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Excessive Seller Closing Costs

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Tim Hicks (Texas)

Elite Member
Joined
Jan 15, 2002
Professional Status
Certified Residential Appraiser
State
Texas
I have noticed a growing trend in our market that seems to have spread like wildfire. For instance, yesterday I had a simple tract home re-fie assignment in a 1980-1988 addition where homes range from 1,200 to 1,800 SF. The borrower had been told by a local realtor that she could get $89,000 for their home as she had just sold the one down the street for $89,000. When I pulled up the listing for that home I noticed it had sold for $89,000, but had been listed for $82,000 with (surprise) zero seller points reported. Now, every other sale in the neighborhood supported $80-84,000. The agent did disclose in a phone conversation that the "seller paid some extra closing costs". So, automatically the home is worth $89,000 because you got a lender to accept those closing costs lumped on top? This situation made me wonder how many appraisers blindly accept accept higher sales prices over the actual list price without investigating. I quite possibly think many don't care. I looked at over 20 sales in the area and 10 of them had similar situations with $2-7,000 prices over the list price. This is not a result of bidding wars, there is ample supply for demand. What are your thoughts and views on this spiraling trend? Does the inflated pricing bother you? How are they getting the appraised value to support it?
 
Joined
Jan 13, 2002
Professional Status
Retired Appraiser
State
Florida
I see this a lot here too in certain areas, especially where there are investor flips. So far, most of the Realtors involved flat out refuse to disclose to me any concessions let alone how much. So far, the only option I have left is to adjust the dollar amount difference between the listed price and the sold price and that is what I do. I might be the only appraiser in my area doing this as most just choose to ignore it. I also look up the listing history of subject and all comps used - amazing what can be found there, such as, price changes to attempt to hide the added on concessions, withdrawn listings at the lower price attempting to hide the added on concessions, etc. I try NOT to use those sales as comps unless I have to.

In the Market conditions section of page 1 of URAR, I also put in comments such as:

There is moderate to heavy REO and investor activity in this neighborhood.
(If that is the case for that neighborhood. Wording is modified depending on what I find.)

and:
The average list price to sale ratio is 78% - 106% depending upon initial pricing, condition & seller concessions added on to the sale price.

I do go through all the sales for the past year to determine these ratios for each neighborhood.

Pulling all withdrawn and expired listings for that neighborhood during the past 6 months, and then the 6 months prior, gives some great information too!

Another comment I have added when qualified comps are scarce and I'm forced to use one of those is:

Comp #3 appears to have sold with seller concessions added on to the sale price and that sale price is higher than typical for this market area with no justification found for that sale price being that high.

This is after I have done everything I can to find out how much updating and upgrades were in that house.

:twisted: :twisted: :twisted:
 

Restrain

Elite Member
Joined
Jan 22, 2002
Professional Status
Certified General Appraiser
State
Florida
Tim,

Up here, when a home is market priced, the average sale price is 93-97% of asking price. If a home is overpriced, that's another issue but is obvious due to days on market.

I agree that there are some homes that sell with very significant concessions. A lot of these are first-time buyers that are using Neimiah or a City/County bond fund, or some similar deal.

Example. Did a review of a SF appraisal. Home was typical for market, value in mid 90's. Appraiser used a sale at $107,000. I went back and checked, found listing at $98,000. Called realtor, said that this reflected one of these programs and there was $9000 in additional costs, down payment assistance, etc. built in, reflected in the final sales price. Appraiser did not adjust, with a final appraised value approximately $10,000 over true market value.

Now, if they're going FHA and there's 3 points, I'm not going to adjust. But if it's obvious that there's something unusual going on, I'm going to try to use another sale. If it's the only one available, comment and adjust back to final list price.

Roger
 

Phil Rice

Member
Joined
Apr 22, 2002
Professional Status
Certified Residential Appraiser
State
Colorado
I looked at over 20 sales in the area and 10 of them had similar situations with $2-7,000 prices over the list price.

The measuring stick is what is normal in your area. The goal is apples to apples.

Does the inflated pricing bother you?

Your use of the word "inflated" makes me think it bothers you. My attitude is that prices are what they are. I don't make the market, and I do not police the market. I just report the facts as best I can, and form an opinion based on the facts. I wonder about the ability to objectively report when the reporter is "bothered" by what the market is doing. If one or 2 sales involve some hocus pocus, then you have to adjust that out as best you can. When 10 out of 20 do it, it looks like it might be "normal" in your area. Best thing to do is explain the situation as best you can. If RE agents will not answer your question, all you can do is report that you asked, and they refused to answer, and therefore, you are going to treat it as ______________ (fill in the blank)
 

Mike Garrett RAA

Elite Member
Gold Supporting Member
Joined
Jan 14, 2002
Professional Status
Certified Residential Appraiser
State
Colorado
I do a CMA on almost every property I appraise. Using the MLS data base, we do a one square mile grid taken from the MLS coordinates for the subject property. It typically returns from 50 to 150 properties in three categories. Active Listing, Under Contract, and Sold. This function provides the highest sold price, the lowest sold price, and the average sold price. In addition it gives me the average days on the market and the sales price to list price ratio. We have seen that ratio expand from an average of 99% to 96 ~ 97%. Much of this is attributable to the "season". Our prime selling periods are summer and fall. The winter months are usually slower.

I recommend this technique to all who have access to MLS with this function. It usually provides a broad enough base to give the appraiser meaningful numbers. Once we have this data it is entered on the appraisal report in the section under neighborhood titled "Market Conditions - page one URAR": Example:

Days on the market are 68 and (stable/expanding/retracting) and the sales price/list price ratio is 98.8% based on msl data specific to this marketing area, dated 06/23/2003. A total of 89 properties were included in this comparative market analysis which is included in the appraiser's work file.

This accomplishes several different things. First, it provides a basis for the single family housing data contained in the neighborhood section of the URAR. There is no guessing...the appraiser has something to hang his/her hat on. Secondly, it demonstrates that the appraiser has at least considered active listings and pending sales in determining the market data. Very valuable in "trending" property values.

We used to include the CMA in the appraisal report, now we just run it, examine the data, and use it as the basis for our comments in the report. While the data is not confidential, it is raw data that may or may not be fully understood by the intended user of the appraisal report.

That type of CMA could also be provided to a client asking for a comp check. It would be specific to the immediate neighborhood or subdivision; however, it would not be defined to style of home and features (although you could if you wanted to). It would give them a price range and enough data that they could select their own sales or listings. In my opinion, this is in full compliance with USPAP. I choose not to provide this service for free.

The original question in this post was asking about adding seller concessions to the contract. We have had a big rash of that here but now it is becoming more difficult to support it with closed sales. When the market was really hot we did have bidding wars with multiple offers on properties but that is rapidly becoming a thing of the past. It is an immediate "red flag" for me when I see the contract thousands of dollars higher than the listing price. One should remember that on VA and FHA deals there are allowable closing costs which, most likely, will be added to the loan amount anyway bringing the loan, in some cases, to more than 100% financing.

Since that type of financing is typical to our market, unless the total exceeds 3% I rarely make an adjustment for seller concessions. Another thing I find helpful is to indicate the type of financing and interest rate on the comparables.

Example: VA 5.87% 30 yr fixed or CV 4% 20 yr ARM.

In the event I need to make an adjustment for financing it helps the reader of the report understand what I am adjusting.
 

Bobby Bucks

Elite Member
Joined
Jan 27, 2002
Professional Status
Real Estate Agent or Broker
State
North Dakota
Mike, I'm glad I'm not the only one using the CMA option. Sometimes I think I'm doing too much work. It is a great tool once the parameters are set. It sure beats the hell out of playing rocket scientist with a spread sheet. :) I use it for REO properties since they require lisiting data as well. A hint, just make sure not to email the CMA to the client or they might reduce your fee by $300 bucks or so......they might mistake it for a BPO and think it's free! :)
 

Tim Hicks (Texas)

Elite Member
Joined
Jan 15, 2002
Professional Status
Certified Residential Appraiser
State
Texas
Phil,

What bothers me is that closing costs do not equal value. The fact that they raise the sales prices so the seller can chip in an additional $7,000 in closing costs does not mean the home is worth $7,000 more. If you look at the sales with no additional seller paid closing costs the value can not be supported. The fact that appraisers "make it work" is what bothers me. The "market is the market" is not a viable answer. If is listed at $82,000 and sold for $82,000 with $7,000 in seller paid closing costs and the market supports it, then it is not a problem. Now, don't take my next comment wrong. It is simple as reading the "Definition of Market Value" in the Statement of Limiting Conditions. The fact that some transactions exceed others in special or creative financing should be a red flag. Sellers get talked into this because it costs them nothing off the bottom line. An $82,000 home should not sell for $89,000 if typical market sales do not reflect $89,000. Once again, appraisers, lenders and RE agents are trying to make a black and white area a gray area with flawed logic. If every home sold with 7-12 seller points this would not be an issue.
 

Richard Carlsen

Elite Member
Joined
Jan 15, 2002
Professional Status
Licensed Appraiser
State
Michigan
Hold on a second.

Let's go back to the definition of Market Value. It reads:

"The most probable price a property should bring in a competitive and open market under all conditions requisite to a fair sale; the buyer and seller, each acting prudently and knowledgeably: 1) buyer and seller are motivated; 2) both parties are well-informed and well-advised, and each acting in what he considers his own best interest; 3) a reasonable time is allowed for exposure in the open market; 4) payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto."

It does not say anywhere that if a buyer agrees to pay more than the asking price for a house, this should be considered a concession. What it says is that market value is based on both the buyer and the seller, operating in their own best interests, being well informed and advised and nothing funny about the transaction. In short, if the seller has not dipped into his pocket to help the buyer, the final sales price is the price of the house....period.

A buyer may find it in his best interest to own real estate but at the present time, does not have enough for all of the closing costs. He therefore, based on advice from trusted advisor's, makes the decision to pay thousands of dollars over the asking price. As long as he knows what he is doing and doing it in his own best interest, how can such add-ons be termed "excessive"?

When a buyer is willing to pay more for a property than the asking price, knowing full well what he is doing, he is operating within the definition of the market as defined in Market Value. If you think that the buyer is not operating in his own best interest or with sufficient knowledge, then the transaction falls outside of the definition above and you cannot use the sale as a comp no matter how much adjustment you make.

My point is, since you do not, under normal circumstances, know when or if a buyer is operating in their own best interest or not and therefore, you cannot make the judgment that the add-ons were "excessive". Therefore, to label any add-ons as "excessive" is incorrect appraisal practice.
 
Joined
Jan 13, 2002
Professional Status
Retired Appraiser
State
Florida
The rest of that definition goes on to say:

*Adjustments to the comparables must be made for special or creative financing or sales concessions. No adjustments are necessary for those costs which are normally paid by sellers as a result of tradition or law in a market area; these costs are readily identifiable since the seller pays these costs in virtually all sales transactions. Special or creative financing adjustment can be made to the comparable property by comparisons to financing terms offered by a third party institutional lender that is not already involved in the property or transaction. Any adjustment should not be calculated on a mechanical dollar for dollar cost of the financing or concession but the dollar amount of any adjustment should approximate the market’s reaction to the financing or concessions based on the appraiser’s judgement.

(From Fannie Mae Form 1004B 6-93 Appraisal Form)



One of the applicable sections of this is:

"No adjustments are necessary for those costs which are normally paid by sellers as a result of tradition or law in a market area; these costs are readily identifiable since the seller pays these costs in virtually all sales transactions."

Those add on concessions that the Realtors up the sale price to cover are not 'normally paid by sellers' and the sellers do not pay "these costs in virtually all sales transactions." A 'typical' buyer would not need this and I do adjust for these and explain it - if I need to use that sale. Normally, I try very hard NOT to use one of these sales.
 

Tim Hicks (Texas)

Elite Member
Joined
Jan 15, 2002
Professional Status
Certified Residential Appraiser
State
Texas
OK, Richard we will probably always disagree on this point.

You did not put the full definition on there. How about:

*Adjustments to the comparables must be made for special or creative financing or sales concessions. No adjustments are necessary for those costs, which are normally paid by sellers as a result of tradition or law in a market area; these costs are readily identifiable since the seller pays these cost in virtually all sales transactions. Special or creative financing adjustments can be made to the comparable property by comparisons to financing terms offered by a third party institutional lender that is not already involved in the property transaction.


and....


5.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.


Here is my point of view, disagree if you want. Concessions do not equal value. If the home is listed for $82,000, has a contract for $82,000, but then is jacked up to $89,000 so the seller can pay more closing costs, then the home should have been under listed or under sold in the first place. If the property is worth $89,000, then there is no problem. I, don't know about your neck of the woods, but RE agents are not in the habit of underlisting properties in our area. I think you have lost sight of how the lending system is worked by lenders. The added closing costs have nothing to do with the value of the property we are appraising, because we are appraising the property not the loan. This same theory should be applied to the comparable sales. Now, if every home sale has 7-12 seller points and they are listed expecting those seller points it would be different. However, just because a minority of sales prices get "massaged" by lending practices, it does not make it encompass the entire market. I know you believe differently, I just don't agree. I appraise a home for what I think it is worth regardless of the the contract price. I also recognize when a comparable sale sold over list price with "special sales concessions", because the majority of sales do not support their price. It is obvious, it is not the market, it is a special market.

Hopefully, you understand I am only debating you and not berating you. I just happen to know appraisers in this market that simply don't care if they over value the property and don't care about sales concessions. I find it funny (not comical, but irritating), that you and I both interpret the same definition two different ways.
 
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