Do Seller Concessions Impact Value
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:
http://www.dora.state.co.us/real-estate/manual/manual_2007/Ch03.pdf.
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.
Please post your comments to this blog. We are interested in your experiences, questions or insights.
Patrick Armbrust
I remember that you are an appraiser, so you know very well these topics :), I was told by an appraiser once that I always need to check on the MLS how much concessions was given ion that transaction, so you can tell how much was really the net sales price to compare with other real estate properties in the same subdivision.
thanks for the update :)
I would agree that the MLS is the first and easiest source for discovering sales concessions paid by the seller. The local Denver MLS separates concessions into two categories, down payment assistance or other closing costs.
For CMA or valuation purposes then it is important to consider how these seller paid items might have INCREASED the final selling price. You see, brokers and appraisers both estimate market value which is the “most probable selling price, UNAFFECTED by special financing concession”. This is what your appraiser friend has referred to as NET selling price.
The first thing to realize when you are trying to determine IF the selling price was affected by seller concessions, is that the impact on price will be driven by market conditions. In a strong sellers market I suspect the seller will increase the price by every single dollar requested by the buyer (because after all there’s plenty of buyers who will pay full price to the seller).
In a buyers market the sellers are not able to get every dollar back in the form of increased sales price, only some portion. Even in a balanced market, buyers are only willing to increase sales prices by some percentage of the concession granted.
Now I know this might sound confusing without more detail and case studies like you might see in a class but it’s really pretty simple once we understand the logic. Let me offer you what I might call the quick and dirty method. If you have comparable sales where sellers paid no concessions to the buyers, calculate and estimate a typical list to sales price ratio. You do that by dividing the selling price by the last listing price. Say $98,000 Sold/$100,000 listed or a .98 list to sales ratio. You should see a pattern develop and can logically conclude then that houses in this area are typically selling for 98% of asking price.
You can then apply that typical ratio to a property where concession have been paid (commonly you see a house sold for MORE than the list price when concessions were made) to estimate a “projected sales price unaffected by concessions”. This projected price can form a basis for your financing adjustment (the different between the actual selling price and the projected selling price) never to exceed the actual amount of the sales concession. I hope this crash course in sales concession helps!
Pat
seller to the buyer) at the closing table to make the deal 'work'. Concessions that the Title Insurance Company didn't want to know about, but...Concessions
that the Realtors (& real estate agents) knew about, Actions from the Lender (using loan originators that didn't know or care what they were doing to get a loan closed...fraud, lies) Concessions from the seller (that were not on the HUD 1), Concessions received by the buyer (not on the HUD 1), Prices raised to pay for the concessions on houses already 'pumped' up from 10 years or so of (what I call) legitimate real estate appreciation. I could be mistaken, but (in my opinion) the problems in real estate are all tied to grossly inflated prices and grossly inflated loans and overbuilding-supply & demand...& more fraud and lies from the 'flipping' "Investors".What happened in Colo.happened in all the US.Ask Wall St. and Europe.We are all a part of Realtors,Builders,Investors,Buyers,Sellers,Lenders.Title Co.We (most of us) knew.But, maybe I'm mistaken.
You make some very important points! Many in our industry have made very bad decisions under the flawed thinking that values will forever
continue to increase. Many lenders, appraisers, real estate brokers, builders and borrowers have had to relearn lessons from the 1980's. Much like the wrong
thinking regarding the "new economy" jargon in the IT boom days, the basic rules of economics remain intact and markets will inevitably go through cycles.
Greed has played a big role in the sub prime and foreclosure mess and the public is now learning how foundational a healthy real estate market is to the national
economy.
Seller concessions are not inherently evil nor are they a new phenomenon with the current market. The lack of disclosure of these concessions has and will remain to be
illegal. Dual contrating, inaccurate HUD-1's etc. constitute mortgage fraud. As we continue through this process regulators are getting very serious about
enforcement. My hope is that we can weed out the a few bad apples and move forward in a sensible manner.
Amazing ! You did a very great explanation, thanks for your answer, it helped me a lot, but I need to digest it slowly. :)
thanks again ! :)