Yet Another Seller Concession Question

[timd354]

I have not seen any comments here that address a certain buyer motivation for concessions, lack of funds for closing costs. Everyone advocating for adjustments 100% of the time forgets that we only adjust when the market says so. That is why the concession adjustment is not necessarily dollar for dollar with the adjustment. I have found in many cases when there is a seller concession that the buyer and seller are fine with the sale price. That is pretty self evident since they both signed the contract...but it is not the point.
The issue is the buyer lacks the funds to close. Therefore, when you ask the question, "would this property have sold for less if there was no concession?" the answer would have been "no". It just may have sold with a different buyer.

On the other hand, if seller concessions are rare, if it sells for higher than asking price (especially if the amount over asking price is equal to the concession) or if the concession is added after the "meeting of the minds" and the price changes then yes, it would have sold for less and you adjust. The key, as always, is explain, explain, explain your work.

You are asking the wrong question. Everyone knows what the buyer's motivation is...it is to get into the home with the least cash as possible (often because the buyer has little cash). The real question that needs to be answered is whether the seller would have accepted a lower sale price without the seller concession and required the higher sale price to offset the cost of the concession. You can argue it any which way you want, but the answer is almost always "yes". If the seller receives 2 offers, one for $170,000 with a $5,000 seller concession which nets the seller $165,000 and one for $166,000 with no cooncession, the seller is going to take the $166,000 offer every time if all other things about the offer and prospective purchasers are equal. Anyone who argues otherwise is just ignoring the basic truth of the situation and is buying into the ridiculous fiction that a $170,000 contract price with what is a $5,000 rebate somehow means that the actual consideration paid for the property is not $165,000.

By the way, using the same scenario, if most every buyer needs a $5,000 seller concession to get into the property and the property otherwise would not sell except to some lowball investor who would offer no more than $150,000 for the property, then an argument can be made that the $5,000 seller concession on a comp in that market area should result in a negative $20,000 adjustment as that is what the market is telling us the property would have sold for without the $5,000 concession.

All of this horse manure is a result of the GSE's (and FHA) working around their charters and essentially making up to 86% LTV loans without mortgage insurance (when the GSE's charter requires loans above 80% LTV to have MI) and making 100% LTV loans with the fiction that they are really 97% LTV loans

By the way, the dollar for dollar for adjustment that I typically made were never mechanical, they were the result of interviewing listing agents in my market, all of whom admitted when pressed that the seller would have accepted a lower contract price without a seller concession as long they netted the same amount of money in the end and by observing numerous contracts with an addendum that added a seller concession and raised the contract price by the same exact amount and seeing numerous sales with a sales price that was higher than the listing price by exactly the same amount as the seller concession.

 

[residentialguy]

I have found in many cases when there is a seller concession that the buyer and seller are fine with the sale price.

Sure, they're happy with that price as long as the seller is paying cash out!. When the buyer gives that cash back to the seller and has to take that cash out of his own savings account, the price isn't as appealing to him. TimD is correct. Sellers and Buyers will settle on the same net in/out of pocket. I verify it every time and it is always the same. Dollar for dollar...no one will holler.

 

[J Grant]

Jesus can we ever solve this? The edict, both from the URAR certs and Fannie, ( fannie, mentions what it "would have sold for"...the cert does not state that), but the edict from Fannie/certs/other guidance is adjust for markets' reaction to PRICE. They state MARKET"S reaction, which implies a comparison to a MV benchmark from other sales activity, not literally what this individual buyer and seller or RE agent said (though that of course is analyzed). And the URAR says appraiser;s judgement, which means we analyze what buyer and seller said and then make a judgement about affect on price.

TMD said what many of us said in our posts, buyers look to what cash they need to spend out of pocket and sellers look to what they will net. The combination of buyer/seller arrives at a price, and it's the price that we adjust for or not, when we see the price to be affected by a concession.

Three different sellers ask 174-175k for 3 identical houses. Transaction A price is 172k with a 5k concession. Transaction B price is 169k no concession. Transaction C price is 176k with a 5k concession. We can easily figure net to seller on each sale, the question is, did it affect price? Talk to buyer, seller, RE agent all you want and consider what they said, but the question still is, did the concession affect market reaction to price? To answer that, appraiser then looks at data and puts similar comps preferably with prices not affected by concessions or adjusted for it on a grid and adjusts them for whatever is needed. .

The adjusted value range is from 168k-172 k. So the MV range for subject is 168kk-172k. Imo, any sale price above 172k shows an effect from the concession. We can easily figure net to seller from the A, B and C so big deal, we know that. The point is the PRICE. Talk to buyer/seller, agent all you want, at end of the day we adjust for market reaction to PRICE.

Thus, buyer A price of 172k with a 5k concession, its arguable if the concession affected MARKET REACTION $ for $, if at all since the price of 172k is within MV range. An appraiser then has to ask, how much did this 5k concession affect price,? It affected to it to higher end of MV of 172 k, most probable might be 170k. An adjustment of 2k impact on price for the 5k concession could be made. If appraiser wanted to get more mechanical and go $ for $ they could adjust the full 5k, but that leaves them 167k slightly below the MV range.

We can ask seller, if you did not offer the 5k concession, would you have sold it for more? Of course seller would say yes, or he'd sound like an idiot .But the fact is, his own actions say otherwise. His own actions , offering the 5k concession and accepting a price of 172k (leaving him net 168k), show otherwise. The seller himself did not have enough confidence in the market to actually reject this offer and sell for more within a reasonable MV exposure without a concession. But then appraiser says sure, property would have sold for more without the concession? There is a problem there, and that's why its the appraisers judgement would it have sold for , not literally what seller told you, and that's why they ask for market reaction to price, not literally this buyer and seller price alone.

Above examples, appraiser establishes from their SOW a MV range for subject of 68k-72k.

Transaction A price is 172k with a 5k concession. Concession affected price moderate amount around 2-3k ( adjust for that), If an appraiser goes $ for $ adjust for 5k they can do so, if appraiser wants to say 72k is still a MV range so no adjustment they can do so...each appraiser has to use their judgement and explain what they did and why. How credible their explanation is would be seen against the context of market and results of the appraisal.

Transaction B price is 169k no concession. ( 169k price within MV range, great example to support any adjustments )

Transaction C price is 176k with a 5k concession., concession clearly affected price above MV range and in fact even above the list price. A $ for $ adjustment equivalence is in order here , adjust 5k down to a MV reaction to 171k price.

 

[J Grant]

TMD-"By the way, using the same scenario, if most every buyer needs a $5,000 seller concession to get into the property and the property otherwise would not sell except to some lowball investor who would offer no more than $150,000 for the property, then an argument can be made that the $5,000 seller concession on a comp in that market area should result in a negative $20,000 adjustment as that is what the market is telling us the property would have sold for without the $5,000 concession. "

Actually, per your example, with many sales occurring at 165k-170k with sellers offering a 5k concession, 150k is NOT what the market reaction to price says the property would have sold for. That's why a concession adjustment is market reaction to price, not a cash equivalency. The question is not what the property would have sold for cash offer, the question is was market reaction to price affected or not affected by the concession.

If most every buyers need, or expect a 5k concession, and most properties sell for 165k-170k with a 5k concession, the seller would be an idiot, or desperate, or property subpar, or conditions changing to sell to a low ball investor for cash 150k. So 150k is NOT what the property would have sold for without the concession, given that the MV definition is typically motivated buyer and seller, not the lone idiot or extremely desperate.

In an active market such as your own example, where concessions are typical, though even not present in virtually all sales, the expectation of typically motivated sellers is to offer a concession , and this price range of 15k-170k is not affected by the granting of a 5k concession. A sale price of 180k is above MF and affected by the concession and need adjusting down.

But, a cash buyer at 150k in such a scenario is buying below market ( the AI had an example of this in a paper about concessions which if I have time will post later. ).

However, if market were depressed and most buyers though were cash buyers at 150k due to a depressed market of REO sales/property flippers, then 150k would be the MV and a sale at 165k-170 with a 5 k concession would be above MV

That is why appraisers have to consider concessions in context of the market, who the typical buyers and sellers are and use that to analyze any individual transaction..., which is why the edict is market's reaction to price, not literally what a buyer seller says they would do or what a seller nets or what it would have sold for cash.

 

[Peter LeQuire]

Timd wrote. "By the way, the dollar for dollar for adjustment that I typically made were never mechanical, they were the result of interviewing listing agents in my market, all of whom admitted when pressed that the seller would have accepted a lower contract price without a seller concession as long they netted the same amount of money in the end and by observing numerous contracts with an addendum that added a seller concession and raised the contract price by the same exact amount and seeing numerous sales with a sales price that was higher than the listing price by exactly the same amount as the seller concession."

Funny - most of the time the agents I ask that question don't need pressing: most respond with an inflection and tone of voice indicating that it's probably one of the 3 all-time silliest questions they've ever been asked.

 

[J Grant]

Of course, an agent, or seller will say if asked would the seller have accepted lower price without a concession , most of them would respond yes, what do we think they would say? BUT, even if they say that, it STILL does not answer the question, did concession affect market reaction to price? That is why the question is market reaction to price, not what the seller net is , or what seller said they would have accepted without a concession.

Sure, a seller can say I would have accepted a price of 160k without offering the 5k concession...but what did the action of the seller tell us? The seller DID offer the concession in order to sell within a reasonable market exposure of X days. (assuming he sold within that time)

So the reality is,the seller did not have enough confidence in the market to reject this offer and wait for a price of 160k without the concession. Which is fine, seller understands the reality of his market, even though the appraiser may not.

All the appraiser needs to do is see if his price of 165k with a 5k concession impacted the price. If appraiser develops from SOW a MV range for subject of 160-165k, no the 5 k concession did not impact price, or impacted it moderately toward the higher end. But, if the price was 170k one could clearly see the 5k concession affected price and adjust $ for $ in this case as indicated by a price of 170k

 

[Peter LeQuire]

"BUT, even if they say that, that STILL does not answer the question, did concession affect market reaction to price? That is why the question is market reaction to price, not what the seller net is , or what seller said they would do without a concession." - JGrant

I don't think this is correct. We're to analyze the transaction(s) - the sales of the comps - to determine the price for the real property interest conveyed, not the "market reaction to price".


(Edited for attribution's sake)

 

[J Grant]

Question, I assume mortgage loan officers quality a buyer, even the buyer with very low cash reserves...

How much they quality them in terms of cash/assets since I'm not a loan officer is the question...let's say a borrower with acceptable income and credit for a low $ down or FHA loan...they qualify buyer for the cash down buyer needs, do they also qualify the buyer to see if buyer has enough funds to close on top of the small downpayment?

 

[residentialguy]

They state MARKET"S reaction

When verification interviews say dollar for dollar 99.9% of the time, guess what? That is the market's reaction. That is the prudent and knowledgeable reaction of the market.

So the reality is,the seller did not have enough confidence in the market to reject this offer and wait for a price of 160k without the concession.

Only a Moron would reject it when it's the same money in his pocket. Duh!

 

[J Grant]

"BUT, even if they say that, that STILL does not answer the question, did concession affect market reaction to price? That is why the question is market reaction to price, not what the seller net is , or what seller said they would do without a concession."

I don't think this is correct. We're to analyze the transaction(s) - the sales of the comps - to determine the price for the real property interest conveyed, not the "market reaction to price".

The prices paid for the real property interest conveyed of the comp sales IS the market reaction to price! what else is it then? ( supplemented by other research, listings, interviews etc)

IF not that, what is the market reaction to price comprised of, in your opinion?