Positive Adjustment on Seller Concessions

[Mark K]

There are some markets where the buyers are so cash starved that a sale won't take place without the seller paying points and costs. In such situations, the seller can earn back the opportunity cost of the concessions in addition to the nominal amount of the concessions in the sale price.

So are you trying to say that, for example, a $5,000 concession can be worth $7,000 to a buyer, and, if someone accepts this notion, is the adjustment on the grid $5K, $7K or something else?

Cash sale: $100K

Concessions sale: $107K with the seller paying $5K concessions? No, I don't buy it.

This might happen in some theoretical mental exercise but not in the real world. The vast majority of buyers just aren't that desperate. I suppose this method comes in handy when an appraiser needs some wiggle room on a valuation but it fails to meet any common sense threshold.

Besides, this wouldn't be the first example of GSE guidelines failing to reflect reality for no other reason than to allow for inflated appraisals.

 

[Mile High Trout]

99% of the time you adjust DOLLAR for DOLLAR the amount of seller concessions on comparables.

Bingo. If you're an apprentice, you may consider telling your mentor that state approaches towards work samples is cinched down tight here and there. Why risk all this training and investment only to be disapproved because your regular methods indicated in your randomly submitted samples show that you don't adjust dollar for dollar, and provide true cash equivalent analysis? That's playing with fire for sure.

It's dollar for dollar.

The subject had 5k concessions. That means the sellers net is total sales price less concessions. Financing probably requires the 5k, but that's not directed to the seller. It's directed to funding. the sales price, less concessions is the cash equivalent to seller. Works the same for subject or comps.

You cannot finance a highest and best top dollar deal, when you don't have at least wiggle room for the 5k concessions in terms of comparative market value at the total sales price.

Anyways, this issue will go on forever. If you were a seller and took 100k inbound. Would you be happy with the sales price reading 105k? You'd ask where your additional money went. That's why we have concessions adjustments, to properly indicate true net to seller. To elaborate just a second more on that subject. If everyone did it, markets would gain in value, without any real cash contribution. Ignoring cash equivalency is a sure fire way to promote unfounded inflation. How could people who do that even live with themselves? Probably because they're completely self centered.

The 1% other times spoken of is new construction, and definitely not the resale market.

Offsetting or ignoring the cash equivalency of concessions is in fact, another way to say manufacturing value or number hitting.

 

[Smokey Bear]

Not to muddle things up further... When looking at concessions, you also have to consider the list price at the time of the contract - often the concessions are there to assist with the down payment. So, when you see a list price of $100k, a contract price of $105k and $5k in concessions, and it's the only offer on the table, this is just funny money, not a true concession. In the 'old days' the concessions were much higher, some weren't disclosed in the HUD1, appraisals were inflated (some unintentionally, based on other deals that were inflated and concessions not disclosed on the MLS or by the agent), they buyer would walk with a bunch of cash some wouldn't even make the first mortgage payment.

Unless the concession is for 'new carpet' (watch out for those as well, sometimes the concession is fake) or some other needed repair, it's usually not a true concession.

 

[NorthTexValuation]

Not to muddle things up further... When looking at concessions, you also have to consider the list price at the time of the contract - often the concessions are there to assist with the down payment. So, when you see a list price of $100k, a contract price of $105k and $5k in concessions, and it's the only offer on the table, this is just funny money, not a true concession.

The question is would you adjust for the $5K or not?

 

[CANative]

Doh! The adjustment is for the market reaction to the concession. If the market reaction is $4$ then the adjustment should be $4$. If it's not then it's something else.

 

[Calvin the Airedale]

So are you trying to say that, for example, a $5,000 concession can be worth $7,000 to a buyer, and, if someone accepts this notion, is the adjustment on the grid $5K, $7K or something else?

Cash sale: $100K

Concessions sale: $107K with the seller paying $5K concessions? No, I don't buy it.

This might happen in some theoretical mental exercise but not in the real world. The vast majority of buyers just aren't that desperate. I suppose this method comes in handy when an appraiser needs some wiggle room on a valuation but it fails to meet any common sense threshold.

Besides, this wouldn't be the first example of GSE guidelines failing to reflect reality for no other reason than to allow for inflated appraisals.

Yes, that is exactly what I'm saying. And whether you buy it or not does not make it any less truthful.

When a home sells with concessions, two things are being sold: first is the real estate; the second is the cash (or credit if you will) that the buyer needs to make the transaction proceed. Each asset has its own market value. It's our job as appraisers to find out the contributory margin of each asset in the total transaction price.

An 8 ounce glass of potable water is the same where ever it exists. But it can have a different value depending upon circumstances. For instance, I can walk to my kitchen sink and draw a glass from my spigot at practically no cost. If I were hiking through the dessert, however, it would have a much higher value to me than it would in my kitchen. Same with seller points.

Most buyers are cash strapped. Especially first time buyers. Even if they have the funds to cover closing costs and prepaids, many prefer to have the seller pay for those so that they can keep their powder dry for all the other expense one encounters after the purchase (furniture, decorating, etc, etc.).

Smart sellers do well to pay points in markets in which the typical buyer is so cash starved. The sale price of the house ends up being higher than it would have been even without the concession, assuming that it will sell at all. I've had more than several rehab investors tell me as much and have been able to prove as much in many instances over the past couple years.

 

[Mark K]

Yes, that is exactly what I'm saying. And whether you buy it or not does not make it any less truthful.

Then I'm still waiting for the answer to the question....

In the example I posted, would you adjust for $5K or $7K?

If you honestly believe that the "market reaction" of $5K concessions = $7K, then we have to assume that your adjustment to the comps would be for $7K when the MLS states $5K. Right? Wrong?

 

[Lee Lansford]

So are you trying to say that, for example, a $5,000 concession can be worth $7,000 to a buyer, and, if someone accepts this notion, is the adjustment on the grid $5K, $7K or something else?

Cash sale: $100K

Concessions sale: $107K with the seller paying $5K concessions? No, I don't buy it.

This might happen in some theoretical mental exercise but not in the real world. The vast majority of buyers just aren't that desperate. I suppose this method comes in handy when an appraiser needs some wiggle room on a valuation but it fails to meet any common sense threshold.

Besides, this wouldn't be the first example of GSE guidelines failing to reflect reality for no other reason than to allow for inflated appraisals.

The old axiom of "Cost Does NOT Equal Value" is true as there certainly can be situations where a buyer lacking cash will pay (re: contract price) more than the dollar amount of the concession.

 

[Calvin the Airedale]

Then I'm still waiting for the answer to the question....

In the example I posted, would you adjust for $5K or $7K?

If you honestly believe that the "market reaction" of $5K concessions = $7K, then we have to assume that your adjustment to the comps would be for $7K when the MLS states $5K. Right? Wrong?

I thought I already answered the question.

If analysis of comparable sales demonstrates that $x in concessions adds $1.4x to the sale price, then the adjustment for concessions in the comps should be $1.4x.

As for any adjustment, this premise assumes the contributory value of concessions for a variety of transactions in a given market has been measured by a variety of methods, including over-bid analysis, and paired sale analysis and has produced useful results upon which to base an adjustment.

PS. What I believe regarding the contributory value of concessions (or anything else) is less important than what the market tells me about such contributory values. $4$ adjustment is the path of lesser resistance for those who refuse to think through the work needed to demonstrate contributory values. The path of least resistant, BTW, is taken by those who hold that a certain level of concessions is typical and customary and thus needs no adjustment.

 

[J Grant]

Calvin is correct.

Since the OP query, and most questions of this nature relate to lender financing transactions, the answer to the quesiton is on the preprinted certification. of the FIRREA form.

Open up any 1004 or similar report form on your software. Go to the certification page. Read the definition of market value (presumed sale terms for subject), and the paragraph below explicitly states that financing and concession adjustments to the comparables should not be mechanical $ 4 $, but based on market reaction. Since you are signing off on that certification, might be beneficial to read it for content.