Roger & Greg,
Roger in your example I agree that no adjustment is warranted because the price was not influenced by the concession. Now, lets use your same scenario with seller adding $6000 to the list price. What then? This is the exact situation I was talking about in my post. I think people get confused because really this is a two part question. #1 Was the PRICE influenced by the concession. #2 If yes, then what is the adjustment based on the market. As regards HUD, I am really not surprised that I was told something different from what you may have been told. When I called HUD they directed me to "Frequently Asked Questions for Appraisers". Below is question #31.
31. Can you explain how an appraiser is to handle concessions?
Sales concessions influence the price paid for real estate. It may be in the form of loan discount points, loan origination fees, settlement assistance, payment of condo/PUD fees, builder incentives or the inclusion of non-realty items in the transaction.
Appraisers are required to verify and analyze all sales on a cash-equivalent basis (interest rate buy downs, below market financing, owner financing, etc). As stated in the Appraisal of Real Estate, Eleventh Edition:
In cash equivalency analysis, an appraiser investigates the sales price of comparable properties that appear to have been sold with non-market financing to determine whether adjustments to reflect typical market terms are warranted. First, sales with non-market financing are compared to other sales transacted with market financing to determine whether and adjustment for cash equivalency can be made. Market evidence is always the best indicator of such an adjustment. However, buyers rarely, if ever, rely on strict dollar for dollar cash equivalency adjustments.
The appraiser must verify all sales transactions for seller concessions and report those findings on the URAR. The amount of the negative adjustment to be made to each comparable with sales or financing concessions is equal to any increase in the purchase price of the comparable that the appraiser determines to be attributable to the concessions. It should be noted that the need to make negative adjustments and the amount of the adjustments to the comparables for sales and financing concessions are not based on how typical the concession might be for a segment of the market (large sales concessions can be relatively typical in a particular segment of the market and still result in sales prices that reflect more than the value of the real estate). The adjustment 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.
Comparables are never adjusted for the subject’s sales concessions. If the subject has a sales concession, the appraiser should discuss the purchase agreement, including any sales concessions for the subject, on page two of the URAR in the section marked “analysis of any current agreement of sale”.
Item 5 of the Definition of Market Value, (which is included with every residential appraisal) as shown above the Statement of Limiting Conditions and Appraiser’s Certification states: “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.”
*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 the 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 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 or transaction. Any adjustment should not be calculated on a mechanical dollar for dollar cost of financing or concessions but the dollar amount of any adjustment should approximate the market’s reaction to the financing or concessions based on the appraiser’s judgment.
