Yet Another Seller Concession Question

[PhiloFarnsworth]

It has been my experience within my market that in considering the effects of seller concessions on the market price of most homes, that the effect is one that closely approaches dollar for dollar. I base this on 1) being able to find one or two comps with no concessions that illustrate such a market effect from matched pairs, 2) finding evidence in the pricing history of the seller raising the price to close to make up for the concessions offered and finally, 3) the logic that says that the default effect would at least approximate the dollar for dollar amount in the absence of any evidence to the contrary. Of course, one problem is that when I ask a broker straight out what they think the sales price would be without the concessions, they seem to usually respond with a 'huh?' or, more often. with deep defensiveness.

My problem comes in when the best comps all have concessions in their sales. This is not uncommon if their are few sales but ends up with the client insisting that concessions are therefore 'prevalent" in the market and I shouldn't adjust for them. However, this leads to an absurd situation where, if there are four comparable sales and three sold with concessions and one did not (indicating that concessions are typical but not required by law or custom), that adjusting for concessions would be just fine. But if by chance the fourth sale DID happen to sell with concessions, it would preclude me from adjusting for concessions at all, effectively raising the value by as much as 6%.

The real problem comes in when the AMC or client insists that the unadjusted value bracket the subject. With four sales that have few adjustments and indicate a $150k value after adjusting for the $4k-$6K concessions, I cannot bracket the unadjusted prices with the indicated value.

So, it is evident to me that the subject could be sold for $150,000 with no seller concessions. Would it be misleading if I gave the indicated value as $155,000 but added narrative that to do so would require paying about $5000 in concessions? To me, the first way would meet the definition of market value. But the client will not accept the report this way.

Any suggestions?

 

[Mike Garrett RAA]

Don't adjust for the concessions UNLESS....your data indicates you should. I've been doing VA appraisals for 24 years and haven't been adjusting for seller paid buyer's closing costs UNLESS those exceed 3%. Have never had an underwriter or VA reviewer suggest I should do something different.

 

[J Grant]

The problem is you are letting your clients dictate what you adjust for, and same with AMC.. whether concessions are prevalent or not, we adjust for them if the concessions are affecting sale prices (driving them higher than they would be without the concessions). If you pair up sales with no concessions and sales with concessions, are the prices equivalent, or are the sales sold with concessions inflated to cover the concession that seller contributed? (look at unadusted prices, then throw them on the grid, adjust for other physical/location factors and see if the concession impacted the value )

 

[Peter LeQuire]

The question has nothing to do with the prevalence of concessions. The question has everything to do with what a property would have sold with without the concessions.

I'll not argue with those who determine whether to make concessions adjustments or the amounts of them based on some analysis that compared closed price ratios between sales with and without concessions. But, I have had scores of conversations with brokers about whether prices are "generally" adjusted to reflect concessions paid: those who didn't guffaw because they considered the question extremely naive affirmed that sellers seldom agree on a price that does not reflect all of the sellers' costs of sale. Costs include such things as commission (which brokers will often negotiate to hold a sale together) "typical" seller costs (which vary by local custom) and concessions to offset buyers' sale and loan expenses. The ultimate answers have generally been that yes, indeed, the properties would have sold for less without the concessions, and that the amount of the concessions generally affected the price dollar-for-dollar.

Also, I have looked at scores of sales contracts and their addenda negotiating sales prices and concessions amounts: in most of those transactions, the seller's net cash position never changed significantly.

In the OP's situation, I'd simply remind the client of the order of adjustments, and show whether the value indication developed fell within the range of sales prices adjusted only for the sales concessions.

I wouldn't change the value indication - with or without explanatory comment. It sounds to me like the client is trying to direct a value. Whoever it is ought to know better.

 

[Michael P Jacobs MAI]

Yes, absurd...

"...payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and
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."

 

[J Grant]

":*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 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 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 judgment."

From the Cert page of the URAR...provides guidance. Note it says based on the appraiser's judgement...(not the RE agent's or seller's or lender's or AMC's judgement., though we can get feedback from therm). The adjustment, if there is one, can be $ for $, but is not supposed to be mechanical dollar for dollar. Write something like "The appraiser's judgement after reviewing market data is that the concession's impact on price is equivalent to dollar for dollar" , or, "The appraiser did not find any measurable difference impact on the price from the seller concession , therefore no adjustment was made" Explain what you did and why you did it.

 

[timd354]

I've been doing VA appraisals for 24 years and haven't been adjusting for seller paid buyer's closing costs UNLESS those exceed 3%. Have never had an underwriter or VA reviewer suggest I should do something different.

Just because no one has called you out for it, does not mean that you have been doing it correctly.

What definition of value have you been using in your appraisals? It is not the the pre-printed Fannie-Freddie definition of value found on the 1004. Here is a definition of value that should be useful for you (with special highlights that show how it differs from the pre-printed Fannie-Freddie definition of value found on the 1004):

Adjustments to the comparables must be made for special or creative financing or sales concessions that exceed 3% of the purchase price. No adjustments are necessary for those costs which do not exceed 3% or 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 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 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 judgment unless the amount of the concession does not exceed 3% of the purchase price, in which case no adjustment is required.

 

[Mr Rex]

A former AQB USPAP qualified instructor doing it wrongf for 24 years doesn't make 1 appraisal correct. Fubared is fubared.

 

[Mike Garrett RAA]

Well I'm in good company as that is what nearly all appraisers are doing or have been doing for many years IN MY MARKET, It has been common and customary for the seller to pay some or all of the buyer's closing costs on VA purchases in nearly all cases. That is not special or creative financing, in my opinion and that of my peers IN MY MARKET. We have debated this endlessly on the forum ever since it's inception and will probably never agree on how to handle it.

I'm doing an appraisal right now and have four sales in the immediate neighborhood of very similar models. All four sales have some concessions which are typically seller paid buyer's closing costs. The contract on the subject property calls for the seller to pay the buyer's closing costs not to exceed $3,000 on a $242,000 purchase price and that is 1.2%. It's my opinion those concessions do not warrant an adjustment.

 

[timd354]

Well I'm in good company as that is what nearly all appraisers are doing or have been doing for many years IN MY MARKET, It has been common and customary for the seller to pay some or all of the buyer's closing costs on VA purchases in nearly all cases. That is not special or creative financing, in my opinion and that of my peers IN MY MARKET. We have debated this endlessly on the forum ever since it's inception and will probably never agree on how to handle it.

What closing costs are typically paid by the seller on a VA purchase transaction certainly is not reflective of what the seller pays on all transactions (including cash, conventional and FHA financed sales), so I don't get what your point is.

Apparently, IN YOUR MARKET, you and your peers have been using a different definition of value because you simply cannot reconcile what you posted in your prior post in this thread (I've been doing VA appraisals for 24 years and haven't been adjusting for seller paid buyer's closing costs UNLESS those exceed 3%) with the applicable definition of value that is used for virtually all mortgage related appraisals:

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.
*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
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 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 judgment.

Please notice that the language highlighted in red above states "virtually all sales transactions" not "virtually all VA sales transactions"

I also did not know that the VA apparently uses a different definition of value than the GSE's, which is odd since VA appraisals use the standard Fannie/Freddie appraisal forms which include the standard GSE definition of value pre-printed on the forms.