Concessions

[Judy Whitehead (Florida)]

We went round and round on this one a few weeks ago. I attended an AI CE class, after I had a "disagreement" with a LO. Neither Fannie nor HUD will clearly define the adjustment - they simply say to make a negative adjustment to the comps for any concessions that "are not common in the area."

The AI (and me) consider the correct sales price to be the cash equivalency to the seller...in other words, the seller pays for his services (real estate commission, title insurance to deliver clear title, etc. or any cost associated with his part of the closing, and anything paid on behalf of the buyer (down payment assistance, closing costs, etc.) would be deducted from the sales price of the home. A $110,000 sale with $10,000 in downpayment or closing costs paid on behalf of the buyer is $100,000 cash equivalency to the seller. Anyone that does it any differently in my opinion is doing it incorrectly. The AI said that they were going to try to get Fannie and HUD to clarify what concessions should be deducted.

After all, if someone pays cash, we can't "add" $10,000 to the sales price as a positive adjustment now, can we? No positive adjustments allowed. Certainly you would never average the amounts and deduct evenly across the board. The only entity that wants you to do that is relo companies when forecasting (which really still doesn't make good sense to me!)

 

[JSmith43]

The AI (and me) consider the correct sales price to be the cash equivalency to the seller...in other words, the seller pays for his services (real estate commission, title insurance to deliver clear title, etc. or any cost associated with his part of the closing, and anything paid on behalf of the buyer (down payment assistance, closing costs, etc.) would be deducted from the sales price of the home.

Why don't you dollar for dollar advocates give a rip about the net to the seller? Or, perhaps, you already adjust for fee differences when they sell the place themselves or via a FSBO/but it is on MLS discount scheme?

There are lots of things that can affect the seller net. How about arrangements where the buyer broker fee is a percent or two above average? Or, the fee split for the cooperating broker is a % or two higher? Bonus to selling agent, anyone?

Dollar for dollar mentality won't cut it if there is market evidence to the contrary. In fact, I am certain that there are some areas where if seller financing of closing costs and pre-paids are not offered, the effect on selling price would be greater than dollar for dollar.

The answer is to lobby for clarity, not to pretend the situation at hand is clear:Eyecrazy:

 

[RSW]

This is what is says in the Fannie Mae Guidelines that I found here in the Forum posted by the Head Surfer.



Sales or financing concessions. The dollar amount of sales or financing concessions paid by the seller must be reported for the comparable sales if the information is reasonably available. Examples of sales or financing concessions include interest rate buydowns or other below-market rate financing; loan discount points; loan origination fees; closing costs customarily paid by the buyer; payment of condominium, PUD, or cooperative fees or assessment charges; refunds of (or credit for) the borrower’s expenses; absorption of monthly payments; assignment of rent payments; and the inclusion of non-realty items in the transaction.

Generally, sales or financing data for comparable sales—such as the mortgage amount, loan type, interest rate, term, and any fees or concessions the seller paid—is available. The appraiser should obtain this information from an individual who was a party to the comparable transaction (the broker, buyer, or seller) or from a data source that the appraiser considers to be reliable. We recognize that there may be some situations in which sales or financing information is not available because of legal restrictions or other disclosure-related problems. In such cases, the appraiser must explain why the information is not available—however, we will not accept an explanation that indicates that the appraiser did not make an effort to verify the information. In all other cases, the appraiser must provide the sales and financing concession information that was available (and verified) for the comparable sales. If the appraisal report form does not provide enough space to discuss this information, the appraiser should make an adjustment (or a relative relationship assessment) for the concessions on the form and include an explanation in an addendum to the appraisal report.

When a quantitative sales comparison analysis is used, the amount of the negative dollar adjustment for each comparable with sales or financing concessions should be equal to any increase in the purchase price of the comparable that the appraiser determines to be attributable to the concessions. The need to make negative dollar adjustments for sales and financing concessions and the amount of the adjustments to the comparable sales are not based on how typical the concessions might be for a segment of the market area—large sales concessions can be relatively typical in a particular segment of the market and still result in sale prices that reflect more than the value of the real estate. Adjustments based on mechanical, dollar-for-dollar deductions that are equal to the cost of the concessions to the seller (as a strict cash equivalency approach would dictate) are not appropriate. We recognize that the effect of the sales concessions on sales prices can vary with the amount of the concessions and differences in various markets. The adjustments must reflect the difference between what the comparables actually sold for with the sales concessions and what they would have sold for without the concessions so that the dollar amount of the adjustments will approximate the reaction of the market to the concessions.

Positive adjustments (or relative relationship assessments) for sales or financing concessions are not acceptable. For example, if local tradition or law results in virtually all of the property sellers in the market area paying a one percent loan origination fee for the purchaser, and a property seller in that market did not pay any loan fees or concessions for the purchaser, the sale would be considered as a cash equivalent sale in that market. The appraiser should recognize comparable sales that sold for all cash or with cash equivalent financing and use them as comparable sales if they are the best indicators of value for the subject property. Such sales also can be useful to the appraiser in determining those costs that are normally paid by sellers as the result of tradition or law in the market area.

 

[Judy Whitehead (Florida)]

Well, in my mind, net to the seller is the same as cash equivalency. If you can find out all of those details from a seller then you are a better man than I am. Every single time I have tried to call a FSBO seller, they have relocated and are impossible locate in order to talk to them. The title company (if you can find it on the deed on the web) is bound by privacy laws and will not share that information with you.

Additionally, getting the information regarding any differences in the real estate commission is virtually impossible. I have been in real estate here in this small town for 25 years and even know most of the agents and they aren't usually happy to share that information with me, nor will they share the settlement statement, since it is usually in storage by the time we find out about the sale. I do agree that in some areas if you do not offer seller assistance, then it makes it more difficult to sell the home due to the oversupply, but those varying amounts ($10,000 on one, $6,000 on another, etc.)

I try more than most appraisers around here to find out all of the details about the sale, but there are limitations, both privacy laws, unable to locate someone that moved, and (in this day and time) real estate agents who have gotten out of the business. I can't understand why you think us "dollar for dollar" advocates give a rip about the seller, since that is exactly what cash equivalency is. If I can determine by my investigations that there were other considerations that the seller had to pay for in order to sell the house, then I certainly would include them. In my market a $1,000 bonus to a real estate agent would be virtually impossible to determine and I still consider it an expense to the seller - perhaps to sell the house quicker? If every transaction demanded a higher real estate comission then it would become standard. As it is, most of the agents have raised their fees, as in this market it takes longer to sell, advertising is higher and if it were ME selling my house I would be offering a higher real estate commission to make my house more attractive to show.

When I sold real estate over 15 years ago, we had a real estate company that cut their commission by 1-2% less than anyone else. I simply asked the homeowner if they were a real estate agent, which house would you be pushing to sell or show?

 

[Lawrence R.]

Why don't you dollar for dollar advocates give a rip about the net to the seller? Or, perhaps, you already adjust for fee differences when they sell the place themselves or via a FSBO/but it is on MLS discount scheme?

There are lots of things that can affect the seller net. How about arrangements where the buyer broker fee is a percent or two above average? Or, the fee split for the cooperating broker is a % or two higher? Bonus to selling agent, anyone?

Dollar for dollar mentality won't cut it if there is market evidence to the contrary. In fact, I am certain that there are some areas where if seller financing of closing costs and pre-paids are not offered, the effect on selling price would be greater than dollar for dollar.

The answer is to lobby for clarity, not to pretend the situation at hand is clear:Eyecrazy:

Just to send you wayy into orbit--I don't use FSBO's at all except for the theory of substitution(for listings)--which is to say they help me set a ceiling. I don't use them for closed sales. In my market, a FSBO is, in and of itself, an anomaly. Who the heck knows what went on in there.

 

[Elliott]

The guy who wrote 'not dollar for dollar' never had to
explain himself, probably worked for Fannie and got a
big bonus. When someone can explain why a dollar
paid by a seller isn't worth a dollar I might not use
dollar for dollar.

 

[Mztk1]

On cash to buyer to pay buyer's closing costs, the cash equivalency is the cash paid and should be adjusted as such.

Today I had a pool table included with the sale as a concession. Per the agent it was a $15,000 pool table. There was no measurable value though and I put it in the report as a concession and commented that it was a seller's convenience to leave it without a measurable effect and I didn't adjust for it - though in my comments I did state that per the agent it was worth $15,000.

When the concession is cash, though, the equivalency is cash. I think a lot of us like to believe otherwise because it gets us out of having to call agents or gets our value a little higher than the competition making us look better to the mortgage client.

 

[Tim Hicks (Texas)]

Simply put, if you have to pay someone to buy your home then whatever you pay them should be adjusted. If you pay some buyer $15,000 to purchase your home for $150,000, then isn't the sales price actually $135,000? If you could sell it for $140,000 without paying somebody to buy it, why would you sell it for $150,000 and pay somebody $15,000? Funny money is funny money no matter how you look at it. That is why Fannie put the "adjust for what the home would have sold for without the concessions" part in there. In most cases, it is dollar for dollar in my market. Plus, since we utilize more than one sale, you will have am adjusted sales price range to base your opinion of value.

 

[Michigan CG]

Just to send you wayy into orbit--I don't use FSBO's at all except for the theory of substitution(for listings)--which is to say they help me set a ceiling. I don't use them for closed sales. In my market, a FSBO is, in and of itself, an anomaly. Who the heck knows what went on in there.

In the Quad Cities FSBO was huge. I did a FSBO purchase last fall and used four FSBO sales. I knocked on all four doors and got the information I needed. I quoted each buyer in my report, and two of the sellers.

 

[JSmith43]

List at 6%, typical split to selling company is, say, 3%. Seller negotiates with listing broker to list the home for 7% and offer a buyer's broker 4% if they procure a buyer. Buyer's broker rebates 2% to the buyer client.

It is legal in MN. If disclosed to the lender, however, it may be a technical violation of loan terms. For you dollar for dollar guys, you just got razzle dazzled.

There is slop in the market and Fannie gives a clarification about adjustments that a competitor can drive a truck through. I admire the "clarity and simplicity" offered by the dollar for dollar crowd.

However, your reluctance to see the door Fannie & the MV definition leaves open will hurt you financially. And, I think you are trying to do the "right" thing. However, there is still that problem of the door being left purposefully open.

The growing tradition of seller paid closing costs is encouraged by Freddie & Fannie. If the borrower has enough skin in the game, for a primary residence, they allow up to 9% before requiring their own dollar for dollar sanction. 10% or less down, 3% allowed, Over 10% down, but less than 25% down, 6% concessions allowed, over 25% down, 9% concessions allowed.

If financing concessions exceed the limits, the selling price for underwriting purposes, is reduced dollar for dollar for amounts exceeding the limits.

A distinction is made by Fannie/Freddie between financing concessions (seller paid closing costs) and cash credits, cash rebates, or even excessive marketing fees (such as hinted in my commission example above). For these items, from dollar one, they reduce the selling price for underwriting purposes. No 3% freebie.

Fannie & Freddie see a difference and I guess quite a few of you think F & F are full of it. You simply refuse to admit who is in charge and what a flexible thing that MV definition is when it comes to "financing" concessions.

Better financing terms, terms that approach zero down, sure as heck help support a market price that is higher than if they were not allowed. One by one, appraisers can try and disallow them, if they want. Good luck.

Fannie/Freddie want that flexibility in the market and are willing and able to adjust their underwriting rules whenever they feel like it. Witness the cameo appearance of 5% CLTV cutbacks in soft market areas. They changed their mind on that one in a hurry It was shooting their portfolios in the foot!