The 37% Appraisal Explained

I was very fortunate to have made contact with the buyer whose unit described in Saturday’s post appraised at 37% less than his contract price. He was willing to share in detail the rationale behind the comps. This will be very helpful to us as we move forward with our closing decisions, and we owe quite a lot to this buyer. My ask, in return for this information, is that others please share as soon as they get their comps so we can all know what’s what.

First, and a very important point to make, is to understand the Contract Price. Contract prices can and will vary depending upon the year they were executed. Someone who bought in 2005 most likely contracted for a lower price than someone in 2007, so therefore the discounts would be greater for the same 2 units for the person that paid presumably higher prices in 2007. So it is critical when hearing anyone’s appraisal to know when they bought their unit. The answer in this situation?  This unit was contracted for in 2006.

There were 3 comps used:  2 were units from the Avenue and 1 was a unit from the Trademark. Four other comps were included from both the Trademark and Avenue but due to various reasons, they were not one of the three used as a comp to determine the appraisal price for his specific unit. The price per square foot (psf) range for the comp came in for his type of unit at $260 – $289. The specific appraisal price for his unit was $253 psf.

In addition to the lower price psf, the appraisal also revealed that the unit was approximately 10% smaller than contracted. This obviously impacted the comps that were chosen as the appraiser chose units that were closer to the actual sq. footage to determine value.  The question now arises, will the Vue expect buyers to pay the same price for units that are smaller, therefore increasing the price psf to an even higher level than what was contracted? I am going to ask my experts to weigh in on the limit that builders may deviate from the original contract and still charge the same price. Would the price be the same if a buyer bought 3,000 sq ft unit and it was presented at 2500 sq feet at closing? Another question is whether or not HOA dues will be based on the actual sq footage or the contracted sq footage?

So, when I say his price is $253 psf, that is with the actual square footage, not with the square footage he originally contracted for. If you used that square footage the price would be $230 psf. This is not really relevant anymore because he is using the actual, but thought I would mention it. 

The logical next question is why did they come in at an appraised price of $253 when the low end of the comp range was $260? I believe one of the factors was the lack of closings in the building. There is no track record of sales yet in the Vue. These other buildings have a solid track record of sales and are almost completely occupied. Similar units for sale in buildings that don’t include the risk of a lower occupancy and/or the potential the units may be converted to apartments would likely command a premium although the Vue may have nicer amenities.

One other note: it turns out that the VUE  Charlotte will be appealing this appraisal. Apparently they feel that is not justified. Another fact: this appraisal was commissioned by one of the Preferred Lenders.

So what happens next? If another appraiser determines the unit is only 20% below contract price, will the Vue remain steadfast in their approach to make those that have put down deposits buy the unit at the contracted price?

What will this buyer do? And what will the VUE Charlotte do? Will they adjust their contract price or make any allowance in the contract price because the square footage is lower than the contract stated? Will they hold this buyer to their contract price no matter what?

This is all yet to be determined, and may take some time before we know. But that we know this much is certainly a big help to all of us.

Please send your appraisal information to Vuebuyer10@yahoo.com or post it in a comment. Thank you again to this very helpful pre-sales buyer for this valuable contribution to the VueBuyer blog! At the very least this contribution deserves a few locally brewed beers at Molly MacPherson’s!

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3 Responses to The 37% Appraisal Explained

  1. The reason that the appraiser cited a figure that was lower than the comps has to do with soft-market guidelines. On the appraisal itself, the appraiser checked the box where it is asked “the market is…” and the options are steady, increasing, decreasing. Can you guess what he checked?

    Charlotte has been under the Fannie and Freddie soft market guidelines for the last couple of years, which has made it difficult to finance anything using a conventional loan. That has been lifted somewhat with the exception being condos and neighborhoods where the appraiser says the market is still in decline.

    On new construction, developers would sell the first few units to investors who would contract for market price but from whom the developer would rent from during the sales phase. The win for the developer is that they get the comps they need (as they are the ones that set the value) and the investor gets a property at a high rent for years which they can hopefully sell for even more profit down the road. I’m not sure why MCL didn’t do this other than they couldn’t find investors.

    Unfortunately, this may be moot if the contract does not have an appraisal contingency. Without one, a bad appraisal could be seen as a buyer problem.

  2. Bob says:

    Just wondering are there any consequences to not closing on a unit besides defaulting on the deposit. I got my certified letter of my closing in Nov and have no intention of throwing anymore good money after bad.

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