NO ADJUSTMENTS for upgrades! No Adjustments for repairs.
Upgrades improve the quality of the subject property and comparables -- we only adjust for cash concessions.
We adust for cash equivalency -- cash back at closing, seller paid closing costs, seller paid down payment, seller "including" the Mercedes in the garage, HOA fees pre-paid by seller, etc., etc.
The list of concessions we adjust for includes anything that has a direct cash equivalent offset for the buyer at closing; this excludes anything that goes to a third party for work done on the subject property.
There are, however, some items that fall into a gray area -- such as the seller paying points to buy down the buyer's interest rate. Since the cash equivalent benefit to the buyer is spread out over time (it takes 3 to 5 years to recover an interest rate buydown) I'm inclined to not adjust for this type of concession, since the benefit is indirect and not immediate.
The test is -- does the cash concession reduce the buyer's out of pocket expense at closing, and would it be immediately recovered if the buyer turned around and sold the property?
If the answer to both questions is YES, then make the adjustment. If either answer is NO, the adjustment is not warranted.
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Some additonal points -- we adjust for the comparables concessions, not the subject property's. The comps either support the purchase price (with or without concessions and upgrades) or they don't; if they don't, the subject is probably over priced or over improved.
That said, I take a dim view of large cash concessions included in purchase agreements, and will generally do a back of the envelope deduction from the purchase price -- the operative word being "large."
I generally consider 20-30% cash concessions way out of line; buyers walking away from closing with big wads of cash is not good either. But in these cases, the appraiser excludes the cash concession in the appraised value, not with a line item concession adjustment.
I will generally support purchase agreements with 3-5% seller concessions, as long as there is strong support from the comparable sales. If it's a low dollar purchase with good support, maybe 10% -- but if the comps don't support the contract price, they definitely don't support the price including concessions.
A big factor that caused the sub prime foreclosure crisis was first time homebuyers with 80/20% ARM loans and seller paid closing costs; this type of buyer often went for the highest priced home, with the concessions added onto the list price. If there wasn't solid support for the value, these buyers were upside down from day one, and were totally screwed when values stopped rising or started to fall.
But once again, this goes back to the ultimate test -- do the comps support the value? Adjust the comps, and ask yourself if the purchase agreement passes the smell test -- do that, and everything else will fall into place.
