Yet Another Seller Concession Question

[TRESinc]

The question has nothing to do with the prevalence of concessions. The question has everything to do with what a property would have sold with without the concessions.

we have a winner!

just went through a concession thing this week. contract price was $160 w/ $6k in concessions. i had one comp on the street and two more within 3 streets, all less than 4 months old (i know, a perfect situation that rarely happens). range of adjusted prices was $149k to $156k. here is the kicker - the subject was listed at $154k. sheds some new light on the seller concessions vs sale price, doesn't it?

 

[Rich Heyn]

Just because the it is a VA appraisal doesn't mean that all of the comps are VA financing transactions. And the definition of market value is the same.

I would also point out that "virtually all" is not the same as "all". This refers to what is typical or prevalent. There will always be exceptions. What are typical actions of buyers? Are they asking for contributions to closing costs as part of their original offers? Are listing agents preparing their clients that any offer they receive will "likely" request that they pay some or all of the closing costs? And for that matter, is a contribution to closing costs requested by the buyer even marginally considered a concession, since the definition of a concession is a contribution or consideration "offered" by the seller to attract and entice a buyer to complete a purchase?

I have been in the interesting position of reviewing appraisals in multiple states and each state, and even different markets within each state, interpret this differently. Some markets, seller concessions are rare or at least less than 50% of transactions. Others, may be closer to 90% or more.

Whether you make an adjustment or not, the GSEs as well as VA and FHA all agree that the adjustment should not be made on a mechanical dollar for dollar basis. Additional research is required to understand your market and how they are reacting to concessions. Some will be more obvious that others. The 1004mc addresses the concessions and market trends in a bit more detail. Just be sure that you are not stating that concessions are prevalent and typically offering some or all closing costs and then making an adjustment equal to the amount of the concession. This would be inconsistent.

"Virtually all" is not synonymous with "typical" or "prevalent." "Virtually all" means nearly all, almost all, essentially all, etc.

 

[GA Benny]

"Virtually all" is not synonymous with "typical" or "prevalent." "Virtually all" means nearly all, almost all, essentially all, etc.

So you are saying that "virtually all" is somewhere in between typical/prevalent and all? lol

ok fair enough.

I think the best way to describe it is an analogy. "Virtually all" Christian households with children will decorate their homes with a Christmas Tree for the Christmas holidays. There may be some that do not but there is enough that most would consider it a tradition nonetheless. So what the guidelines are saying, in my opinion, is that if concessions are as common as a Christmas tree, you should not adjust for it. Maybe I am way off base, but that is my interpretation.

 

[Rich Heyn]

So you are saying that "virtually all" is somewhere in between typical/prevalent and all? lol

ok fair enough.

I think the best way to describe it is an analogy. "Virtually all" Christian households with children will decorate their homes with a Christmas Tree for the Christmas holidays. There may be some that do not but there is enough that most would consider it a tradition nonetheless. So what the guidelines are saying, in my opinion, is that if concessions are as common as a Christmas tree, you should not adjust for it. Maybe I am way off base, but that is my interpretation.

No, that's not what I'm saying. "Virtually all" goes well beyond typical and prevalent. "Hardly ever" or "almost never" might be good antonyms.

 

[residentialguy]

But if by chance the fourth sale DID happen to sell with concessions, it would preclude me from adjusting for concessions at all, effectively raising the value by as much as 6%.

Why is that?

 

[residentialguy]

So you are saying that "virtually all" is somewhere in between typical/prevalent and all? lol

No, it means that it is all with very rare exception....as if there was a law saying that sellers had to pay the buyer's closing costs....including cash deals.

 

[residentialguy]

My problem comes in when the best comps all have concessions in their sales. This is not uncommon if their are few sales but ends up with the client insisting that concessions are therefore 'prevalent" in the market and I shouldn't adjust for them....Any suggestions?

Yes. Nip it in the bud by putting this in every report

SELLER CONCESSIONS: These adjustments reflect the difference between what the comparables actually sold for with the sales concessions and what they would have sold for without the concessions so that the dollar amount of the adjustments will approximate the reaction of the market to the concessions. There are some appraisers and reviewers believe that if the concessions are "typical" in the area, then no adjustments are necessary. This is incorrect with regards to Fannie Mae and Market Value, as defined.

The definition of Market Value states:
"(6) 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."

Further clarity is given to sales concessions; Nowhere does it mention or even suggest that no adjustments are necessary for seller concessions if they are "typical" in the market, but rather only when they:
"are normally paid by sellers as a result of tradition or law in a market area"

How does one identify this? Market Value goes on with additional clarity;
"these are identifiable since the seller pays these costs in virtually all sales transactions."

There is no such tradition or law in the market area and these costs are not present in virtually all sales, therefore it is clear that typical concessions still need to be adjusted if they result in a different price had the seller not paid them.

The following excerpt from the Selling Guide, Part XI, Section 406.5 (C) provides further guidance for these circumstances:
“The need to make negative dollar adjustments for sales and financing concessions and the amount of the adjustments to the comparable sales are not based on how typical the concessions might be for a segment of the market area—large sales concessions can be relatively typical in a particular segment of the market and still result in sale prices that reflect more than the value of the real estate.... The adjustments must reflect the difference between what the comparables actually sold for with the sales concessions and what they would have sold for without the concessions so that the dollar amount of the adjustments will approximate the reaction of the market to the concessions.”

This adjustment is not a mechanical dollar for dollar adjustment, nor should it be. Market value states: "Any adjustment should not be calculated on a mechanical dollar for dollar cost..." The key word is "mechanical"; Dollar for dollar is often the market reaction, but this cannot be assumed. In order to get the most accurate insight, the agents of the comparable sales are called to verify the contributory value of the concessions and then tested against the market for reasonableness.

 

[Michigander]

deleted

 

[Terrel L. Shields]

payment is made in terms of cash in U.S. dollars

Exactly....cash on the barrelhead, and not one "cash" sale reflects anything but a "dollar for dollar" adjustment.

should approximate the market’s reaction

Since the data would almost always be inconclusive, particularly in areas where cash was used commonly, then the adjustment could be done with a dart board and be no more or no less than any other drunken guess.

a automatic 3% continual boost to the market. So concessions automatically became a step-child to the time honored definition of Market Value.

Exactamondo. If "Cash" is the MV standard, then any concession is by its very nature, a non-cash distortion of the market. If List to Sales ratio is 97% and sale is 1:1 the list price, but with 3% concessions??? Net to seller is still 97%.

 

[J Grant]

; (4) payment is made in terms of cash in U. S. dollars or in terms of financial arrangements comparable thereto;

THIS above is what it says Terrel, not your edited version of cash only...why do you post a misleading things like this? It is misleading to say that MV terms are based only on cash since that is clearly not what it says, and for good reason...sales in the market can be cash or financed, and the reality is in many markets more sales are financed than paid in cash.

So the impact of concessions are on PRICE without the concession ( whether the price is funded with cash or financed)