Seller concessions can be a little tricky for appraisers. The appraiser’s job is to decide if the buyer is paying a fair market value for the home. So how are appraisers supposed to analyze and consider these concessions adjustments to the comparable sales? The Buzz staff caught up with Lee Lansford, IFA, to help gain a little insight into his on demand webinar for appraisers, Concessions and Misconceptions.
Buzz: Can you tell us a little bit about your background and how you got started in this profession?
Lansford: My interest in the profession comes from the aspect of our work where we are problem solvers and “detectives” (of a sort)- it’s fun! I have been appraising for 30+ years. As to related matters, I am a past-instructor of “Appraisal Principles” at a local community college, I am an AQB Certified USPAP Instructor and I hold an MBA with a concentration in real estate finance and urban development. Finally, I have been a member of my state’s “Appraisal Board” since 2008 and I am a designated member of the National Association of Independent Fee Appraisers (NAIFA).
Buzz: What is the focus of this webinar?
Lansford: What this is NOT is a “How much do I adjust?” for concessions found in the sales comparisons. This is a primer, a foundation, for appraisers to correctly understand and approach the topic.
Buzz: You mention that concessions to buyers are one of the most frequently discussed topics among appraisers, but it is often misunderstood on how the appraiser is to consider and analyze. Why do you think that is?
Lansford: As a profession with 80,000+ licensed appraisers, we lack a single authoritative source to instill understanding and application of principles. This is very much an educational issue. Unfortunately, and this extends beyond this topic, many were taught incorrectly.
Buzz: When should an appraiser adjust for concessions?
Lansford: Always, though the adjustment may be “0” or some other dollar amount. The question the appraiser should ask is this: “At what price would the sale comparison have sold without the concession?”
Buzz: Why should appraisers take the time to watch this webinar?
Lansford: We all have something to learn and I know that I continue to learn and be open to the fact that I do not know everything. We all have a responsibility to be competent. As stated in Standards Rule 1-1 “…an appraiser must (a) be aware of, understand, and correctly employ those recognized methods and techniques that are necessary to produce a credible appraisal.”
Buzz: Thank you Lee Lansford for taking the time out and speaking with us today regarding your webinar. Appraiser’s can find this on demand webinar on the Allterra Online’s website or by simply clicking here.
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I agree 100%, only everyone already knows the answer, but no one comes out directly and says it. As Mr. Lansford poses; The question the appraiser should ask is this: “At what price would the sale comparison have sold without the concession?” I have personally studied this very topic and ask myself this very question every time seller concessions are present. I have interviewed at least 50 or so different real estate agents and builders and lenders throughout the Washington DC/Maryland Metro areas. THE ANSWER: Always, The price of the comps, or in cases of a purchase price of the home can and would be lowered by the exact amount of the seller concessions if the buyer(s) decide to not have the concessions. So, lets say the price is $100k and the seller are willing to give $5000k in seller concessions. We sign the contract and at some point the buyers say, forget the concessions, instead drop the price by $5000k. The seller will agree every time. Think about it, this means the commission paid to the real agent is less, the transfer taxes are less and now the buyers are not financing that extra $5000 over the life of the loan. This is why sellers concessions should and must be adjusted out 100%. Remember; (Value is defined as the price the property would sell for “unaffected by seller concessions”.) Even though the sales concession might be “typical” of the market and paid by the seller in virtually all transactions.
Marty is completely & totally correct~
Is that true if the sale price is increased by the amount of the concessions? List price = $100,000, sale price = $105,000, seller concessions = $5,000.
That’s usually the case, this is why appraisers should ask, what affect does the seller concession have on the sale price. The answer is if the concessions were not present, then the price can be lower by at least that amount, so this is the affect the concessions have on the price. .To your point if I understand correctly, If the list is 100k, and the sale price is 105k with 5k in concessions, I would back out the 5k and then reconcile the comps for a final value. 9.9% of the time the comps have the 5k or more concessions too.
Thank you for answering my question.
YW :)
How does that work if the list price is $100,000, sales price is $100,000 and concessions are $5,000? The adjusted value(assuming no other adjustments)is therefore $95,000. Am I correct?
I completely agree with Marty; net price to seller.
FNMA says “dollar for dollar” adjustments are not always appropriate and analyses of the sale should reveal whether the price is affected or if the $ amount was conceded only to help the borrower obtain financing.(especially if it is typical for the market) . One should consider exposure time and a history of price changes during the listing period before making adjustments.
If it is typical in an area or customary that sellers pay say between 1%-5% towards buyers closing costs then its NOT a true adjustable concession because its built into the sales price just the same as the Realtors commission’s which are in some markets between 5% and 7% however FSBO sales have no commissions should we not factor that into the net price to seller argument.
The AI Mr. Gary Taylor wrote a letter to the appraisal foundation on this. He said:
“The purpose of adjusting comparable sales for concessions is to provide an indication of value of the subject property based on the definition of value. Even though the sales concession might be “typical” of the market and paid by the seller in virtually all transactions, the sale price is impacted by the concession. Furthermore, if the concessions are related to financing, the properties purchased with cash are atypical of the market and must be adjusted accordingly. Not adjusting for sales or financing concessions, even though seller paid concessions might be prevalent in the market, is not proper guidance when the definition of value includes a price unaffected by sales or financing concessions.” Finally, read the APB Valuation Advisory #2: Adjusting Comparable Sales for Seller Concessions March 7th 2012. I believe you will change your mind….. Now I realize that some or maybe even most buyers may want or need the concessions to get into a home. However, this is over inflating values very similar to the S&L problems back in the day, again which is why we all now have jobs.
Fannie Mae on Seller Concesions(FAQ)
How should the appraiser determine appropriate adjustments for sales concessions on the comparables?
The appraiser must consider the impact a sales concession had on the transaction. The adjustments must reflect the difference between what the comparables actually sold for with the sales concessions and what they would have sold for without the concessions, so that the dollar amount of the adjustments approximates the reaction of the market to the concessions
When reading, take note of the words (MUST) & (what they would have sold for without)
It is actually wrong to adjust 100% of concessions. If the buyer would have paid $5,000 more for the property had the seller not accepted their offer with $5,000 in concessions, then there would be no adjustment. That is how we are supposed to analyze concessions, from the buyers perspective, NOT from the sellers’. The problem is reaching the buyer to ask them the question.
No sir, that is incorrect. You are forgetting, one buyer may be willing to over pay, but the majority of buyers will not, especially if they are informed that they are over paying, hence is our job.
I am glad to see this brought up, and kudos to Lee for addressing it. Lee makes a very key point, which is “At what price would the sale comparison have sold without the concession?”
The APB tried to address this topic a few years ago as well. I would certainly like to see appraisers tackle it head on, and am very glad to see this interview and Mr. Lansfords comments.