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Seller Paid Concessions

Discussion in 'General Appraisal Discussion' started by Tammy Medley, May 5, 2005.

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  1. Tammy Medley

    Tammy Medley New Member

    0
    Feb 28, 2005
    Can anyone help me! I had a sale on a property which had $3,900 in seller paid concessions. I made a negative adjustment to the comparables for the seller paid concessions and at that point I couldn't make the sales price. The lender and real estate agents were pissed and cancelled the order and took it to an appraisal that would not made the negative adjustment for seller paid concessions. Was I taught incorrectly? Was I wrong? Do you make an adjustment for seller paid concessions. I really want to know if I'm right or wrong? I always try to do the best job possible and if I'm incorrect I really need to know! Thank you for your help in this situation. :question:
     
  2. Caterina Platt

    Caterina Platt Senior Member

    0
    Jan 17, 2002
    Professional Status:
    Certified Residential Appraiser
    State:
    New Mexico
    Tammy,

    Whoa! Edit: I re-read your post. You adjust comparables for thier concessions. Don't adjust the comparables for your subject's concessions. Your job with the subject which contains concessions is to reflect the market value in cash equivalent. Let the concessions for your subject ride for the moment while you complete your grid. Complete your grid as usual, and then comment on the contract of the subject and whether or not it's contract price is supported by market data.

    It appears you've been taught well. I'll expand a bit from a past Appraising For FHA class that was offered by my HOC out of Denver. This is coming directly from the end client we serve as FHA appraisers. I would tend to believe it is good practice for our other reports as well.

    When atypical seller concessions exist, we are to measure the effect these concessions had on the sales price of that sale and adjust accordingly. This may or may not be a dollar for dollar adjustment. In my personal experience, most times it is, but there are a handful of situations where the entire amount of concessions was not necessarily equal to the adjustment.

    For example, the typical list to contract price ratio for cash and other cash equivalent sales (sales where concessions did not appear to exist) in a neighborhood is 95%. The sale price is $105,000 and total concessions listed are $4900. The listing price was $100,000. Similar homes to this particular comparable sell for $95,000 to $99,000 without concessions. Your adjustment amount must be determined by your best judgement, but would range from $6,000 to $10,000.

    Or.....let's say similar comparables sell from $101,000 to $103,000 in the same example. Your adjustment would be $2,000 to $4,000, again based on your best judgement.

    The above examples are for illustrative purposes. I'll be darned if I can ever find enough data on one particular home in most cases to have as clear a picture. At any rate, yes indeed. Sales concessions affect the price most times, and must be adjusted to reflect the cash equivalent.

    Was this an FHA deal perhaps??? If so, make note of the address and contact your regional HOC. They have a penchant for nailing these situations.
     
  3. Ross (CO)

    Ross (CO) Senior Member

    0
    Jan 17, 2002
    Professional Status:
    Certified Residential Appraiser
    State:
    Colorado
    The terms of the sale and purchase of your subject are....what they are....and what you would read about and acknowledge from your perusal of that final purchase contract shared with you via your client or perhaps that local listing agent, and having BOTH signatures and latest (change) date amended. (I would prefer to have the contract in a sealed envelope, and review and mention it in report AFTER I have concluded my value opinion. Rarely will that actually happen that way.)

    As for concessions, your specific requirement in the grid analysis will reflect only that respective element of concession that might have affected, or was part of, the posted selling price of THAT individual comparable. Perhaps, only one in your grid had a concession, perhaps all three did, etc. When not directly stated in the post-sale follow-up by the listing agent then it might mean that YOU need to make a few phone calls to verify and confirm such when you have reason to believe they may have been offered, or it's prevalent for that market.

    Do not hesitate on calling the BUYER's agent to ask about details of financing that sale. Many a time they "remember" better exactly what came together to enable THEIR buyer to secure that home they wanted. I come right out and relate to my obligation to attain clarification on what the house-price component might be within that "total transaction price" posted in the MLS database.....Was there any seller-paid assistance to YOUR buyer from the seller ? (That IS the primary concession I experience out here regularly !) They know exactly what I am asking about......and I can attain that $-number I need to know. All too often concessionary amounts are rolled-into a posted selling "price". Too many get the wrong perception of the "market" when this occurs. Such will confuse county assessors, other new house shoppers in that market, overly-optimistic sellers and their agents, and appraisers who do NOT verify data.

    I see your postings number here is "2". Welcome. Stick around. The "concessions" question you pose is one of the very common situations that is awakened often here, along with "comp checks" and "re-assigning a prior report into another (new) client's name". Keep reading regularly and scroll back into archival postings.

    I read that your client "cancelled" the order. Sounds like this was a move made after you had submitted your report. Yes ? Did you not have any back-up to pre-view your report before sending it out, and making sure that concessions were sufficiently handled in case your client was to phone you afterwards ? Discuss any such issues with your office supervisor, then your client. This "cancellation" of the order appears to have placed you on the outside of the compensation circle.

    Where in the country are you located ? If you are in my market area, know that our local appraiser's assoc. is hosting a 2-hour (for C.E.) dinner/meeting/seminar with our speakers being two folks from our Denver HOC, discussing pertinent FHA
    appraising issues. Date is May 18th, all starting about 5:30pm-ish.
     
  4. liznindy

    liznindy Senior Member

    0
    Jan 15, 2002
    Professional Status:
    Certified Residential Appraiser
    State:
    Indiana
    Tammy,

    Seller concessions should be deducted from the comparables when they are paid in connection with the COMPARABLE SALE transaction.

    Whether your subject has seller concessions is not a grid adjustment item.

    However, concessions paid in connection with the subject should be mentioned and analyzed in the report as should any unusual contract terms.
     
  5. Otis Key

    Otis Key Elite Member

    0
    May 15, 2004
    Professional Status:
    Certified Residential Appraiser
    State:
    New Mexico
    Tammy - you received good advice above. Remember, all adjustments in the sales comparison approach are to the sales in reference to the subject. The exception, there may be more but this is the obvious one, is seller concessions to the sales that you use in your analysis that have an indication of the fact that the concessions influenced the sale price.

    Example (Overly Simplified):

    LP = $100,000
    LP/SP = 99%
    SP = $102,000
    Seller concessions = $4,150

    Nothing else impacting or influencing this and based on the "typical market" action/reaction then it would have gone.

    SP = $99,000 without seller concession or with seller concessions where they did not influence the sale price.

    See the influence on the sale price from the seller concessions?

    BTW, welcome to the forum in case no has told you so. Don't be bashful.
     
  6. Peter LeQuire

    Peter LeQuire Elite Member

    88
    Jan 3, 2005
    Professional Status:
    Certified Residential Appraiser
    State:
    Tennessee
    This is a worrisome topic. The question I often have to try do deal with is how to establish a bench mark to determine what a "typical" list price/sales price ratio is. The problem is that, in the lower price ranges, a significant number of transactions involve substantial seller concessions. A rather common result would have SP/LP ratio approaching or exceeding 100% (using summary MLS data). Not having a (supportable) bench mark to estimate the effect of concessions makes asserting a supportable adjustment that is other than the amount of the concessions tenuous, doesn't it? I often wind up trying to weed out from the possible comparables transactions that are obviously loaded with concessions (by which I mean SP exceeding LP by a significant amount, after having verified that that amount was, in fact, concessions). When that's not possible, I retreat to the posture that what the seller actually receives is the actual consideration, and wind up making an adjustment in the amount of the concessions admitted.

    I know that some make no adjustment if concessions are "typical" in the market, but, typical or not, the "actual" selling price is what the seller receives (before transfer costs, commission, etc.) and that is sales price net of concessions.
     
  7. moe cohen

    moe cohen Member

    0
    Feb 24, 2004
    Professional Status:
    Certified General Appraiser
    State:
    New Jersey
    A new worrisome twist on the seller concession issue is a seller's second mortgage that could be as high as 20%. This is done by inflating the selling price, sometimes by as much as 20%. The seller gets their price and could care less about the 2nd. The first mortgage ends up holding the bag.
    Moe
     
  8. Robert Anderson

    Robert Anderson Senior Member

    0
    Nov 27, 2004
    Tammy,

    As others have noted, you should not adjust the comparable sales for seller concessions that relate to the subject property. So, to directly answer the question that you raise, yes you were taught incorrectly.

    The definition of market value contained in the 1004 form states that seller concessions should be dealt with as follows:

    Adjustments to the comparables must be made for special or creative financing or sales concessions. No adjustments are necessary for those costs which are normally paid by sellers as a result of tradition or law in a market; these costs are readily identifiable since the seller pays these costs in virtually all sales transactions. Special or creative financing adjustments can be made to the comparable property by comparisons to financing terms offered by a third party institutional lender that is not already involved in the property or transaction. Any adjustment should not be calculated on a mechanical dollar for dollar cost of the financing or concession but the dollar amount of any adjustment should approximate the market's reaction to the financing or concessions based on the appraiser's judgment.

    So, you first need to determine what costs are normally paid by the buyer and by the seller in your area. In my work area, this determination is easy. In other areas, I understand that this may be difficult.

    Once you have ascertained what is and is not a seller concession, you need to estimate the appropriate adjustment for use in the Sales Comparison adjustment grid. This is never easy, and is a whole separate topic, but interviews with the listing and selling agents are critical.

    As an aside, I work in areas where comps are typically plentiful. So, I generally avoid this issue by utilizing comparables that do not involve seller concessions. Once again, this may not be possible in other areas.

    Bob Anderson
     
  9. Jo Ann Meyer Stratton

    Jo Ann Meyer Stratton Elite Member

    28
    Jan 16, 2002
    Professional Status:
    Certified Residential Appraiser
    State:
    Arizona
    Adding for George:

    Caterina wrote:

    "When atypical seller concessions exist, we are to measure the effect these concessions had on the sales price of that sale and adjust accordingly. This may or may not be a dollar for dollar adjustment. "

    "The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:

    1. Buyer and seller are typically motivated;
    2. Both parties are well informed or well advised, and acting in what they consider their best interest;
    3. A reasonable time is allowed for exposure in the open market;
    4. Payment is made in terms of cash in United States Dollars or in terms of financial arrangements comparable thereto;
    5. The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale." Let's review the definition.

    There is no ambiguity in condition 4. The preceding defined value is reflected only when consideration received as payment for real property interests has been converted to the equivalent of cash. Condition 5 further clarifies condition 4.


    The test for cash equivalency is what the seller receives, from the buyer, at the date of closing, in the way of cash, and/or other items that could be converted to cash at the time of closing. This excludes any items paid by the seller in the way of services such as real estate commissions to anyone other than the buyer. If the seller receives all cash, no cash equivalency analysis is necessary. If the seller receives notes, mortgages or items of a personal nature, the test then becomes what could the seller convert those items, other than the cash received, into cash as of the date of closing.




    George K. Cox, MAI, SRA
    George K. Cox & Associates, Inc.
    Appraisals * Litigation Support * Education Providers * Consultants
    Post Office Box 1753
    Owensboro, KY 42302-1753
    Voice: 270.926.8353 * Fax: 270.686.7204
    george@georgekcoxvaluationprofessionals.com

    http://www.georgekcoxvaluationprofessionals.com
     
  10. Jo Ann Meyer Stratton

    Jo Ann Meyer Stratton Elite Member

    28
    Jan 16, 2002
    Professional Status:
    Certified Residential Appraiser
    State:
    Arizona
    Another message from George:

    Tammy:

    I assume that you used the typical definition of market value required in FRTs. If that is the case, there is no question in my mind that you were correct.

    I wrote an article on this subject while I was Chair of the KREAB. If you would like a copy send me a personal email.


    George K. Cox, MAI, SRA
    George K. Cox & Associates, Inc.
    Appraisals * Litigation Support * Education Providers * Consultants
    Post Office Box 1753
    Owensboro, KY 42302-1753
    Voice: 270.926.8353 * Fax: 270.686.7204
    george@georgekcoxvaluationprofessionals.com

    http://www.georgekcoxvaluationprofessionals.com
     
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