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Seller concessions generally come in two forms, seller paid closing costs for the buyer's new loan or seller paid down payment assistance. Whatever the origin, seller concessions have the net effect of INCREASING the selling price of a property.
The Colorado Real Estate Commission, HUD, and secondary market buyers share the same concern due to the predominance of seller concessions in some markets. The concern is this: If sales concessions are not adjusted out of comparable sales prices when valuing a subject property through the comparison analysis, it will have the effect of artificially inflating the indicated value (list price, sales price and appraised value) resulting in a loan amount (loan to value ratio) larger than anticipated and/or overpriced properties.
Value is defined as the price the property would sell "unaffected by seller concessions". When the broker or appraiser estimates value for a property, it is based largely on the sales prices of comparable properties. When the comparable sold price is increased due to seller concessions (the seller is simply trying to offset these costs and the buyer is willing to increase the offer if the seller will assist) the broker and appraiser MUST adjust these concessions out of the comparable price to reflect the "unaffected" sales price.
Knowing that appraisers will be adjusting the comparables downward for these concessions, the real estate broker should be aware of the ramifications on loan to value ratios and the likelihood of closing in the event of an appraised value below contract sales price.
The question then is how to adjust comparable sales prices for these concessions. The real answer is driven by supply and demand (see our upcoming spotlight feature on supply and demand analysis on our school web site). In strong markets (seller markets) the sales concession adjustment will often be equal to the actual dollar amount paid by the seller. In a buyers market the increase in sales price will usually be some percentage of the actual dollar amount paid but not the whole amount.
As the skill required to discern the proper adjustment is not universal, the Colorado Real Estate Commission and the Colorado Board of Real Estate Appraisers issued a joint Position Statement on July 11, 2003 which can be viewed at:
The proper technique to determine appropriate adjustments is the paired sales analysis whereby two otherwise similar sold houses are compared, one affected by sales concessions, the other unaffected. The difference in selling price - after adjusting for any other dissimilar items - indicates the concession impact on price and therefore the adjustment.
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As the "Dear Abbey" of Colorado Real Estate, Betty has been providing one-on-one counseling and assistance to the real estate community for many years. It is our hope that this forum will allow many more to benefit from your questions and Betty's answers.
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Patrick C. Armbrust Director Armbrust Real Estate Institute www.armbrust-rei.com