Preconstruction Appraisal Process

[Rambunkscious]

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.

 

[Pirate]

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.

 

[jlweathers]

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.

 

[Rambunkscious]

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.

 

[Pirate]

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

 

[SHELLY]

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.

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[SHELLY]

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.

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[SHELLY]

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."

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[Pirate]

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.

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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.

 

[Mango]

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.