Concession Question

[Murray Bloom]

On an FHA appraisal for a purchase of a newly renovated home ($283k), the seller has given a $10,000 concession.

My question is, given that information, would you adjust comparables with smaller concessions upward? In today's market, I'm usually adjusting all concessions (usually refis), rather than considering some 'typical.'

In this case, I don't want to raise an underwriter's red flags, or create value via an adjustment; but it seems to me that the subject's concession has effectively reduced its selling price. Logic tells me that the comps then become more valuable, relatively speaking (yes, I know that we adjust the comps to the subject).

Interested to hear what you have to say.

 

[Lee Lansford]

On an FHA appraisal for a purchase of a newly renovated home ($283k), the seller has given a $10,000 concession.

My question is, given that information, would you adjust comparables with smaller concessions upward? In today's market, I'm usually adjusting all concessions (usually refis), rather than considering some 'typical.'

In this case, I don't want to raise an underwriter's red flags, or create value via an adjustment; but it seems to me that the subject's concession has effectively reduced its selling price. Logic tells me that the comps then become more valuable, relatively speaking (yes, I know that we adjust the comps to the subject).

Interested to hear what you have to say.

If you have interest in reading a brief article on the topic of "concessions" and the manner in which they are to be considered by the appraiser, e-mail me at (remove the spaces): Lansford @ ameritech. net and provide me with your e-mail address.

To answer your question in brief: Appraise the Subject IGNORING (for the purpose of analysis in the Sales Comparison Approach) whether the seller of the Subject is giving a concession to the buyer or not.

 

[Lee Lansford]

On an FHA appraisal for a purchase of a newly renovated home ($283k), the seller has given a $10,000 concession.

My question is, given that information, would you adjust comparables with smaller concessions upward? In today's market, I'm usually adjusting all concessions (usually refis), rather than considering some 'typical.'

...

Interested to hear what you have to say.

Responding to your question: No, no, no!

Do this: READ and STUDY the asterisk section of the definition of Market Value in the Fannie form that you are using to, in part, communicate your appraisal. That section directs you as to how you are to consider and analyze concessions to the buyer.

 

[Murray Bloom]

Thanks Lee. I had a feeling I had to ignore my logic on this one.

 

[Mztk1]

The closing costs automatically paid by the seller in your area, unless contractually stipulated otherwise, are "Seller's closing costs" and that's why they are called that.

The closing costs automatically paid by the buyer unless stipulated otherwise in the contract are "Buyer's closing costs" which is why they are called that.

Adjustments are made based on what is common due to tradition or law, not what is typical in the current market. The latter is more fleeting while the former steadfast.

When the seller contractually obligates to pay $10,000 to cover the "Buyer's closing costs" an adjustment is made for the market value of that $10,000. To me, the market value of $10,000 is $10,000. Others disagree. Regardless, all atypical concessions relative to tradition and/or law have to be reported and adjusted at market value.

 

[Murray Bloom]

Thanks, Jim.

Interestingly, you note that you prefer 'traditional' to 'typical' due to the element of permanence. For sake of argument, I'd submit that with a changing market, 'typical' might be a better indicator of whether to make an adjustment. For example, in a seller's market (two years ago here), where buyers are bidding up the price of properties, no concessions may be typical. But in a buyer's market (now), concessions have become the name of the game in most communities. Shouldn't our procedures reflect the current state of the market?

The essence of my question had to do with the differential between a concession for the subject property and any one comparable sale. It seems that the value of the comp (and hence the subject) would be affected.

Also, with regard to what is either traditional or typical, if some sellers offer concessions and others do not, or the concessions differ dramatically, does this not affect the ultimate value paid for one property relative to another? Even when the concessions fall into the traditional or typical range, don't their differences mean anything, since they may amount to 5-6% of the transaction value?

 

[Mztk1]

"By law or tradition" is how it is stated in the definition of market value. It is expressly because at times the concessions are so typical that the wording is put this way. So that we make adjustments for each even if across the grid.

 

[Lee Lansford]

...

Interestingly, you note that you prefer 'traditional' to 'typical' due to the element of permanence. For sake of argument, I'd submit that with a changing market, 'typical' might be a better indicator of whether to make an adjustment. For example, in a seller's market (two years ago here), where buyers are bidding up the price of properties, no concessions may be typical. But in a buyer's market (now), concessions have become the name of the game in most communities. Shouldn't our procedures reflect the current state of the market?...

/QUOTE]

"Shouldn't our procedures reflect the current state of the market?"

To answer your question: No (specific to the manner in which appraisers are to consider and analyze concessions to the buyer).

In the current state of things (in general: buyer's market; over-supply; etc.), concessions "mask" declining prices.

Today's "concessions" do not rise to the level of being present by "tradition" or "law" in most all sales transactions yesterday, today, and most likely, tomorrow.

 

[Lee Lansford]

...

Also, with regard to what is either traditional or typical, if some sellers offer concessions and others do not, or the concessions differ dramatically, does this not affect the ultimate value paid for one property relative to another?...

"...does this not affect the ultimate VALUE paid...?"

The amount of the concession may affect the PRICE paid, but the "value" does not change due to the amount of the concession.

 

[Couch Potato]

The closing costs automatically paid by the seller in your area, unless contractually stipulated otherwise, are "Seller's closing costs" and that's why they are called that.

The closing costs automatically paid by the buyer unless stipulated otherwise in the contract are "Buyer's closing costs" which is why they are called that.

Adjustments are made based on what is common due to tradition or law, not what is typical in the current market. The latter is more fleeting while the former steadfast.

When the seller contractually obligates to pay $10,000 to cover the "Buyer's closing costs" an adjustment is made for the market value of that $10,000. To me, the market value of $10,000 is $10,000. Others disagree. Regardless, all atypical concessions relative to tradition and/or law have to be reported and adjusted at market value.

That is very sound advice when evaluating a comparable sale. However, if I am reading correctly, the post is discussing a concession on the sale of the subject property. Such concessions have nothing to do with adjustments to comparable sales. Comparable sales would be adjusted for any concessions they had at the time of their sale. That concession would not be modified based on concessions in the subject property transaction.