Is a Builder Purchase a Comparable Sale?

This is Diana with ABC-The Appraiser’s Business Companion.  I was asked the question, “Tell me why I can’t use a Builder purchase as a comparable.”  Of course, I had to ask a couple of more questions, the first was, “Can you first tell me the whole story?  What is it that you’re appraising and why do you want this sale to be used as a comparable”?

The property is detached single-family.  The sale is one that was purchased by the builder who built their house. “Whose house?”, I asked.  The owner’s house was the response.  The appraiser stated that the purchaser was the builder who had built the owner another new house that couldn’t be closed upon because they’d not yet sold their existing house.  The owner’s house that was put on the market had not sold by the time the new house was built.  The contract had a contingency clause.  The builder had to close and the only way the loan would be made is if the owner/buyer of the new construction had the contingency satisfied.  My next questions were, “How long had the existing house been on the market and what is the typical exposure time of other houses that could be expected?”

Turns out the subject house that was the contingency of the new construction contract was on the market for 45 days.  Keep in mind our time of year.  This dwelling was placed on the market at the end of September.  The appraiser’s research showed exposure of similar properties to run 4-6 months.  All of those sales occurring prior to the builder’s purchase means they were exposed during the peak season.  The question is, was the 45 days reflective of an open exposure or was the sale closed because of duress?

I asked, do you have any other sales and could you use the house as a fourth comparable in the appraisal.  The appraiser said he was struggling with finding three sales.  I then asked another question, which house are you appraising, the new or the existing?  If you’re appraising the new house, then why are you using the existing house in the valuation of the newly constructed house?  The appraiser explained that the neighborhood boundaries were the same, these were large, somewhat rural residential parcels (2-10 acres).  His next reaction before I could ask any more questions was, “I’ll just toss it and use something else.”  My thought was, why would you call me and asked me these questions when you had stated you lacked sales?

Now I’m really confused, existing house owned by current purchasers is bought by the builder so he can close on the new house.  What’s the criteria of a comparable transaction?  Exposure on the open market, similar property type, no duress is certainly part of the criteria.  This sale was none of those except that it was placed on the open market but was absorbed in a shorter time than market behavior was tracked and it was in a season of the year when the housing market typically slows down this this particular neighborhood.

It’s not wrong to use a sale from a builder even when it’s out of his “existing house inventory”, which is exactly what this was.  The problem is the terms of the sale.  This sale had to close to make the other transaction happen.  This sale had all the earmarks of being a non-market transaction.  Now in the end you have two other transactions, but in a market value, when you are going to limit yourself to three sales, is it reasonable to consider this transaction as a comparable?

In the end, I think the sale could be discussed as it was recent and it was within the boundaries of the neighborhood.   I wouldn’t grid the sale in a Sales Comparison as it lacks the characteristics of being what some would describe as “fair sale”.  Possibly if left on the open market it would have brought a different price, we don’t and won’t know until the property is offered up to the open market again.  I don’t think we should ever ignore sales that show up in our research.  I think they should be made known but not necessarily as comparable transactions.  The reason they should be discussed for the appraiser’s protection in the future should someone question, why did you not use that most recent sale.  Simple answer, it was not reflective of market behavior and therefore was identified as a non-market transaction.

This is Diana Jacob, and you’ve just had a tip of the week from ABC-The Appraiser’s Business Companion.