Pre-paids = seller concession?

[Jim Vincent]

Are you talking about the subject contract or comps?

Subject contract.

 

[residentialguy]

What difference does it make? If it's in the comps, his obligation is to adjust out the contributory value of the concessions.

If it's in the subject deal, his obligation is to comment on the effect of the concessions on the sale price in the contract review section.

Interesting. Why do you think that is what they want in the subject's contract review section? That doesn't jive with the contract section. If they wanted that information in the contract review, why would they ask if there were any concessions in the next line and what they were being used for if they wanted you to answer that in the prior line? Could you explain your reasoning, Calvin. Thx.

 

[Calvin the Airedale]

Interesting. Why do you think that is what they want in the subject's contract review section? That doesn't jive with the contract section. If they wanted that information in the contract review, why would they ask if there were any concessions in the next line and what they were being used for if they wanted you to answer that in the prior line? Could you explain your reasoning, Calvin. Thx.

Both of those sections of the form are, in fact, one section. Most form vendors show "contract" in the left margin tab for both sections.

An appraiser has obligations regarding contract review from at least two and maybe three sources: USPAP; FNMA guidelines; and maybe CFR regs, if the loan is being originated by a regulated institution. (also FHA or VA)

USPAP Standards Rule 1-5, a) analyze all agreements of sale...

The question to answer is "what constitutes analysis?" CFR requirements for contract analysis predate USPAP by perhaps a dozen years. What the regulators are looking for is some statement from the appraiser regarding the reasonableness of both the price and terms for the sale agreement.

Now I ask you, what basis do we have for determining the reasonableness of the sale price or any of its terms? There really is only one basis, our opinion of market value for the subject.

Unfortunately, when the URAR form was designed, this section was placed at the front of the form. It should have been placed at the back end, after the valuation. This is because a contract review analysis cannot be properly performed until the valuation is completed.

But the placement of this section on the form suggests to many that it should be performed first. In fact, most appraisals I review have the author simply recounting the terms and conditions of the sale agreement without any mention as to whether the price, terms or conditions are reasonable, unreasonable, or preposterous.

The following is an excerpt from one of my recent contract reviews performed for an FHA loan:


"The subject is appraised on a cash equivalent basis and assumes no seller finance or personal property concessions.

I reviewed a copy of the proposed sale agreement provided by the lender. Based on the valuation contained herein ($118,000), the terms of this contract appear reasonable and arm's length but the sale price ($127,500) is too high.

The sale contains kitchen and laundry appliance concessions and the seller is paying for a home warranty. There are no seller finance concessions. I did not speak with either the buyer or seller regarding their pricing strategies so I cannot say what influences they believe justify the contract price. In any case, I believe the sale price is too high given the value estimate in this report and the recent sale activity in this market for similar homes."

(A week latter the buyer and seller presented a revised contract for $118,000 and the deal was funded.)

I should note that I reproduce this commentary in my summary of the sale comparison section, and in the reconciliation section at the end of the report.

 

[residentialguy]

I do that also...but I talk about the sale price and terms in reconciliation, as it seems to make more sense with the order of our process. You're right, the form is bass ackwards in that regard.

 

[JSmith43]

I decided to look it up in the bible (Selling Guide) so I could quote something.

Part B, Origination Through Closing June 30, 2010 Subpart 3, Underwriting Borrowers Chapter 4, Asset Assessment, General Asset Requirements
• financial contributions from interested parties that provide a benefit to the borrower in the financing transaction;
• payments or credits related to acquiring the property; and • payments or credits for financing terms, including prepaids.
Typical fees and/or closing costs paid by a seller in accordance with local custom, known as common and customary fees or costs, are not subject to Fannie Mae IPC limits. Financing concessions that exceed the limits listed below are considered sales concessions and are subject to Fannie Mae IPC limits.

In case anyone is curious, financing concessions are limited to 3% of SP for loans greater than or equal to 90% LTV. Otherwise, 6% if 75.01-90% LTV.

Bottom line, call financing concessions financing concessions, not seller concessions.

Not sure what counts as financing concessions? The Bible says:

"Financing concessions typically include origination fees, discount points, commitment fees, appraisal costs, transfer taxes, stamps, attorneys’ fees, survey charges, title insurance premiums or charges, real estate tax service fees, and funds to subsidize a temporary or permanent interest rate buydown (if these fees are not considered common and customary fees or costs based on local custom, as described above). Financing concessions can also include prepaid items, such as:
• interest charges (limited to no more than 30 days of interest);
• real estate taxes covering any period after the settlement date (only if the taxes are being impounded by the servicer for future payment);
• hazard insurance premiums (limited to no more than 14 months);
• homeowner association (HOA) dues covering any period after the settlement date (limited to no more than 12 months);
• initial and/or renewal mortgage insurance premiums; and • escrow accruals required for renewal of borrower-purchased mortgage insurance coverage."

 

[residentialguy]

Good one, mentor - thanks. I didn't know there was a distinction.

 

[Calvin the Airedale]

I decided to look it up in the bible (Selling Guide) so I could quote something.

Part B, Origination Through Closing June 30, 2010 Subpart 3, Underwriting Borrowers Chapter 4, Asset Assessment, General Asset Requirements
• financial contributions from interested parties that provide a benefit to the borrower in the financing transaction;
• payments or credits related to acquiring the property; and • payments or credits for financing terms, including prepaids.
Typical fees and/or closing costs paid by a seller in accordance with local custom, known as common and customary fees or costs, are not subject to Fannie Mae IPC limits. Financing concessions that exceed the limits listed below are considered sales concessions and are subject to Fannie Mae IPC limits.

In case anyone is curious, financing concessions are limited to 3% of SP for loans greater than or equal to 90% LTV. Otherwise, 6% if 75.01-90% LTV.

Bottom line, call financing concessions financing concessions, not seller concessions.

Not sure what counts as financing concessions? The Bible says:

"Financing concessions typically include origination fees, discount points, commitment fees, appraisal costs, transfer taxes, stamps, attorneys’ fees, survey charges, title insurance premiums or charges, real estate tax service fees, and funds to subsidize a temporary or permanent interest rate buydown (if these fees are not considered common and customary fees or costs based on local custom, as described above). Financing concessions can also include prepaid items, such as:
• interest charges (limited to no more than 30 days of interest);
• real estate taxes covering any period after the settlement date (only if the taxes are being impounded by the servicer for future payment);
• hazard insurance premiums (limited to no more than 14 months);
• homeowner association (HOA) dues covering any period after the settlement date (limited to no more than 12 months);
• initial and/or renewal mortgage insurance premiums; and • escrow accruals required for renewal of borrower-purchased mortgage insurance coverage."

Just so we're clear on what you've posted. These are instructions to the underwriters as to what to allow in a given deal and not to the appraisers.

Appraisers are still bound to value the home in accordance with the terms and qualifiers of the definition of MV printed in the form.

Also, this post highlights the need for an adequate contract review and analysis by the appraiser. I often state, in deals that contain concessions, that while such concessions may frequently be found in area deals, they are neither customary or common.

I call seller prepaids or points paid on behalf of the buyer "seller finance concessions" to distinguish them from the other types of concessions employed in these deals.

 

[Mike Garrett RAA]

And, of course, everyone is tap dancing around whether or not to adjust comparables for these "concessions". IN MY MARKET, the Department of Veteran's Affairs (VA) has said..."it's up to the appraiser; however, if seller paid buyer's closing costs are common or typical in the market, the appraiser should list what was paid but it is not necessary to make a negative adjustment for seller paid buyer's closing costs unless those exceed 3%".

 

[residentialguy]

And, of course, everyone is tap dancing around whether or not to adjust comparables for these "concessions". IN MY MARKET, the Department of Veteran's Affairs (VA) has said..."it's up to the appraiser; however, if seller paid buyer's closing costs are common or typical in the market, the appraiser should list what was paid but it is not necessary to make a negative adjustment for seller paid buyer's closing costs unless those exceed 3%".

I was taught to think like that, but when I ask the agent about the contributory value of those concessions it is typically is dollar for dollar...the seller would have knocked that exact amount off of the price if he didn't pay those concessions. I don't know how you can get around not adjusting for that.

There have been exceptions where I don't adjust. I've run across builder's that offer 3% seller paids. If they pay cash, the price remains the same.

But what about the flip side...adjusting more then dollar for dollar. If you think about it, the seller is acting like a loan shark. The buyer has no money and needs this money from seller or he can't get the house. The seller agrees to pay 3%, but only if the price increases by 5%. What's the contributory value now? :icon_idea:

 

[Calvin the Airedale]

And, of course, everyone is tap dancing around whether or not to adjust comparables for these "concessions". IN MY MARKET, the Department of Veteran's Affairs (VA) has said..."it's up to the appraiser; however, if seller paid buyer's closing costs are common or typical in the market, the appraiser should list what was paid but it is not necessary to make a negative adjustment for seller paid buyer's closing costs unless those exceed 3%".

Dear Mike,

I certainly hope you don't think I'm tap dancing around whether or not to adjust the comps for concessions. It is the appraiser's obligation to adjust the comps to the extent that they have inflated the sale price beyond the value of the real estate being sold. Period.

Yes, if such concessions are customary, by all means, give them a pass. However, for one to find them customary, such concessions must be paid in virtually all deals, in good time and in bad, no matter the type of financing, even in cash deals.

I defy anyone to show me a market in which such non-sense prevails.