Declining Markets and Sales Concessions

[Judy Whitehead (Florida)]

I went to the AI course on the subject above yesterday and if anyone is interested (since there was quite a thread on this last week or so) I will tell you that the instructor said that the AI has taken a position on the sales concessions issue (I think he said within the last few months) and has stated that anything above cash equivalency to the seller should be deducted from the comparables. Those items that the seller pays to a "servicer" such as a real estate commission, title insurance, taxes, etc. are considered to be normal and common and do not benefit the buyer.

Interestingly this part of the course was left until the last half hour and I had hoped that it would be covered much more thoroughly. The instructor did say that the AI would be working with Fannie and HUD to get them to issue an advisory, or whatever, to clarify what adjustment and how much should be made.

The bottom line is that if the Seller sells his house for $110,000 with $10,000 given to the buyer, then that $10,000 is a negative adjustment (for the comps only as compared to the subject) and the seller's cash equivalency was $100,000 - in other words that is the actual price paid for the house. In the case where there is seller concessions being given to the buyer on the subject, that should not be considered or adjusted, since you are comparing the comparables to the subject. This is what I have been doing all along. As all of you are aware (I'm sure) Fannie and HUD states that there should never, never, ever be a positive adjustment for sales concessions.

The instance that I had, a major bank was trying to convince me that 3% in seller financing concessions was "common in the market" and the "1st" 3% should be ignored and an adjustment made only on anything exceeding that. I pointed out that some people still pay cash for houses (retirees down here and investors scooping up good deals now) so this "theory" could not apply to every sale. In other words, should a cash sale have a "positive" 3% adjustment made? No.......Fannie won't let us.

So it was nice to know that the AI thinks that I have been doing it correctly. The instructor agreed that without clear definitive instructions from Fannie and HUD (they have a small verbage added that says "adjustments that are common in the market") that it is difficult to know exactly what to do, but their position is that money given to the buyer by the seller in the form of sales concessions should be a negative adjustment to the comp and the true value of the sale is the cash equivalency to the seller.

 

[Randolph Kinney]

I would reserve my judgment for the idea of your AI instructor that anything above cash equivalency to the seller should be deducted from the comparables.

I always thought that financing should be considered. 100% cash payment to the seller is provided in part or in whole by financing. It is not that same as an all cash buyer.

If we are going to really get down to cash equivalency, lets consider the effect that financing has on value.

 

[Mztk1]

Good to hear Judy. I knew they'd be in the same camp as us, but it is still nice to hear your follow-up and that there were no surprises.

 

[Pamela Crowley (Florida)]

It's about time!!! Thanks, Judy!

 

[Mike Garrett RAA]

The AI can say what ever it wants but until Fannie/Freddie, FHA, and the VA issue a statement the issue will remain clouded. I, for one, would like to see that happen and soon.

 

[The Bob]

I would reserve my judgment for the idea of your AI instructor that anything above cash equivalency to the seller should be deducted from the comparables.

I always thought that financing should be considered. 100% cash payment to the seller is provided in part or in whole by financing. It is not that same as an all cash buyer.

If we are going to really get down to cash equivalency, lets consider the effect that financing has on value.

That's a legitimate point, especially considering that RE has traditionally been purchased with majority debt financing. But we don't need to go any further than simple accounting principles to see that two people can't save the same dollar. If a seller gives back $1 in concessions, the buyer benefits. It's a debit to one and a credit to the other. So shouldn't that be deducted from what the seller receives.........his "price"?

 

[airphoto]

To continue the thinking, what adjustments (if any) should be made for non-amortizing debt, ARM's, "atypical" interest rate financing, etc.?

 

[Judy Whitehead (Florida)]

I would think that there is usually only so much you can find out about the comparable sales, anyway, since in my experience, only the real estate agents are still around to give you the information. Anyone else (bank,title company, etc.) are not going to give the information out. Actually, the privacy laws could apply in all cases.

Each one would have to be analyzed on its own. I'm afraid on a Friday I'm too dense to understand why it would matter if the seller received his money via mortgage or cash from the buyer. I can't think of a situation where the amount would be different - at least it never has in any real estate transaction I've been involved in.

I called HUD and got a very vague response from them.....mainly don't let the bank pressure me, and I had to be the one to decide what was "common in the market." I believe that they should specify what are considered negative concessons and what should not be considered.

The bottom line, is that the instructor pointed out that appraisers were being disciplined in Tennessee from their state board for ignoring the adjustment for sales concessions, as they were (and even punished criminally) in the Poconos, so at this point the only thing that we need to be concerned with is how our own Appraisal Board would view an appraiser deliberately ignoring a negative adjustment for sales concessions to a comparable sale. If anyone knows how we can go about getting our Board's opinion on this, please let me know and I will pursue it. Too bad we don't still have Frank on the Board, although he may be able to provide their stance on this issue.

 

[Randolph Kinney]

That's a legitimate point, especially considering that RE has traditionally been purchased with majority debt financing. But we don't need to go any further than simple accounting principles to see that two people can't save the same dollar. If a seller gives back $1 in concessions, the buyer benefits. It's a debit to one and a credit to the other. So shouldn't that be deducted from what the seller receives.........his "price"?

You make a point for a net sum zero results and therefore no adjustment for financing. However, consider the effect financing has on the value of a property. How many buyers are available with 100% financing versus 80% financing? Versus all cash?

Value is created when there is a demand or destroyed when there is no demand. It is the terms of the financing that pushes price one way or the other. Cash back at closing does not work with an all cash buyer. Cash back closings can work very well with 100% financing.

The game of discounting is played all the time in retail where they are selling at 50% off their regular price for a special sale. They record the gross sales price and deduct the sales concessions as marketing expense. The same is done on real estate when a Realtor gives back a portion of their commission so the deal will go through or cash back at closing that is really coming from the lender, not the seller.

 

[Mike Garrett RAA]

IN MY MARKET, cash sales represent less than 5% of the total transactions. Cash is not considered the norm. VA/FHA comprise more than half of all the loans. Considering all types of loans, less than 10% have more than minimum down payments. So, what is considered normal and customary?