Yet Another Seller Concession Question

[Elliott]

Twenty five years ago, Fannie production sought a way to include closing costs in a purchase so more people could buy homes. Lenders liked it, Fannie liked it, buyers liked it, realtors liked it, it is a automatic 3% continual boost to the market. So concessions automatically became a step-child to the time honored definition of Market Value. To further intimidate appraisers, an attorney at Fannie cautioned that adjustments shouldn't necessarily be $4$, so appraisers were tasked to "prove" adjustments more than zero. With such a convoluted origin understanding or discussing concessions from the appraissal perspective of "market influence" is an impossible task. Concessions are an accounting function.

 

[timd354]

Twenty five years ago, Fannie production sought a way to include closing costs in a purchase so more people could buy homes. Lenders liked it, Fannie liked it, buyers liked it, realtors liked it, it is a automatic 3% continual boost to the market. So concessions automatically became a step-child to the time honored definition of Market Value. To further intimidate appraisers, an attorney at Fannie cautioned that adjustments shouldn't necessarily be $4$, so appraisers were tasked to "prove" adjustments more than zero. With such a convoluted origin understanding or discussing concessions from the appraissal perspective of "market influence" is an impossible task. Concessions are an accounting function.

Yes, it is a complete fiction that the contract price could be $100,000 with the seller paying 5% of the buyer's closing costs and the consideration paid for the property is somehow not $95,000

 

[Marty Boone]

Looks like your trying to find a reason not to adjust for seller concessions. I'm a Realtor in central PA and believe me I have never had a client ignore the impact of a concession to the bottom line. Review your comparable sales for listing history / DOM and see how many sold for more than list price after 100 days with the sale price being more than the last list price along with a 6% seller assist. Ignoring the necessary adjustment only inflates the market. sorry to sound so grumpy but 20" of snow will do that.

 

[Atlanta CG]

There are neighborhoods here of very modest homes sold to buyers who can afford the monthly payment but simply do not have $5,000 or $6,000 for the concessions, after saving up for the down payment. The market indicates the values are around $125,000 with several transactions. Sellers saying they simply will not pay any contributions have their properties sit there unsold for weeks and they end up decreasing their asking prices beyond the concession threshold. So what is the true value? $125,000 with sellers paying closing costs or $110,000 to $115,000 with none? I contend the former.

 

[J Grant]

There are neighborhoods here of very modest homes sold to buyers who can afford the monthly payment but simply do not have $5,000 or $6,000 for the concessions, after saving up for the down payment. The market indicates the values are around $125,000 with several transactions. Sellers saying they simply will not pay any contributions have their properties sit there unsold for weeks and they end up decreasing their asking prices beyond the concession threshold. So what is the true value? $125,000 with sellers paying closing costs or $110,000 to $115,000 with none? I contend the former.

That does present a dilemma ...but what does "true" value mean?

For better or worse,we are appraising for market value...like it or not, the MV definition says a price unaffected by concessions or special financing. So, to answer in terms of the MV definition , it would be the latter, not the former.

If side by side comparisons show 110k-115k with no concessions and 125k with 6k concessions, the MV after taking off for concessions is 115k. Which shows the concession has an affect far larger than the 6k.

At first glance, looks like the buyers can not afford to close on a home without the seller kicking in 6k. However, with a price reduction, the homes do sell. So either they are selling to different buyers, or the buyers manage to come up with closing costs with the satisfaction of reduced price.. the actual closing costs to a buyer are reduced but still substantial with a price reduction of 10k. Which means it is the sellers who badly need the cash $ as much as buyers in these transactions. The seller increases his price 10k with a 6k paid concession, because the seller needs every penny he can get in cash funds to move or buy /close on their new home.

If virtually all transactions closed with 6k concessions, then it would meet the threshold of virtually all and no adjustment is needed. But if it is 70% sold with the concessions and 30% sold without (for example), it still is not "virtually all". Which is stinky for us appraisers to deal with, but that's the terms of the MV definition and concession adjustment statement on the URAR.

 

[Mr Rex]

JM. I think you answered your own question but came to the wrong conclusion.

 

[GA Benny]

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.

Just because the it is a VA appraisal doesn't mean that all of the comps are VA financing transactions. And the definition of market value is the same.

I would also point out that "virtually all" is not the same as "all". This refers to what is typical or prevalent. There will always be exceptions. What are typical actions of buyers? Are they asking for contributions to closing costs as part of their original offers? Are listing agents preparing their clients that any offer they receive will "likely" request that they pay some or all of the closing costs? And for that matter, is a contribution to closing costs requested by the buyer even marginally considered a concession, since the definition of a concession is a contribution or consideration "offered" by the seller to attract and entice a buyer to complete a purchase?

I have been in the interesting position of reviewing appraisals in multiple states and each state, and even different markets within each state, interpret this differently. Some markets, seller concessions are rare or at least less than 50% of transactions. Others, may be closer to 90% or more.

Whether you make an adjustment or not, the GSEs as well as VA and FHA all agree that the adjustment should not be made on a mechanical dollar for dollar basis. Additional research is required to understand your market and how they are reacting to concessions. Some will be more obvious that others. The 1004mc addresses the concessions and market trends in a bit more detail. Just be sure that you are not stating that concessions are prevalent and typically offering some or all closing costs and then making an adjustment equal to the amount of the concession. This would be inconsistent.

 

[timd354]

Just because the it is a VA appraisal doesn't mean that all of the comps are VA financing transactions. And the definition of market value is the same.

No kidding.

Please read the thread more carefully paying particular attention to the posts that I was responding to. I fully understand the applicable definition of market value used in a typical mortgage related appraisal and fully understand when and how to adjust for seller concessions. It is someone else who seems to have the misunderstanding/

 

[Peter LeQuire]

Just because the it is a VA appraisal doesn't mean that all of the comps are VA financing transactions. And the definition of market value is the same....

... the GSEs as well as VA and FHA all agree that the adjustment should not be made on a mechanical dollar for dollar basis.

Is an adjustment in the amount of concessions (that don't include costs that are paid by sellers by law or customer) considered (automatically considered) being made "mechanically dollar for dollar"?

 

[J Grant]

Is an adjustment in the amount of concessions (that don't include costs that are paid by sellers by law or customer) considered (automatically considered) being made "mechanically dollar for dollar"?

If you make it mechanically ( mechanically means even if it did not impact price, aka compare it to sales where the seller did not pay the concession on top of closing costs by law or custom)