Positive Adjustment on Seller Concessions

[J Grant]

Calvin, then what you are seeing in your market is different than what I am seeing in my market. In a buyers' market, buyers have choices of properties and can negotiate harder. Thus, if they demand a concession, and the seller wants to raise the price to include the concession, the buyer can just not budge on price, and often the seller caves on price and does not raise it, throwing in the concession as a "freebie" in order not risk losing a deal (since buyers are scarce)

In a seller's market, why would seller not raise price to include a concession? The seller knows there are more buyers out there.

The exception, in my market at least, is FHA and flip sales, where the concessions often clearly raise the price, very easy to spot. (in fact FHA is lowering the allowed concession amount, because of this)

Individual deals of course vary, and one has to look at each one on its own terms, whether it is a buyer's or seller's market.

Thankfully, in my area, a majority of the deals don't have concessions, or small ones, too minor to affect price.

 

[J Grant]

It's almost never a question of the price being raised. In most markets (buyer's or seller's), the asking price is typically set higher than the value of the asset. The difference leaves room for negotiation and compromise on terms and price.

Asking prices have little to do with it...though tracking asking prices is interesing. In my area, typically, high asking prices languish on the market. The homes tend not to sell, unless very desireable/unique.

They do tend to sell when the prices are reduced, in which cases the buyers, smelling desperation or motivation, will often negotiate for a concession without the price being raised to include it.

Just reporting on what I see, not arguing that it is right.

 

[The Bob]

Important Note: Although the math suggests a specific dollar amount adjustment, the appraiser should verify with a party to the transaction the impact of the dollar amount; a participant may indicate a dollar amount different than that calculated using the mathematical analysis.

I'm not so sure I agree with this line of thinking. We are looking for "market" reaction, not the reaction of one particular buyer or seller. If most buyers view concessions as $4$ but one buyer says, no I didn't give the concession any value, is a "0" adjusmtment for that comp really correct?

I have always felt that the most transparent way to handle concessions is to use $4$, unless you have good supportable data to show otherwise, and then use the final reconcilliation to support you OMV. There is just too much room for error/fudging. I've seen reports with $12,000 ($150,000ish SP) added into the list price of a comp and the appraiser made no adjustment, called it "typical", and believe me it wasn't.

 

[Calvin the Airedale]

Calvin, then what you are seeing in your market is different than what I am seeing in my market. In a buyers' market, buyers have choices of properties and can negotiate harder. Thus, if they demand a concession, and the seller wants to raise the price to include the concession, the buyer can just not budge on price, and often the seller caves on price and does not raise it, throwing in the concession as a "freebie" in order not risk losing a deal (since buyers are scarce)

In a seller's market, why would seller not raise price to include a concession? The seller knows there are more buyers out there.

The exception, in my market at least, is FHA and flip sales, where the concessions often clearly raise the price, very easy to spot. (in fact FHA is lowering the allowed concession amount, because of this)

Individual deals of course vary, and one has to look at each one on its own terms, whether it is a buyer's or seller's market.

Thankfully, in my area, a majority of the deals don't have concessions, or small ones, too minor to affect price.

It is almost never a question of raising the price, it is a question of how much lower than asking price will result with or without a concession.

Sure there are lots of houses to choose from, but by the time a buyer selects one to bid on, he has already made an emotional investment. The one thing buyers lack most (in many markets): is cash. What they have they need to conserve for their down payment, moving expenses, furniture, et cetera.

One of the reasons that the economy is in the shape it's in is the low RE transaction volume. When homes sell, lots of other stuff gets purchased also. Anything from furniture to lawn mowers, to paint.

 

[Mike Garrett RAA]

We have debated this endlessly and still don't agree. Those on the side of dollar for dollar contend that's the way it should be and that's what they do. On the other side are those who believe in what Fannie Mae, The Appraisal Foundation, and the Appraisal Institute say...

The adjustment should be a mechanical dollar for dollar.

I just completed an appraisal for the Department of Veterans Affairs (VA). Pulled six sales of which 4 were very comparable. All had seller paid buyer closing costs. Two were Conventional loans, two were FHA, and two were VA. In the case of all six, none of the contract prices were inflated to cover these costs. All six sold for less than the list price. The sales price to list price ratio averaged 97%. It has been common and customary IN MY MARKET for the sellers to pay some or all of the buyers closing cost for the last 5 years.

Nearly all of the 26 VA appraisers in my county do not make a negative adjustment for seller paid buyer closing costs unless it exceeds 3% of the purchase price or it is obvious the contract price was inflated over the list price to cover the cost of those concessions. For the record, I have never had an underwriter or reviewer question or suggest we should be doing anything other than what we have been doing...reporting the concession but making no adjustment.

In discussion with review appraisers for FHA as recent as last week they are of the same opinon. There will be an FHA appraiser training meeting in Denver next month. Will be interesting to see what they say in light of the new directive.

It is common and customary IN MY MARKET for VA buyers to pay nothing down and for the sellers to pay all or part of the buyer's closing costs. Does this inflate values? The market doesn't seem to think so.

 

[Calvin the Airedale]

Important Note: Although the math suggests a specific dollar amount adjustment, the appraiser should verify with a party to the transaction the impact of the dollar amount; a participant may indicate a dollar amount different than that calculated using the mathematical analysis.

I'm not so sure I agree with this line of thinking. We are looking for "market" reaction, not the reaction of one particular buyer or seller. If most buyers view concessions as $4$ but one buyer says, no I didn't give the concession any value, is a "0" adjustment for that comp really correct?

I have always felt that the most transparent way to handle concessions is to use $4$, unless you have good supportable data to show otherwise, and then use the final reconciliation to support you OMV. There is just too much room for error/fudging. I've seen reports with $12,000 ($150,sh SP) added into the list price of a comp and the appraiser made no adjustment, called it "typical", and believe me it wasn't.

I think the AF got it wrong with that comment. It is based on the premise that the buyer or seller (or other market participants) know the contributory value of the concession, or at least have an opinion. Based on many conversations over my career, almost everybody believes that concessions have a $4$ contribution. It's taken as gospel by many, including a lot of AF members.

They may however, have a false sense of a concession's real contributory effect. Which is to say that the actual results of collective actions in the market place can and sometimes do differ from their perceptions of what their actions will accomplish.

There are plenty of reasons for this phenomenon: emotion, bias, and asymmetric knowledge are just a few.

 

[Calvin the Airedale]

We have debated this endlessly and still don't agree. Those on the side of dollar for dollar contend that's the way it should be and that's what they do. On the other side are those who believe in what Fannie Mae, The Appraisal Foundation, and the Appraisal Institute say...

The adjustment should be a mechanical dollar for dollar.

I just completed an appraisal for the Department of Veterans Affairs (VA). Pulled six sales of which 4 were very comparable. All had seller paid buyer closing costs. Two were Conventional loans, two were FHA, and two were VA. In the case of all six, none of the contract prices were inflated to cover these costs. All six sold for less than the list price. The sales price to list price ratio averaged 97%. It has been common and customary IN MY MARKET for the sellers to pay some or all of the buyers closing cost for the last 5 years.

Nearly all of the 26 VA appraisers in my county do not make a negative adjustment for seller paid buyer closing costs unless it exceeds 3% of the purchase price or it is obvious the contract price was inflated over the list price to cover the cost of those concessions. For the record, I have never had an underwriter or reviewer question or suggest we should be doing anything other than what we have been doing...reporting the concession but making no adjustment.

In discussion with review appraisers for FHA as recent as last week they are of the same opinion. There will be an FHA appraiser training meeting in Denver next month. Will be interesting to see what they say in light of the new directive.

It is common and customary IN MY MARKET for VA buyers to pay nothing down and for the sellers to pay all or part of the buyer's closing costs. Does this inflate values? The market doesn't seem to think so.

Wow, even cash buyers are getting concessions in your market?

Question: is it possible that the entire price structure of your market has been masked from buyers, sellers and appraisers by some form of mass hypnosis? How else can one explain the fact that cash concessions have no value whatsoever? That is, that the prices of homes sold with such concessions are all real estate value and nothing else.

 

[Mark K]

I don't know about anybody else but I HAVE SEEN THE LIGHT!!

As a matter of fact, in the future I'm going to interview every buyer and seller of every comp and get their opinion of value that they placed not only on concessions but also on bathrooms, garages, bedrooms, square footage, decks, sun rooms, and any other conceivably adjustable item.

After all, a single guy selling a house with 3 bathrooms won't put much value on the extra baths, maybe only 0.1X, but if he sells it to a family with 8 kids, they might give it a 1.4X value. These extra baths could be worth anywhere from $0 to $50K, TO THE BUYER, maybe more if they happen to have the flu when they buy it. (This might interfere with that pesky definition of market value predicated on equally informed and equally motivated buyer and seller.)

 

[J Grant]

Basing an adjustment for concession on market reaction rather than $4$ would indicate we are making the adjustment based on typical buyer (aggregate of typical buyer reaction per local market ), rather than the reaction of ONE buyer, per definition of MV based on typical buyer/seller

In my area too, I see concessions on cash deals. My experience is that except for FHA and flips, many buyers today actually have cash, and are taking advantage of market conditions. They will make a deal for all cash, but then use financing (which is allowed of course in cash deals), and ectract a concession if they can.

The problem is not that most buyers dont' have enough cash, though that is a contributing problem, the problem re the market is also is tight ending policies and not enough income/credit scores to get a loan.

 

[Elliott]

The AF draft on Concessions should be put in a new thread. I think it takes a
confusing issue and makes it more confusing. There financing examples are
really stupid.