Seller Concessions Adjustments Revisited

There seems to be continued debate among appraisers, reviewers, and underwriters regarding seller concessions.  A particular point of contention in this debate is whether or not it is appropriate to adjust seller concessions on a dollar-for-dollar basis.  

I must admit, that point of contention is somewhat understandable, as the ‘Sales or Financing Concessions’ portion of the Fannie Mae Selling Guide has always appeared to be a little contradictory (see B4-1.3-09, Adjustments to Comparable Sales).  One paragraph in that section concludes with “adjustments based on dollar-for-dollar deductions that are equal to the cost of the concessions to the seller, as a strict cash equivalency approach would dictate, are not appropriate.”  That seems pretty clear until you read the next paragraph which concludes that “if the appraiser’s analysis determines that the market’s reaction is the full amount of the financing concession, a dollar-for-dollar adjustment is acceptable.”  The apparent contradiction leaves quite a bit of room for interpretation (or misinterpretation).

To their credit, in the December 2023 Appraiser Update newsletter, Fannie Mae clarified the issue nicely.  The newsletter pointed out that the problem is not dollar-for-dollar adjustments, but no adjustments at all.  The “great concern” they cite is appraisals where 4.4 million comparable sales with concessions had no adjustment at all.  For appraisers who did adjust, their data indicated dollar-for-dollar adjustments in 86% of cases, which they report as a “brighter side” of their findings.  The article clarified why they consider these dollar-for-dollar adjustments a good thing.

 

“Market theory suggests that sellers would typically aim to recover the expense of the seller concession by increasing the price, so something close to a dollar-for-dollar adjustment would be the predicted outcome of the appraiser’s analysis in most cases.”

 

This, of course, is nothing but common sense.  When explaining seller concessions to newer appraisers in my office, sometimes I’ll have a conversation similar to this:

 

Trainee:  Can you help me understand seller concessions?”

Supervisor:  Sure, let me see your wallet.

Trainee:  (looks confused)  Umm…OK…(holds up wallet).

Supervisor:  That’s a nice wallet, I like it.  How much would you sell it to me for?

Trainee:  (thinks this is getting weird) I don’t know?  Just the wallet?  Maybe $25?

Supervisor:  Sounds reasonable.  I think I’d agree to that price.  I’m curious though…how much cash do you have in it?

Trainee:  (looks in wallet) $16.

Supervisor:  How much would you take for the wallet if you left the cash in it?

Trainee:  Are you serious?  Are you asking me how much more I want you to pay for an extra $16 dollars?

Supervisor:  Yep!

Trainee:  (Suspiciously) So you are asking, ‘how much extra cash do I want you to pay me for my cash’?

Supervisor:  Absolutely!

Trainee:  $16 seems the obvious answer, so I guess I’d take $41 for my wallet with the cash inside.

Supervisor:  So, is the wallet worth $41, or is it worth $25?

Trainee:  (begins to smile knowingly) $25.

Supervisor:  Is ‘cash’ real estate?

Trainee:  No, it’s personal property.

Supervisor:  So, if a seller of real estate agrees to transfer $10,000 in cash to the buyer at closing, how much extra do you think that seller would want the buyer to pay for the house?

Trainee:  (more confidently) $10,000.

Supervisory:  If the house sold for $500,000 with the $10,000 concession, what is the price for the real estate and what is the price for the personal property?

Trainee:  (fully confident) The personal property would be $10,000, thus the price paid for the real estate would be $490,000.

Supervisor:  Congratulations!  You just learned the basics of handling seller concessions!

 

That logic works well for seller paid closing costs on behalf of the buyer (which is the most dominant form of seller concession), but there are nuances.  So how might the impact on value differ from the seller concession amount?  

The first thing to consider is the impact on the seller’s net proceeds.  Some of the seller’s costs are directly tied to the amount of the purchase price.  Title fees and real estate commissions are the most obvious.  If the title fees and real estate commissions equal 5% of the purchase price, that $10,000 concession actually costs the seller $10,500 from their net proceeds.

The second thing to consider is the value of risk.  Well informed sellers will be aware that raising the price to accommodate concessions will result in more transactional risk.  The artificially inflated price increases the risk that the appraisal will be insufficient to allow the buyer to obtain financing (at that price).  If that risk is priced into the transaction, that too would mean a price differential higher than that of the concession amount.

But what about possible scenarios when the concession might have resulted in a lesser impact than the concession amount?  Consider a market where the vast majority of transactions have the seller pay the title fee.  What if there is a contract which stipulates that the buyer will pay the title fee, but that the seller will contribute an amount equal to the title fee as a seller concession?  In that case, the concession results in a transaction which mirrors the fee structure which is customary to transactions in the market.  A solid argument could be made in that scenario for no adjustment at all.  

I believe it is these scenarios which Fannie Mae had in mind when they wrote the ‘Sales or Financing Concessions’ section to their Selling Guide.  Reflexive adjustments aren’t appropriate.  The appraiser needs to consider the scenario reflected in each comparable transaction and decide what is appropriate.  Is it true in the majority of cases the evidence will strongly suggest a dollar-for-dollar adjustment?  Absolutely, but analysis requires that the appraiser give proper consideration to the potential for an outcome which might differ from what common sense and logic might dictate.