Concessions - What % do you adjust?

[Tim The Enchanter]

Dollar for dollar.

Not sure what to say about this contract for my subject that says,
"seller to pay 3# closing cost" Three pounds? percent? dollar figure?

Makes no sense to me as stated, and it's signed w/o counteroffers.
But, it's the subject, so no adjustment anyway.

 

[sputnam]

Just don't say it's dollar for dollar or else someone WILL holler.

Let them holler if they want (although, so far, no one has)...but in my market it's dollar for dollar....although I do usually round if the actual concession is something like $2,327.

 

[residentialguy]

Sale price $120,000, $0 concessions and the seller gets $120,000 while the buyer pays $120,000.

Sale price minus funny math of $5,000 "concession" and the seller gets $115,000 while the buyer pays $115,000.

Not a hard concept. $4$.

I agree for the most part with Can, Sput, Mich and the likes. However, we need to make sure that this is not "mechanical"...iow, check if the seller would sell for $5,000 less in lieu of paying $5,000 in concessions. 99.5% of the time that's the case, but I've had it where they would not. For instance, I've had builders offer the $5k concessions IF the buyer financed through them. Had they paid cash, they'd have to pay the full amount, therefore there was $0 adjusted because the price represented the price they'd have to pay without the concessions.

It could go the other way, too. Zero concessions would get the house for $200k or the seller would offer to "help the buyer" by paying the needed 3% concessions, IF the price was raised by 5%. Then the $6k in seller paid concessions would need to be adjusted by $10k.

Don't make the mistake of making an adjustment mechanical. MV definition is clear on that....it's a no-no Pick up the phone and verify.

Of course, that might mean you have to charge more than $275 in order to make it worth your while to produce a credible report, since you won't be able to krap out 10+ reports a week.

 

[Calvin the Airedale]

So... for those of you like me that appraise all day long... every day... 24/7/365

What % of concessions do you typically adjust for?

100% for entry level homes?

50% for jumbo estates?

Thanks or the info!

It depends on the price tier, the market conditions, the typical buyer for the properties in question (buyer demographics).

Sometimes my adjustments are $4$, sometime they range from $1.50-$3 for every $1 of concession. In my experience, they can be less than $4$ but seldom are.

Lee has it exactly right. This business is rife with unbridled ignorance of the concepts involved for the contributory values of this feature. Worse yet, the same concepts govern most other adjustments one must make, suggesting that many practitioners are just winging it when it comes to many adjustments.

Let's review some of the ways one can determine or support the adjustments:

You can ask the: broker, listing agent, selling agent, buyer or seller. The down side here is that they may not know. They may think they know, but the actual contributory value can be higher. I've found that RE operators with skin in the game, such as rehab investors often have the best handle in certain markets as to what contributory values such concessions return. In some markets the deals won't take place if concessions aren't offered. Those are the one in which the concessions often contribute at multiples of $4$.

You can apply the cost method. $4$ is very attractive logic as many of the posts in this thread will attest. As with much else, however, it sometimes isn't true and needs to be tested. Have you ever seen $2k in landscape labor & expense add $5k to the value of a house? I have. Same with concessions. Some buyers are so cash starved that they would gladly pay higher than $4$ to save cash for all the expense that will take place after closing. Besides, if they can add that contributory margin to the loan balance, it's easy enough to justify. For Sellers, the logic of it says that any seller that makes a $1 concession to receive a return of less than $1 is a moron. IME, that's probably about right but we have to admit that even morons trade in real estate.

You can perform a paired sale analysis. Good luck with that. The right circumstances for this method almost always seem to happen by chance, and often when you're not really looking for them. But when you come across them, pay attention. Such occasions can help you refine your adjustments for a whole host of issues.

You can perform a trend analysis, that is, adjust your comps to the subject for everything else except concessions and note the differences among the comps which have and do not have such concessions. Overtime this will give you a feel. Like paired sales, doing this just once or twice won't help you much. You have to do it often and over time to refine all your adjustments.

Lastly, there are several other methods that, IME, many appraisers, maybe even most, seem to employ:

1) Magic Eight ball

2) Dart Board

3) This is how I was taught.

4) Guess

5) Peer Survey.

Peer survey is the method employed by the OP in this thread. There is nothing wrong, per se, with peer survey if the group from which answers are obtained happen to know what they're doing. But so many appraisers rely on methods 3 or 4 that this method can acquire the same level of reliability as those other methods.

 

[J Grant]

Agree with Calvin...though many times it is $ 4 $, not always. In the case of builder sales, it's usually $ 4 $, in resales, harder to ferret out...as he said adjust for all factors except concession and see where you are.

It is more than figuring out what the seller would have sold for without concession (net to seller), because each deal is different and sellers can't always have the luxury of deciding what they "would have sold " a house for. Obviously, if the seller is kicking in $ for closing costs or for repair credits, they are motivated to do so.

And in mid level or lower price houses, buyers are cash short, so the Concession is really a help with down payment. In higher end homes it is more to sweeten the deal and make their deal more attractive by providing cash at closing for decorating, for example.

Sometimes, the home won't sell at all if not for a concession. So it's in comparison to other market level sales , and comparison to typically motivated buyers and sellers out there, as well as what the concession means to that particular buyer and seller .

 

[residentialguy]

Agree with Calvin...though many times it is $ 4 $, not always. In the case of builder sales, it's usually $ 4 $, in resales, harder to ferret out...as he said adjust for all factors except concession and see where you are.

It is more than figuring out what the seller would have sold for without concession (net to seller), because each deal is different and sellers can't always have the luxury of deciding what they "would have sold " a house for. Obviously, if the seller is kicking in $ for closing costs or for repair credits, they are motivated to do so.

And in mid level or lower price houses, buyers are cash short, so the Concession is really a help with down payment. In higher end homes it is more to sweeten the deal and make their deal more attractive by providing cash at closing for decorating, for example.

Sometimes, the home won't sell at all if not for a concession. So it's in comparison to other market level sales , and comparison to typically motivated buyers and sellers out there, as well as what the concession means to that particular buyer and seller .

I don't agree. If the price is right, it'll sell. I have a five dollar bill that I will gladly purchase with on any house you have that you say won't sell at all if not for a concession.


If sellers are giving money away because cash is short, then it would be a greater adjustment than $4$. Same with cash for repair or decorating. How much would a non-concession price be? Answer that, and you'll have your adjustment. I'll tell you this much...it will be $4$ or greater. I find that $4$ is best because you are presuming a sale where the buyer has the cash. When you start adjusting 2x the concession amount because cash is short, you're going to have a big headache in front of you...and way less future work.

 

[Calvin the Airedale]

I don't agree. If the price is right, it'll sell. I have a five dollar bill that I will gladly purchase with on any house you have that you say won't sell at all if not for a concession.


If sellers are giving money away because cash is short, then it would be a greater adjustment than $4$. Same with cash for repair or decorating. How much would a non-concession price be? Answer that, and you'll have your adjustment. I'll tell you this much...it will be $4$ or greater. I find that $4$ is best because you are presuming a sale where the buyer has the cash. When you start adjusting 2x the concession amount because cash is short, you're going to have a big headache in front of you...and way less future work.

I've been doing it this way, when the situation calls for it since the early 1980s. Truth be told, I may have been questioned about it once or twice, but not at all over the past few years. As with any adjustments, however, just making the adjustment is not enough. It is always helpful to give the reader some explanation of your thinking and basis for making the adjustment.

Furthermore, those clients who would withhold work because I make concession adjustments in accordance with form instructions, or because I kill a deal here and there, are not clients worthy of my services.

 

[residentialguy]

I've been doing it this way, when the situation calls for it since the early 1980s. Truth be told, I may have been questioned about it once or twice, but not at all over the past few years. As with any adjustments, however, just making the adjustment is not enough. It is always helpful to give the reader some explanation of your thinking and basis for making the adjustment.

Furthermore, those clients who would withhold work because I make concession adjustments in accordance with form instructions, or because I kill a deal here and there, are not clients worthy of my services.

I agree with you, Calvin. Been there, done it. As long as you have good support, shouldn't be a problem.