Builder Closing Cost Credits/Sales Concessions Adjustments

[Sadie]

I thought the newsletter complained about appraisers not making adjustnments for market conditions ( time adjustments )

There was one for that too,

 

[sputnam]

Whether to adjust or not... and how much to adjust.... are market questions. You determine and quantify the market reaction based on market extracted data. There is no single 'rule' that applies in all markets or for all properties. In my area, it's usually $1 for $1...but not always.

The common sense thinking would be that a potential buyer/seller would view a $100,000 zero concessions sale as the same as a $105,000 sale with $5,000 seller concessions. And that makes sense however, markets are not always rational.

 

[NC Appraising]

The gses and HUD just need to end the shet show on seller concessions.

If they are going allow say up to 3%, then we should only adjustment past 3%.

Below is the very old HUD handbook. They did a 180 when 4150.2 came out.

6-4. USE OF MARKET DATA CONCERNING BUYDOWNS AND INCENTIVES TO BUY. The
sales price of properties which offer the purchaser a cash refund by
means of a monthly payment reduction plan (buydown or similar
arrangement) is not to be used as comparable sales data unless the
worth of the total refund is deducted from the sales price to
reflect the true all cash payment to the seller. Appraisers must
make a dollar for dollar adjustment to comparables where the
seller's contribution exceeds limits established by HUD, currently
six percent.

A. Seller buydowns are payments for discount points, any type of
interest payments, or seller payment of closing costs normally
(under local market practice) paid by the buyer (including the
one percent loan origination fee). The sales price of the
comparable is selected as the base for making the adjustment in
order to simplify the process. To provide an abbreviated
example:

Sales Price of Comparable $75,000
Dollar Amount of Seller Buydowns: $8,750
Less: six percent of sales price 4,500 (excess) 4,250
______ _______
Adjusted Value of Comparable Property $70,750

To the extent possible appraisers should select comparable sales
from properties which sold without the benefit of various seller
buydowns in excess of six percent. When comparables are not
available without these types of incentives, adjustments must be
made to the sales price of the comparable to better reflect the
cash equivalent value of the property.

B. The instructions above, particularly the six percent allowance,
relate to seller buydowns as defined. Where sellers use other
known incentives such as trips, non-realty items, monthly
payments to principal, homeowner association or condominium
association fees, and similar gifts as inducements to purchase,
reductions in the sales price of the comparable must be made on
a dollar-for-dollar basis from the first dollar, without regard
to the six percent allowance. These instructions apply both to
new construction and sales of existing properties.

The appraiser will he responsible for making appropriate
notations on the URAR explaining all adjustments mad

 

[John Hassler]

Circa 1990 when appraisal worked dropped off I got a brokers license to make ends meet. Here are some generalized observations about how buyers and sellers value concessions.

The entry level buyer will often value concessions at more than their dollar value. For instance, they will take a $210k SP with $6k concessions over a straight $200k SP. Why? Because without the concession they don’t have enough cash to get the deal done. Calling the listing agent to see if a seller would be agreeable to concessions in advance of a showing was not uncommon. If the seller didn’t play there was no offer

Mid-level buyers would use concessions to get value for any repairs needed. It was fairly easy to get $ for $ for any pest work needed if it were only 1-2% of SP. it often took the form of NRCC rather than actual repairs that might get done after closing. If the seller didn’t play it could kill a deal.

Upper level buyers saw concessions as more of a game. Getting something was considered winning and the money would be used for something silly like an interest rate buy down. I can’t remember a seller that would not kick back at least a few $k when shown an inspection report (and when have you seen a report with no $$ repairs). The seller wanted to just get the deal done.

The above are just my generalized real world observations in my local market.

 

[Cob]

Fannie and Freddie should read their actual pre-printed form before complaining about appraisers.

*****Adjustments to the comparables must be made for special or creative financing or sales concessions. No adjustments are
necessary for those costs which are normally paid by sellers as a result of tradition or law in a market area; these costs are
readily identifiable since the seller pays these costs in virtually all sales transactions.****

This is what I have ALWAYS gone by.

 

[alebrewer]

https://singlefamily.fanniemae.com/media/37541/display

Appraiser Update Archive | Fannie Mae

Fannie Mae’s lender partners rely on appraisers to provide them with thorough, accurate, and objective appraisal reports that result in reliable opinions of market value so they can make prudent underwriting decisions. The appraisal is used to judge the property’s acceptability for the mortgage...

singlefamily.fanniemae.com

Interested Party Contributions (IPCs) | Fannie Mae

This topic contains information on interested party contributions, including:

selling-guide.fanniemae.com

Not to argue, NC, but the IPC article you cited is for lenders in assessing what contributions can be allowed for a loan transaction. For the 'Appraiser Update' page you cited, which article deals with concessions?

 

[Mike Ault]

Not to argue, NC, but the IPC article you cited is for lenders in assessing what contributions can be allowed for a loan transaction. For the 'Appraiser Update' page you cited, which article deals with concessions?

This might be the one he was thinking about…

https://singlefamily.fanniemae.com/media/37541/display

We looked at appraisal data from Q4 2021 to Q3
2023 to test our prediction. This time period was
characterized by shortages in listing inventory
relative to historic levels, giving sellers considerable
leverage to negotiate recovery of the cost of
any concessions.
Within this appraisal population, appraisers reported
seller concessions for 7.6 million comparables. Of
great concern, for 58% of these comparables, the
appraisers made no adjustment for the concessions.
Of course, this tends to inflate the appraisal results
and undermines the credibility of the appraiser.
On the brighter side, for the minority of cases when
appraisers did adjust, they adjusted dollar for dollar
86% of the time.

 

[Bobby Bucks]

As someone who uses both licenses, I see sellers all the time offering to pay $10,000-20,000 or even more in closing costs at the last minute just to make the deal happen. They expect nothing in return, they do it out of the goodness of their heart. They are stubborn about the price, but always gracious about paying closing costs.

 

[John Hassler]

Fannie and Freddie should read their actual pre-printed form before complaining about appraisers.

*****Adjustments to the comparables must be made for special or creative financing or sales concessions. No adjustments are
necessary for those costs which are normally paid by sellers as a result of tradition or law in a market area; these costs are
readily identifiable since the seller pays these costs in virtually all sales transactions.****

This is what I have ALWAYS gone by.

Agree, but the key words are “tradition or law” and “virtually all sales transactions.” I take this mean ‘under all market conditions’ as well. That is to say it means whether it’s a seller’s or buyer’s market.

In Northern CA, traditionally the buyer pays escrow. In Southern CA it split between the buyer and seller. This is irrespective of rising or falling markets. As such, these costs are not a concession by either party. I point this out because I’ve encountered many appraisers who believe if it’s a down market yet all sellers are offering concessions that meets the definition of “tradition”. It does not, it just meets the current buyer expectations based on market conditions.

 

[Sadie]

Agree, but the key words are “tradition or law” and “virtually all sales transactions.” I take this mean ‘under all market conditions’ as well. That is to say it means whether it’s a seller’s or buyer’s market.

In Northern CA, traditionally the buyer pays escrow. In Southern CA it split between the buyer and seller. This is irrespective of rising or falling markets. As such, these costs are not a concession by either party. I point this out because I’ve encountered many appraisers who believe if it’s a down market yet all sellers are offering concessions that meets the definition of “tradition”. It does not, it just meets the current buyer expectations based on market conditions.

Agree.
The test is who pays if its a cash sale. This is for things like street fees or other things that are codified in law that the seller pays. Or some transfer fee that the seller always pay, all the time. Its not generic closing costs.