov/Archives/edgar/data/1397612/000088237707001364/p07-0615_424b5.htm

Even "high quality" mortgages accepted by Fannie are going down the toilet: http://www.housingwire.com/2007/12/...o-shrink-delinquencies-continue-upward-trend/



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They ALL did subprime and Alt -A loans INCLUDING Fannie and so did Freddie Mac. I'll see if I can find Fannie's delinquency specific loan types in delinquency. The article doesn't list, but they did stated income, stated assets and investulator hig LTV loans (ALT-A) as well as subprime.

I still don't understand why you don't include these sales because they're made "under duress".

It isn't as if Tony Soprano is holding a gun on someone, it's a sale price that reflects the current state of the real estate market and the economic situation in this country.

I certainly understand that you don't want to use an anomaly as the standard when appraising, but given how many homes are being sold at auction or "under duress" it needs to be taken into consideration.

Find it even more fishy that it shouldn't be used as a comp because it's a "builder reducing inventory", yet SJ says he knows the owner is lawyer! :angry:

TOTALLY agree - ScooterB. - it's not as if a distress sale in today's market is an exception. If that was the case, I could see the rationale of not using it as a good comparable. But this is a new market with new rules - using procedures in determining the appraised value of a property from even 5 years ago need to be adjusted to reflect the realities of the market today.

I still don't understand why you don't include these sales because they're made "under duress".

It isn't as if Tony Soprano is holding a gun on someone, it's a sale price that reflects the current state of the real estate market and the economic situation in this country.

I certainly understand that you don't want to use an anomaly as the standard when appraising, but given how many homes are being sold at auction or "under duress" it needs to be taken into consideration.

Find it even more fishy that it shouldn't be used as a comp because it's a "builder reducing inventory", yet SJ says he knows the owner is lawyer! :angry:

Are you saying the appraisal process should be changed to show all sales? As it currently applies an appraisal is looking at 3 comps to the contract in hand. The buyer/agent job is to sniff out market trends.

BTW, appraisers are beginning to have to look at some distress sales as comps because it all they have for comps.

Are you saying the appraisal process should be changed to show all sales? As it currently applies an appraisal is looking at 3 comps to the contract in hand. The buyer/agent job is to sniff out market trends.

No, simply ones that reflect what is going on in the market today. Big difference between a family member selling things at less than "market value" to other family members and builders and banks selling properties for any reason I can think of atm. The builders, banks, and private individuals selling under these circumstances ARE THE MARKET!

As I mentioned, I know the seller. What if I told you that one of the sellers was an attorney, rather than a builder? Would that be new information which might change your thoughts on the sale being distressed? I'm not saying that he wasn't distressed, but I'm saying that the comments need to stick to factual info regarding the sale.

Fine SJ. You've made your point. Jeez. I don't belong to the ecar mls and I don't really care whether the agent's comments in the listing were appropriate or not.

The point of my post was that distress sales are not used as comparable sales in an appraisal. (fwiw... agents should not use them in a CMA either). Since the property under discussion seemed to be a distress sale to me, I used it as an example. I also said that an appraiser thinking about using it as a comp should interview the parties to determine and document whether it was indeed a distress sale, or not, before using it.

Sable, your points are very valid regarding properties which should not be used as comps for appraisals and CMAs, and I agree with them. I'm just pointing out (to the general reader) that one cannot make assumptions about the sale based solely on an agent's general statements. As you state, Realtors and Appraisers should be interviewing the selling the agent to discover the material information regarding the sale.

No, simply ones that reflect what is going on in the market today. Big difference between a family member selling things at less than "market value" to other family members and builders and banks selling properties for any reason I can think of atm. The builders, banks, and private individuals selling under these circumstances ARE THE MARKET!

I agree that sellers selling under the current conditions (as well as buyers buying) are the market.

But it seems that a lot of people want to take these bottom of the barrel sales and say that they represent the current market while ignoring that there are other sales at more reasonable (non-distressed) prices that may represent the market more accurately. These other sales don't get reported and discussed on this board because they are not "sensational" enough.

For example, this home just sold for $1,925,000... after selling earlier in the year for $1,700,000. It's on busy Western Lake Drive. The seller bought it in the summer, but decided he needed more room for his car collection, so he decided to sell it again. And he sold it quickly for $225,000 more than he had just paid for it.

Now pardon me while I again use the example of the property on Scrub Oak which sold recently by a builder (or attorney) or whoever... that so many hope represents current market value.

No reasonable person on this board could argue (with a straight face) that this property is representative of "the market." Everyone agrees that it probably cost a bunch of $$$ to construct this house. And if you factor in the lot cost, plus architect costs and the 6 months of interest and overhead to get your plans approved through WaterColor, plus interest for another 12 months or so while it's being built, plus interest while it sits on the market waiting to sell... this property sold for less than cost.

Obviously, this level of discount (below cost) are anomalies... and not market. Someone got one helluva deal. And buyers would be lining up in droves to buy another deal just like it. I would have bought it myself if I'd had the opportunity!

(As an aside, I would submit that if this seller could have held out for another 30 or 60 days, he could have easily sold for $100,000 or $200,000 more... and still be selling at a distress price. Perhaps there was a need to close this sale before the end of the year? For tax purposes? Or perhaps he had some other pressing reason to sell. But he could have sold for more if he could have held on).

The fact that others are saying... "find one like that for me!"... demonstrates that this sale was below market.

Anyone who believes that these distress sales represent the current market value should be able to easily locate other sellers willing to sell at this value too!

And if this is the case, then I would submit to you that you've just timed the market perfectly. We are at bottom! (Because the market doesn't work when you can buy for less than cost). Start buying because it's not going to get any better than this!

Excellent Post SablePoint. I agree with your statement. You make excellent points.

I agree that sellers selling under the current conditions (as well as buyers buying) are the market.

But it seems that a lot of people want to take these bottom of the barrel sales and say that they represent the current market while ignoring that there are other sales at more reasonable (non-distressed) prices that may represent the market more accurately. These other sales don't get reported and discussed on this board because they are not "sensational" enough.

For example, this home just sold for $1,925,000... after selling earlier in the year for $1,700,000. It's on busy Western Lake Drive. The seller bought it in the summer, but decided he needed more room for his car collection, so he decided to sell it again. And he sold it quickly for $225,000 more than he had just paid for it.

Now pardon me while I again use the example of the property on Scrub Oak which sold recently by a builder (or attorney) or whoever... that so many hope represents current market value.

No reasonable person on this board could argue (with a straight face) that this property is representative of "the market." Everyone agrees that it probably cost a bunch of $$$ to construct this house. And if you factor in the lot cost, plus architect costs and the 6 months of interest and overhead to get your plans approved through WaterColor, plus interest for another 12 months or so while it's being built, plus interest while it sits on the market waiting to sell... this property sold for less than cost.

Obviously, this level of discount (below cost) are anomalies... and not market. Someone got one helluva deal. And buyers would be lining up in droves to buy another deal just like it. I would have bought it myself if I'd had the opportunity!

(As an aside, I would submit that if this seller could have held out for another 30 or 60 days, he could have easily sold for $100,000 or $200,000 more... and still be selling at a distress price. Perhaps there was a need to close this sale before the end of the year? For tax purposes? Or perhaps he had some other pressing reason to sell. But he could have sold for more if he could have held on).

The fact that others are saying... "find one like that for me!"... demonstrates that this sale was below market.

Anyone who believes that these distress sales represent the current market value should be able to easily locate other sellers willing to sell at this value too!

And if this is the case, then I would submit to you that you've just timed the market perfectly. We are at bottom! (Because the market doesn't work when you can buy for less than cost). Start buying because it's not going to get any better than this!

We will be at the bottom when there is no supply of homes that are being sold for less than the cost to build. A builder acquaintance in Atlanta just had to give back 7 houses. Those 7 houses will be in competition with other individual sellers houses until all 7 are gone. I see why I as a seller wouldn't want the prices of those 7 to be used as comps, I also see why I as buyer am going to use those prices to browbeat an individual seller into compliance...or not..they don't have to sell to me.

We will be at the bottom when there is no supply of homes that are being sold for less than the cost to build. A builder acquaintance in Atlanta just had to give back 7 houses. Those 7 houses will be in competition with other individual sellers houses until all 7 are gone. I see why I as a seller wouldn't want the prices of those 7 to be used as comps, I also see why I as buyer am going to use those prices to browbeat an individual seller into compliance...or not..they don't have to sell to me.

Agree that we will remain at bottom until that point.

I don't think anyone can go wrong buying a house below cost (as long as there's nothing wrong with it from an construction or aesthetic standpoint). Buying homes below cost, to me, definitely represents the bottom of the market because it can't last forever. There are plenty of buyers out there wanting to snap up properties selling drastically "below cost" in WaterColor.

Appraisers are still not supposed to use distress sales as comps. From a lender's perspective, they will be willing to lend on like properties selling for MORE than the distress prices (assuming a solid, willing, and able buyer), because the lender is evaluating it from a perspective of risk. The lender understands that the distress sale is below market, so they don't use them as a determination of market value to deny a loan (which they want to make) to a buyer.

Agree that we will remain at bottom until that point.

I don't think anyone can go wrong buying a house below cost (as long as there's nothing wrong with it from an construction or aesthetic standpoint). Buying homes below cost, to me, definitely represents the bottom of the market because it can't last forever. There are plenty of buyers out there wanting to snap up properties selling drastically "below cost" in WaterColor.

Appraisers are still not supposed to use distress sales as comps. From a lender's perspective, they will be willing to lend on like properties selling for MORE than the distress prices (assuming a solid, willing, and able buyer), because the lender is evaluating it from a perspective of risk. The lender understands that the distress sale is below market, so they don't use them as a determination of market value to deny a loan (which they want to make) to a buyer.

ok.

Great posts Sable

For example, this home just sold for $1,925,000... after selling earlier in the year for $1,700,000. It's on busy Western Lake Drive. The seller bought it in the summer, but decided he needed more room for his car collection, so he decided to sell it again. And he sold it quickly for $225,000 more than he had just paid for it.

"SaleNotes: Home sold furnished."

The way I see it is new buyer is paying property taxes on $225,000 in furniture.



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"SaleNotes: Home sold furnished."

The way I see it is new buyer is paying property taxes on $225,000 in furniture.



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Unless they are paying cash, they are also paying doc stamp taxes, and mortgage taxes on that furniture, and they may also be financing the furniture over 30 years.

"SaleNotes: Home sold furnished."

The way I see it is new buyer is paying property taxes on $225,000 in furniture.



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So, as you can see, the market doesn't work like a lot of people seem to want it to. This person is probably quite happy with their new home. Whereas Shelly views them as being idiots. Either way, they represent the market.

The market is comprised of buyers who are looking for that perfect vacation home that meets all of their dreams and needs. And it's also comprised of buyers whose only objective is low price... which may ultimately be Shelly's dreaded "investulators" back in the market again!

So, as you can see, the market doesn't work like a lot of people seem to want it to. This person is probably quite happy with their new home. Whereas Shelly views them as being idiots. Either way, they represent the market.

The market is comprised of buyers who are looking for that perfect vacation home that meets all of their dreams and needs. And it's also comprised of buyers whose only objective is low price... which may ultimately be Shelly's dreaded "investulators" back in the market again!

Don't overreach the dreaded version of the "Investulators" weren't concerned with price.

We will be at the bottom when there is no supply of homes that are being sold for less than the cost to build. A builder acquaintance in Atlanta just had to give back 7 houses. Those 7 houses will be in competition with other individual sellers houses until all 7 are gone. I see why I as a seller wouldn't want the prices of those 7 to be used as comps, I also see why I as buyer am going to use those prices to browbeat an individual seller into compliance...or not..they don't have to sell to me.

I'm not sure I have seen a house that sold for less than what it cost to build the house. I HAVE seen many homes that have sold where the value of the LOT plummeted to the point where the total cost of home and land was pretty low compared to a couple of years ago.

For instance, the home that sold in Watercolor that started this whole thread did not sell for less than the cost of building the house. Instead, the value of the underlying land plummeted. That house probably cost somewhere in the range of $600k to $650k to build (true cost--not marked up by a builder). Which means the value of the lot was $200k to $250k. The seller got full price for the house and took a beating on the lot which was purchased for $770k.

I happen to know the seller, J & T Investments, LLC, and your math is a bit off on the cost per sf, just a weeeeeeeeeeeeeeeeeeeeeeeeeeee bit. I like the house, though. I could live in the carriage house.

Joe,

Are thinking about the right house? This home does not have a carriage house.

And it's also comprised of buyers whose only objective is low price... which may ultimately be Shelly's dreaded "investulators" back in the market again!

"Investors" = Buy value & Hold for future cashflow/appreciation

"Speculators" = Buy now at any price & Sell tomorrow at higher price

"Investulators" = Speculators claiming to be Investors & bleeding cash now

Investulators aren't coming back...the vultures see the blood and are circling.


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I'm not sure I have seen a house that sold for less than what it cost to build the house. I HAVE seen many homes that have sold where the value of the LOT plummeted to the point where the total cost of home and land was pretty low compared to a couple of years ago.

For instance, the home that sold in Watercolor that started this whole thread did not sell for less than the cost of building the house. Instead, the value of the underlying land plummeted. That house probably cost somewhere in the range of $600k to $650k to build (true cost--not marked up by a builder). Which means the value of the lot was $200k to $250k. The seller got full price for the house and took a beating on the lot which was purchased for $770k.

Here's my analysis of building the above WaterColor house in today's market:

First, I don't think you can buy a nicely located lot in Phase 3 for $250K. While I see that there are a couple listed below 300, I'm thinking that $300K is a more realistic number to use for a builder who is searching for a nice lot to build a spec house on. And that's pretty cheap. Of course someone can disagree with this... and all of my numbers for that matter... but it's the number I'm using for this example. In my experience, everything ALWAYS ends up costing more than you expect, so if nothing else, I prefer to be conservative when projecting costs and tend to over-project.

Please note that these calculations are not perfect as I'm not 100% sure how each builder finances their projects, but it's close enough.

Lot Cost: $300K

Closing Cost: $5K

6 months interest: $11,250 (on 250K at 9% to get plans designed and approved through WaterColor DRB):

Architect and Design Review Board Fees: $25K

Construction Cost: $650K (I used the higher of the two numbers suggested by Fisher because, as I stated, everything costs more than you think and it's better to be conservative).

Interest during construction: $56,250 (I assumed a build time of 10 months with an average note balance of $750K throughout the process with 9% interest).

3 months of carrying cost: $22,500 (to allow marketing time after completion and before the home sells and closes).


Total Cost: $1,070,000

Builder shoots for 15% Profit Margin: $160,500

Total Cost (including Profit for Builder): $1,230,500


Builder lists it for $1,350,000 and sells it for $1,275,000 within 90 days of completion.

Builder pays 5% real estate commission... so he nets $1,211,000 after paying commission... yielding him a profit of $141K... or 13% profit margin.

If he doesn't sell it in the first 90 days, it costs him him around $8,000 (and 1% of his profit margin) for each month that it sits unsold.

Okay. Let's pick apart my numbers. They aren't perfect, but it's probably a lot more realistic than a lot of the numbers I hear thrown around. Lots of people say that if I buy a lot for X, and build it for Y... then X+Y = My Total Cost. Or in the above example, if I buy a lot for 300K and build a house for $650K, I'll only have $950K in it! WRONG.

You can certainly find issue with my numbers, but it will probably not add up to a big difference and it probably won't affect the "big picture" to a great degree. The fact is that it costs a lot of money to build a home in WaterColor. But... people keep buying them at a faster rate than any other high-end development on 30-a.

Oops... I forgot a couple of other costs that the builder has. Taxes and Insurance. Well, that certainly will eat into his profit... or he'll have to sell for even MORE than $1,275,000.

Are there other costs that I've forgotten, or am not aware of? You bet.

Keep in mind that this is a SPEC HOUSE. Anyone out there who thinks they can buy a lot and get a builder to build it for them at this price is going to be in for a big surprise because you'll want a custom home... not a spec home. You're sure to do a lot of upgrades. You'll choose to spend money not only on cosmetic upgrades, but also on better quality construction that most people (including yourself) never even knew existed before... much less noticed when viewing a house for sale.

Count on it costing at least 10% more than you originally anticipated... if you're lucky. Also, if you don't live in the area, will you count the cost of the many, many trips you will have to make down to look everything over? And after you're done in 18 months, you'll say to yourself that you'll never do that again!

You might guess how I know all this? I've walked in those shoes... and just did the final walk-through with our builder 2 weeks ago. Now if only we could afford to furnish it!

Merry Christmas to All!!!