Confused About Stupid Seller Paid Concessions

[KHS445]

Quick math regarding concessions.
$100,000 Sale
- 20% down conventional financing, 5% concessions - Cash required from buyer $15,000 plus remaining buyer closing costs
- 20% down conventional financing, no concessions and reduce sale price to $95,000 - Cash required from buyer $19,000 plus remaining buyer closing costs
- 10% down financing, 5% concessions - Cash required from buyer $5,000 plus remaining buyer closing costs
- 10% down financing, no concessions and reduce sale price to $95,000 - Cash required from buyer $9,500 plus remaining buyer closing costs
- 5% down financing, 5% concessions - Cash required from buyer $0.00 plus remaining buyer closing cost
- 5% down financing, no concessions and reduce sale price to $95,000 - Cash required from buyer $4,750 plus remaining buyer closing costs

Forgetting any of the remaining closing costs; the difference in required down payment on the 20% down deal with/without concessions is $4,000, the difference on the 10% down deal is $4,500 and the with 5% down the difference is $4,750. These numbers are ratio based so an initial deal at $250,000 would result in the differences being 2.5 times the numbers shown in the example.

So in the end the seller has sold their house and the buyer has purchased the house with a lower cash investment and the lender is holding the bag.

 

[jay trotta]

Quick math regarding concessions.
$100,000 Sale
- 20% down conventional financing, 5% concessions - Cash required from buyer $15,000 plus remaining buyer closing costs
- 20% down conventional financing, no concessions and reduce sale price to $95,000 - Cash required from buyer $19,000 plus remaining buyer closing costs
- 10% down financing, 5% concessions - Cash required from buyer $5,000 plus remaining buyer closing costs
- 10% down financing, no concessions and reduce sale price to $95,000 - Cash required from buyer $9,500 plus remaining buyer closing costs
- 5% down financing, 5% concessions - Cash required from buyer $0.00 plus remaining buyer closing cost
- 5% down financing, no concessions and reduce sale price to $95,000 - Cash required from buyer $4,750 plus remaining buyer closing costs

Forgetting any of the remaining closing costs; the difference in required down payment on the 20% down deal with/without concessions is $4,000, the difference on the 10% down deal is $4,500 and the with 5% down the difference is $4,750. These numbers are ratio based so an initial deal at $250,000 would result in the differences being 2.5 times the numbers shown in the example.

So in the end the seller has sold their house and the buyer has purchased the house with a lower cash investment and the lender is holding the bag.

IMO- The Lender/Bank runs the same numbers and then some to determine their "Risk Factor", I do not believe they are Holding Any Bag; they make an "Informed Decision" to take the Risk or Not. There are numerous ways to develop a concession within market acceptable indicators, but again, the Lender/Banker see's more than you do on numbers and they decide to take the Risk or not. By bracketing the; the Sale Price or adjusted value, you have created a range in which the Lender observes the market. When you pinpoint that observation, it is only for the Lenders potential defense; you have been targeted.
Have fun, stay lose and above all..........

 

[Michigander]

You give Realtors no credit for being creative. Abolish the concessions and see what happens.

Very true. When I sold RE in the mid 80's, we didn't structure concessions (at least in my area) and people still needed 5% or greater down payments, and deals still happened every day, even first time buyers.

 

[Terrel L. Shields]

the lender is holding the bag.

Exactly. And Mark Lewis, in a presentation before the state "day with the board" made that point. If a bank has an 80% LTV guideline then the concession may push the value below that mark. If so, then technically the bank has to count 100% of the loan against reserves.

 

[norapp]

Without a doubt, this is my biggest pet peeve. No seller in my locale ever gives a buyer money to help pay for the home. The word seller should be eliminated. These are closing costs being rolled into the mortgage and it creates a false market when they are recorded at gross. I have had quite a few over the past year that I have not been able to justify the gross sales price. I include a statement about the use of sellers concessions in my locale and how they are being used. If I don't have sales that support my subject after concessions are accounted for, it's not my problem. It's the brokers and the lenders who are trying to finance over 100% of the loan. I've posted this comment before and it is in all my reports where concessions are common. Since adding this comment I have been getting less throwback now when the appraisal is not supporting that gross number.
Sellers Concessions- Sales That Include Sellers Concessions Have A Negative Adjustment To Reflect The Actual True Net To Seller Sale Price.
The Use Of Sellers Concessions May Appear To Inflate The Market When Sales Are Recorded At Gross And Not Net To Seller. Appraiser Has Researched All Sales And Made A Negative Adjustments Where Concessions Were Used. Readers Of This Report Should Be Aware Of How Sellers Concessions Are Used In This Market And That The Gross Sale Price Is Not The Actual Sale Price/Net To Seller. Sellers Concessions Are Typically Being Used To Finance Closing Costs. Brokers Who Utilize Closed Sales To Establish A List Price And Subsequent Sale Price Should Be Aware Of The Actual Sale Price And Not Misrepresent The Gross Sales Price Listed On The MLS As Actual When Sellers Concessions Are Clearly Stated.

 

[Deleted member 130081]

Cookie cutter subdivision....All five sales are FHA/USDA with $3K-$4K seller paid closing costs.

Subject ALSO has $3,500 is seller paids.

The appraisal is not coming in due to all the comps seller paid concessions.

What would you do.

I don't understand the confusion on this issue. Don't be confused. Enlighten yourself by reading the 3 sentences below and ignoring 95% of the 8 pages of comments on this.

If a comp has concessions AND concessions are not typical in your market, make a downward adjustment on the stupid sales grid, equal to the dollar amount YOU reconcile to be appropriate. Concessions ALWAYS inflate the value. The question is if it is typical in the market or not, resulting in market value or not.

So in your case, either the 5 sales you speak of are atypical and subsequently the prices are considered as inflated vs the rest of the market, in which case you would adjust them down on your grid OR the 5 sales you speak of may be inflated, but the practice is typical and subsequently the prices are considered as not inflated vs the rest of the market, in which case you would not adjust them down on your grid. This is why the protocol on concessions is included in the definition of market value - you are being instructed on how to consider what market value is or isn't.

Edit - I am not going to edit this post, rather leave this post up in shame. I am completely wrong about this. Concessions are not to be considered as normal or traditional seller paids. RG is right and I am very wrong.

 

[residentialguy]

I don't understand the confusion on this issue. Don't be confused. Enlighten yourself by reading the 3 sentences below and ignoring 95% of the 8 pages of comments on this.

If a comp has concessions AND concessions are not typical in your market, make a downward adjustment on the stupid sales grid, equal to the dollar amount YOU reconcile to be appropriate. Concessions ALWAYS inflate the value. The question is if it is typical in the market or not, resulting in market value or not.

So in your case, either the 5 sales you speak of are atypical and subsequently the prices are considered as inflated vs the rest of the market, in which case you would adjust them down on your grid OR the 5 sales you speak of may be inflated, but the practice is typical and subsequently the prices are considered as not inflated vs the rest of the market, in which case you would not adjust them down on your grid. This is why the protocol on concessions is included in the definition of market value - you are being instructed on how to consider what market value is or isn't.

OP, ignore the comment above, too. It is incorrect.
1. Typical has nothing to do with it.
2. Concessions don't always inflate the price, hence why appraisals can't make it a mechanical adjustment, rather they have to verify it with the party of the transaction and not make assumptions.

fcrecords...I suggest you actually learn the "protocol on concessions" before you get on that horse again saying to ignore 95% of the posts here and to read your misinformation.

 

[Deleted member 130081]

OP, ignore the comment above, too. It is incorrect.
1. Typical has nothing to do with it.
2. Concessions don't always inflate the price, hence why appraisals can't make it a mechanical adjustment, rather they have to verify it with the party of the transaction and not make assumptions.

fcrecords...I suggest you actually learn the "protocol on concessions" before you get on that horse again saying to ignore 95% of the posts here and to read your misinformation.

Right back at you RG. Simply stating something with conviction does not make it true. As far as protocol, I take that from the definition of market value pre-printed on all GSE forms, shall we cut and paste it here for debate? I would love to see your alternate source. And as far as what you have stated, I find it shocking you passed your exam if you cant wrap your head around what is essentially a pretty simple concept. Of course a concession inflates the price. Being typical or not has everything to do with how we address that inflation in our value estimate. I would say refer to the one poster on the this thread who discussed "net to seller" and have a long, hard think on that. The question is not if a concession is an inflation or not, it is. The question is in what context we consider the inflation. Is it typical, meaning we could consider it in/as market value (not adjust) or is it not typical, meaning we should consider/reconcile the market reaction in terms of dollars and adjust. All you are doing is confusing the OP with your 8 pages of nonsense. The OP needed urgent help, not additional confusion.

Edit - I am leaving this post up, but it is wrong. RG is right. Sorry RG.

 

[norapp]

Right back at you RG. Simply stating something with conviction does not make it true. As far as protocol, I take that from the definition of market value pre-printed on all GSE forms, shall we cut and paste it here for debate? I would love to see your alternate source. And as far as what you have stated, I find it shocking you passed your exam if you cant wrap your head around what is essentially a pretty simple concept. Of course a concession inflates the price. Being typical or not has everything to do with how we address that inflation in our value estimate. I would say refer to the one poster on the this thread who discussed "net to seller" and have a long, hard think on that. The question is not if a concession is an inflation or not, it is. The question is in what context we consider the inflation. Is it typical, meaning we could consider it in/as market value (not adjust) or is it not typical, meaning we should consider/reconcile the market reaction in terms of dollars and adjust. All you are doing is confusing the OP with your 8 pages of nonsense. The OP needed urgent help, not additional confusion.

I have to say that it's apparent that concessions are used and analyzed differently depending on your market. We live in a big country and what is happening in my market may be different than yours. It is possible to have more than one right answer for this. You all know what is right for your market. Discussion is good. Insults are not.

 

[residentialguy]

Right back at you RG. Simply stating something with conviction does not make it true. As far as protocol, I take that from the definition of market value pre-printed on all GSE forms, shall we cut and paste it here for debate? I would love to see your alternate source. And as far as what you have stated, I find it shocking you passed your exam if you cant wrap your head around what is essentially a pretty simple concept. Of course a concession inflates the price. Being typical or not has everything to do with how we address that inflation in our value estimate. I would say refer to the one poster on the this thread who discussed "net to seller" and have a long, hard think on that. The question is not if a concession is an inflation or not, it is. The question is in what context we consider the inflation. Is it typical, meaning we could consider it in/as market value (not adjust) or is it not typical, meaning we should consider/reconcile the market reaction in terms of dollars and adjust. All you are doing is confusing the OP with your 8 pages of nonsense. The OP needed urgent help, not additional confusion.

LOL...ok...apparently you want to go toe to toe.

Let's hope you can learn, but with your haughty attitude, I won't hold my breath. I'll keep myself open to learning. I'll cut and paste, as you suggested.

So lets start with your notion about the market being typical making a difference.

This is incorrect with regards to Fannie Mae and Market Value, as defined.

The definition of Market Value states:"(6) The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions* granted by anyone associated with the sale." In other words, if it inflated the price, it has to be adjusted so that it reflects a price without concessions inflating it.

Reading further, FNMA gives more clarity to sales concessions; Nowhere will you find it mentioned or even suggested that no adjustments are necessary for seller concessions if they are "typical" in the market, but rather only when they:"are normally paid by sellers as a result of tradition or law in a market area" . This doesn't mean typical. It means every sale the seller will pay concessions. There is no such tradition or law in any market area. Then it gives further clarity saying "these are identifiable since the seller pays these costs in virtually all sales transactions." No market has seller paid concessions present in virtually all sales, therefore it is clear that concessions, even when typical, still need to be adjusted if they result in a different price had the seller not paid them.

Let's see what else FNMA requires. The following excerpt from the Selling Guide, Part XI, Section 406.5 (C) provides further guidance for these circumstances: “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'

Therefore, if concessions are typical, it doesn't matter!!! If they affected the sale price, then you adjust...even when 90% of all the other sales have concessions.


Now. Let's talk about your assertion that "concessions ALWAYS inflate the price".

If that were the case, then FNMA would have instructed us to make a mechanical adjustment, because FNMA Selling Guide, Part XI, Section 406.5 (C) states that "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". According to you, it always inflates the price, therefore if that were the case, we should adjust automatically on every concession...but they stated the opposite. They state "Any adjustment should not be calculated on a mechanical dollar for dollar cost." Hmmmm....Ooops

Therefore, it can only be concluded that concessions don't always inflate the price. And I have run into situations and verified where they didn't inflate the price. So, like I said above. You're wrong.

Hopefully you can wrap your head around what is essentially a pretty simple concept, as I showed above.