Comp adjustment for builder paying closing costs?

[jennifire]

This is a related question to the other thread I began, but thought it may warrant a separate thread.

I am buying in a new community where there are very few resales. The builder offers most buyers up to $10,000 in closing cost concessions. In my appraisal, two of the six comps were adjusted downward by $10,000 due to the buyer receiving that credit.

In my opinion, there are two potential issues with this. Having been in the mortgage business for 5 years and currently working for a large bank, I am somewhat familiar with appraisals and how values are determined. As you all obviously know, comps are adjusted to make them as similar or equal to the subject property as possible. Since I am also getting the same $10,000 credit at closing, that means my subject property and the comps are equal in this respect, meaning no adjustment should be made.

Second, financing details should have no bearing on the true market value of a home. If the sales price is fair, and supportable by other comps at the time of the sale, then whether the buyer paid $5,000, $15,000, or $0 in closing costs should have no bearing on that property's value as a future comp. What if the builder gave no incentive to a particular buyer? Does that mean their home is worth more and would require a positive adjusment? Obviously not. Also, what if my closing costs were less than normal due to some other fact, such as getting a much better deal from my lender? I may pay far less closing costs than another buyer, but that has nothing to do with the value of my home.

After having read quite a few of the threads in this forum, I believe that my appraiser was more concerned with fitting the "guidelines" of an FHA appraisal and avoiding any questioning than arriving at a true representation of the market value of my property. I am financing through my employer as they offer incentives to their employees, and they do most likely use an appraisal management company.

Please explain if I am incorrect in my line of thought. Thanks!

 

[Lloyd Bonafide]

Hopefully you are wearing your blast/flame-retardant suit tonight.



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[Lee Lansford]

...

Since I am also getting the same $10,000 credit at closing, that means my subject property and the comps are equal in this respect, meaning no adjustment should be made.

...

You cite a common, but erroneous, understanding of how "concessions" are to be considered and analyzed.

"PM" me with your e-mail address and I will provide you with an excellent )) article specific to this topic.

 

[NORTON]

your correct, concessions don't have impact on the true market value of the comparables but we don't adjust from the true market value of the comparable....we adjust from the sales price so if the sales price was impacted by concessions.....then wouldn't it stand to reason that the concession be analyzed as potentially impacting the final sales price?

"If the sales price is fair, and supportable by other comps at the time of the sale, then whether the buyer paid $5,000, $15,000, or $0 in closing costs should have no bearing on that property's value as a future comp."

if the sales price was fair...why were concessions necessary? what if the builder gave 30% concessions, or 50%? are u of the opinon that would not impact the sales price also? at what point would you deem a concession as acceptable? we are expected to determine a value based on cash or a cash substitute....not what it would sell for if the seller gave back 20k.....what would happen if your builder gave every buyer 30k back.....every buyer but u....would u think u should pay the same as the folks that got 30k back? we don't think so...that's why an adjustment would be deemed necessary...it seems like part of your logic is based on "well the last home got money back" so it must be part of the normal process....well, then all a builder does it sell one home with their crooked ways and every home should fall in line after that, correct?


"As you all obviously know, comps are adjusted to make them as similar or equal to the subject property as possible. Since I am also getting the same $10,000 credit at closing, that means my subject property and the comps are equal in this respect, meaning no adjustment should be made."

we adjust the comparables to be similar to the subject regarding their physical characteristics.....not to match your financing.....but to a cash substitute or what is typical in the market place.....you have not mentioned if other builders are offering the money back...only yours....can you walk up and get your house cheaper if u pay cash? is the concessions also associated with utilizing their lender? there are a variety of questions that go along with the financing adjustments...hope it helps....others will be here soon to chime in.

 

[jennifire]

Hopefully you are wearing your blast/flame-retardant suit tonight.

I have learned a long time ago to always put on a flame suit before posting on any forum. Honestly, though, I can't see anything in my post that would offend or otherwise annoy an appraiser enough for them to flame me. If I am that out of line with my post, please educate me.

 

[Lobo Fan]

The comp concessions must be adjusted. If you go into the store and buy a shirt that is $50 with a $10 discount, you paid $40. It is the same with seller concessions. They have to be adjusted out of any comps to get to the actual market value. It doesn't matter if you are getting the concession or not, the comps did and it inflated the sales price.

That $10,000 concession did not come out of the goodness of the developer's heart. It is designed to draw in people with minimal cash to get a 97% LTV loan. An appraiser cannot ignore these concessions. That is a good way to get on the FHA Most Wanted List.

 

[Mr Rex]

If you are getting a $10,000 concession at closing the sales price is inflated by $10,000.

 

[jennifire]

Thanks Norton, your points do make sense and I appreciate the insight. My thoughts are that if a comparable's sale price was $225,000 and the buyer used FHA financing, there had to be market data to support that price at the time, meaning that the concession was an incentive to assist with financing, not necessarily because the home was overpriced. I see it more equivalent to Macy's giving you 10% off if you decide to open a new credit card when you make a purchase. It doesn't mean their goods are worth any less, it just allows a larger percentage of the market to afford them since a buyer is not paying out of their pocket at the time of purchase. I do see your point, though: at what dollar amount or percentage of sales price does it cease to serve as a incentive to buy and begin to be a discount to counteract an inflated sales price. The problem I have is that these other units were financed through FHA as well, and an FHA certified appraiser was able to justify the sales price based on market data. Also, the appraiser did note in my appraisal that sales prices have not decreased in my area over the past 12 months.



To comment on another point you made, there was a cash sale comp in the appraisal that was the exact same unit as mine and at a higher sales price, but there was an erroneous $20,000 negative adjustment on it due to an incentive that appraiser thought the buyer received. I was provided documentation by the builder that proves there was no $20,000 concession.



And to Lobo Fan, if you were to do an appraisal and use only MLS resales as comps, do you know if the seller paid closing costs for the buyer and would you also make a downward adjustment in that situation? Again, I feel that closing cost concessions are a tool to allow more people to qualify for financing, not necessarily a tool to allow sellers to overprice their homes.



The area where I am buying is all relatively newly developed, without many resales at this time. My builder does not list any of their homes on MLS, meaning that an appraiser would have a hard time getting an accurate picture of the market by using mainly MLS data. Also, if nobody is selling their home and the only MLS listings are a few short sales or foreclosures, but there are dozens of new construction purchases every month, MLS would give a skewed vision of the market as distressed sales could account for a much smaller percentage of total sales in reality.



I apologize that my two threads are now covering some of the same topics, I am just anxious to get some answers and obviously this is a very stressful and emotional time for a first-time homebuyer who was supposed to close in five days...

 

[CANative]

Everything you wanted to know about cash equivalency analysis...

http://www.boe.ca.gov/proptaxes/pdf/ah503.pdf

 

[Walter Kirk]

To explain this situation as simply as possible the seller concessions are subtracted to show how much the seller actually received for the property. The concessions in your purchase will be listed on the appraisal report, but not on the grid, to show how much you are actually paying for the property. The lender will use these figures to determine how much to lend you.