Closing Costs

[TPERALTA]

This is definietly a newbie question regarding closing costs. It was my understanding that closing costs are viewed as discounts, if you will, that the buyer receives from the seller for purchase of their property. And that closing costs ARE considered concessions because they are incentives to help buy or sell a house. With that said, I have always subtracted the amount of the closing cost, on the grid, for each of the comparables (assuming the comps did NOT have any concessions or closing costs). Therefore, adjusting the comparables for the concession/closing costs that the S/P received.

I am completing a report for an appraisal managament company and the appraisal manager called me requesting I take out this adjustment on the grid and put together an addendum stating that "the revised appraised value is based on removal of the closing costs... no concessions were offered, and that market value is reflective of the particular indicated value range of sales comparables...etc...etc".

Apparently, I am uncertain on how to properly handle closing costs. Will you please advise me on the correct way to handle closing costs that are paid by the seller?

Thank you very much.

 

[Farm Gal]

OK let me make sure I get this:
You are adjusting the comparables DOWN in value (for superiority) -as compared to your Subject Property- because the subject has seller participation?!?!

 

[Farm Gal]

Moderators Note:
1. BE NICE...

2. Wait for a reply from the original poster.

3. This will be moved to the :new_newbie: thread, if needed.

4 and it may so be needed

 

[Wendy]

It is surprising how often this comes up. Just one of those things I guess.

TPRALTA,
If the concessions you are talking about are your subject's, then you do not adjust the comps.

Only adjust for concessions on your comparables. Subject concessions need to be reported and explained on the space provided. They have no impact on the sales grid.


Edit to add: Sorry Lee Ann, I didn't wait. But I was nice.......

 

[Farm Gal]

Wendy:

I just want folks to walk this poster through the actual thought process STEP by STEP... and I gotta go run some errands and do some actual work... so please BE nice.

At least TPeralta knows what s/he does not know:blush:.... and admitted it!


leeann: nevermind that it took an :new_2gunsfiring_v1: AMC to convey the cause for concern)

FWIW it was this very 'concession issue' as a freshly minted newbie myself, that solidified forever the WHY and wherefore of comparable adjustment logic. I am going to try to pay it forward. Cause I was sure a knot-head over the issue... somehow concessions confused me terribly cause I just thought I HAD to adjust... and someone had to draw me a map lead me by the hand, and then tell me when I 'got there'.

 

[Jim Buckner]

The process is to deduct seller paid concessions from the sale price of the comparable sale to arrive at an effective cash price for that comp.

 

[TPERALTA]

First, thank you for your replies. I appreciate the request to "be nice", as I understand this may seem like a no brainer to most of you. I just want to make sure I am handling it properly. Yes, the seller is crediting the buyer $15,000 for reoccuring/non-reoccuring closing costs.

I am still confused because Wendy say it has "no impact on the sales grid" while Jim says "The process is to deduct seller paid concessions from the sale price of the comparable sale to arrive at an effective cash price for that comp" which is what I have been doing, until recently questioned. I just want to make sure I am handling it properly. Please, if you can take me step by step, on the logic, I would appreciate it.

My logic was always that the concession (closing costs paid by seller) is a "discount" on the property that had to be considered if the comparables did not have a similar discount. So, yes, I was subtracting the amount of the S/P closing cost, on the grid, for each of the comparables.

 

[Charles Knutson]

Hi Tperalta --

Excellent questions, and issues I had problems with when I was a newbie.

It was my understanding that closing costs are viewed as discounts, if you will, that the buyer receives from the seller for purchase of their property. And that closing costs ARE considered concessions because they are incentives to help buy or sell a house.

Closing costs per se are not discounts or concessions -- when the seller pays for them (or the down payment, or whatever) either as a percentage of the loan amount or a stipulated dollar amount, that is a cash concession.

But even there, you do not adjust for it in the grid -- in the section under contract price of the URAR or 2055, check the "yes" box, and explain the concession. I include comments something like this:

"The seller agrees to contribute 3% of the sales price for the buyer's closing costs and down payment." -- or -- "The seller agrees to contribute $4,000 towards the buyer's closing costs and down payment."

That is all you need to do -- note the concession on page one, and then adjust the comps.

If the comps have seller concessions, do a negative adjustment against their sales price -- but the subject property's terms of sale are not considered in the grid.

My logic was always that the concession (closing costs paid by seller) is a "discount" on the property that had to be considered if the comparables did not have a similar discount.

Seller concessions discount the cash equivalent purchase price of the subject property, but that has nothing to do with the comps.

If the comps don't have SC's, it doesn't matter -- the comps indicate value, regardless of the terms of sale for the subject property.

Another way to think about it -- the subject property you appraise today with a $5k seller concession will become a comparable when it closes; it will then require a negative $5k adjustment against the subject in future reports.

Adjusted the comps for their seller concessions -- use them to support the market value of the subject property. If that is higher than the purchase price with the seller concession included, that's great -- if not, that's the way it is.

 

[TPERALTA]

Thank you, Charles. It makes sense to me and I will take this knowledge with me for future appraisals. It all clicked when you explained, "Another way to think about it -- the subject property you appraise today with a $5k seller concession will become a comparable when it closes; it will then require a negative $5k adjustment against the subject in future reports."

 

[Mark to market]

In short, you are adjusting the comps to the subject.
You may never have a positive adjustment in the concession bracket.


A little longer way of looking at it would be to say you are doing two appraisals on two identical properties. Both appraisals are using the same comps. One of your subject properties has $5000 in seller concessions the other has no concessions.
If you do the appraisals the way you tried to do it, you would end up with two different values for the same model home. That wouldn't make much sense.