Question Details

Muah, Home Buyer in Santa Rosa, CA

Is an appraisal essential prior to closing on a new construction that will be completed in July 2008?

Asked by Muah, Santa Rosa, CA Sun Oct 7, 2007

I am negotiating a price on a new construction in Santa Rosa, California. The lot is empty, and the completion estimate is July 2008. When I placed the offer, I added a stipulation that the price is subject to my own appraisal prior to closing. The builder counteroffered with a good price, but rejected the appraisal clause. My thought in including the appraisal clause was to protect myself if the market continues to drop, and the house appraises for much less than the agreed-upon price. On the sellers' side, I'm sure he's trying to lock in a price in case the market falls. So my question is... I am OK with the price, but I can't decide if I should insist on my own appraisal, giving me the option to back out. Part of me wants to close this deal, but I want to protect myself, too. I am planning to keep this house 5-10 years, so I am assuming in the long run the house will appreciate and offset any appraisal loss at close. I'm afraid insisting on the appraisal might ruin our deal.

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Hello Muah. I can understand your concern about the appraisal. I want to tell you up front that I am not an expert in the Santa Rosa market. If I were you, I'd ask your agent to research how many comparable new homes this particular builder has recently sold and what the respective sale prices were. This will tell you whether this builder has a history of selling similar properties at discounted prices. I have seen this happening in my market and buyers usually don't know about it because it does not show in the MLS when the builder don't sell their listings through the MLS. I have even seen new construction that listed in the MLS, but not reported as a sale in the MLS. Instead, the builder's listing agent reported the listing as withdrawn or cancelled when it was in fact sold. I can only speculate as to the reasons why a builder would not want the sales history be easily researchable. I am not saying that the builder you are dealing with is doing this. I am just saying that you want to know what the likelihood is that this builder will offer the same model at a discounted price to someone else later this year or shortly after you closed escrow.

You could also offer to strike a compromise by adding a stipulation that the appraised value has to come back at no less than a certain percentage of the agreed upon price. When you enter into a contract in a declining market, you always run a certain risk because nobody can predict the future. If this house were ready to move in now, you'd have to make a decision now, not 9 months from now. The only way you can be absolutely certain is by waiting until the house is closer to being finished. Of course you also run the risk that it will no longer be available by then.

Sealing the deal now also has certain benefits as the builder will bear the risk of construction materials price increases. While there are some that think that construction materials may go down in price, nobody can know for sure. Furthermore, if you keep the back door open, this may also affect the builder's willingness to implement any changes you may want done during the construction. You may think that everything is final once you sign on the dotted line, but I venture to say that you'll walk through the construction site from time to time and you may find that you'd like certain things slightly different. The builder will probably be willing to make the changes, but may ask you to make non-refundable deposits to pay for the requested changes. I don't know if you have discussed how change orders are handled, but I would recommend that you are clear about that before you enter into a contract with the builder.

I hope this helps you in making a decision. The best of luck to you.
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0 votes Thank Flag Link Sun Oct 7, 2007
Ute Ferdig -…, Real Estate Pro in Newcastle, CA
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There are many ways to approach this - I will give you one suggestion via the liquidated damages clause. This clause limits the buyers damages exposure if the buyer fails to complete the transaction after removing all contingencies. The maximum exposure a buyer will have is 3% of the purchase price or less - the less applies if there is less than 3% of the purchase price in escrow when the buyer defaults. This clause will give you a similar protection as what you are seeking with the appraisal contingency - yet you would not have to negotiate for this - assuming it is already in the purchase agreement. You can still get your appraisal in July 2008 and know that you will only lose 3% of the purchase price if you walk. Walking would typically be an option if the appraisal price comes in less than 97% of your purchase agreement. In order for your purchase contract to have this clause in effect - both buyer and seller have to opt for this clause. A savy builder very well may not opt for this clause. Definitely talk to your Realtor and or real estate attorney.
0 votes Thank Flag Link Sun Oct 7, 2007
Mario Pinedo,…, Real Estate Pro in Beverly Hills, CA
MVP'08
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