Builder Closing Cost Credits/Sales Concessions Adjustments

[FLRealEstateValuator]

My supervisor trained me to ALWAYS adjust closing costs credits dollar for dollar because in our market, a buyer sees these credits as a discount from the total price paid for the house. About 95% of my work is new construction, and it is very typical for builders to credit $20k - $30k in closing costs to buyers when paying $300,000 to $500,000 for a house. Are you adjusting for these closing cost credits on new construction? How are you handling this?

 

[alebrewer]

This is from P4 of the 1004: "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, then, it seems the most appropriate method of calculating concessions adjustments is to apply the same logic as you would any other adjustment. If the 'adjusted price' of the sale indicates the concessions influenced the price (i.e. if the adjusted price is relatively higher than the other comparables cited), adjust for that part of the concession that brings that adjusted price in line with the other comparables. If the adjusted price of a comparable is at, or below, the adjusted prices of the other comparables, it can be argued that concession didn't influence the price at all.

I have adjusted for full concessions, adjusted for partial concessions, and made no adjustments for concessions - all in the same report.

 

[FLRealEstateValuator]

Thanks for your response. Interesting that you have adjusted for full concessions, adjusted for partial concessions, and made no adjustments for concessions - all in the same report. How do you explain how you calculated those adjustments? I have a really picky client for whom I must explain (with math calculations) how I reached each and every adjustment amount. I use matched pair analysis to calculate every other adjustment amount. This doesn't always result in the adjusted prices falling in line with the other comparables, but I get as close as I can. While what you say makes sense, I'm not sure how I would explain the logic we as appraisers get, but obviously not picky underwriters...

 

[alebrewer]

My explanation is pulled directly from the definition. "I applied concessions adjustments in accordance with guidance from the GSE's that adjustments be made based on the appraiser's judgement as to the market's reaction to the concession. This could result in $0 concession adjustment, partial concession adjustment, or full concession adjustment." Never had my process questioned by a client.

 

[J Grant]

If the same model builder home , 3 sales...

sale A) sold price 500k no concession

sale B sold price 500k with a 20 k concession

sale C) sold price 520k with a 20k concession.

sale D sold price 510k, with a 10k concession

In the above example, only sale 3 would have a 20k concession adjustment, because the concession impacted the price by 20k above the other similar sales. sale D adjustment for concession impact is 10k as an adjustment ...

Of course, this is a simple example, and things are not always so clear. Put the most similar sales on the grid, make all other adjustments, then see if the builder sales that had concessions sold for more than th eothers ( enough $ to matter as an affect on price ) I always include resales that are not from the builder, at least 2 in almost every new construction appraisal .
New homes can be a bear to appraise...

 

[FLRealEstateValuator]

If the same model builder home , 3 sales...

sale A) sold price 500k no concession

sale B sold price 500k with a 20 k concession

sale C) sold price 520k with a 20k concession.

sale D sold price 510k, with a 10k concession

In the above example, only sale 3 would have a 20k concession adjustment, because the concession impacted the price by 20k above the other similar sales. sale D adjustment for concession impact is 10k as an adjustment ...

Of course, this is a simple example, and things are not always so clear. Put the most similar sales on the grid, make all other adjustments, then see if the builder sales that had concessions sold for more than th eothers ( enough $ to matter as an affect on price ) I always include resales that are not from the builder, at least 2 in almost every new construction appraisal .
New homes can be a bear to appraise...

Right. Thank you. At the moment, I have 4 comps. Two are the most recent sales of the same builder's model homes the same as the subject. One is another new construction from a different builder and the 4th is a re-sale. The subject's model matches sold for $429k with $29k in concession and the other sold for $445k with $30k in concessions. I take the upgrades into account also. The one that sold for $445k had $21k in upgrades, so those two line up pretty closely once that is adjusted for. The other 2 comps are pretty close if I adjust the concessions on the 3rd new construction, but then the resale adjusts higher than all. Typing this makes it clearer; I'm probably over-thinking it. But - it's looking like I should not adjust for the concessions on the subject's model matches at all - even though I adjusted for them fully on the different builder's sale. I'll just have to explain why, and see what happens. Thanks again.