As residential fee appraisers we have been asking for someone to give direction on Sales Concessions; with our major focus on the seller's participation in closing costs. Well, the Appraisal Practices Board of the Appraisal Foundation set up a task force a few months back, and is attempting to help us with that. This task force has published their Exposure Draft and is requesting comments.
Please click on this link to read the entire Draft: Exposure Draft Concessions.pdf
There are couple of areas that focus on Sales Concessions (lines 1 through 8) and Financing Concessions (line 9 through 14). Which includes within the definition that financing concessions generally inflate values and are not reported (lines 9 through 14), and lines 150 through 160:
Fees or costs that are generally paid by the seller as a result of tradition or law and found on virtually all transactions could include, but are not be limited to: seller’s title policy, transfer tax, escrow fee, deed preparation, and recording fee. These items are most often thought of as anticipated or expected costs to be paid by the seller.
Fees not generally paid by the seller may include, but are not limited to: loan origination fees, appraisal fees, attorney fees, loan application fees, credit report fees, loan document preparation fees, photocopying fees for easements and restrictions, mortgage title policy and loan-related inspection fees, discount fees, etc. For all practical purposes, any fees or costs associated with the buyer’s loan would generally be considered seller concessions if paid by the seller.
The prevalence of seller concessions does not eliminate the need to measure the monetary impact of the concession on the sale price, or negate the need for an adjustment
I would like to know if CAREA would like to put together a formal response to this draft in time for the December 2nd comment deadline. If so I would like to get input from those who have given this some thought.
*** From here forward is my personal opinion, which has been discussed with many market participants to include realtors and my appraiser peers, and IS NOT the opinion of CAREA. It is also specific to those markets (neighborhoods) in which the "Sales" Concession is the norm, and to not have a concession is an outlier.
There are those with concerns, that when seller's participation in the buyer's closing costs are apparent in virtually all market sales, that we appraisers, will be further declining the market values of properties within our communities by adjusting comparable properties by the amount of the concession.
With our current market conditions, are there time when the Sales Concession represents a cost of sale to assist the buyer with origination fees, appraisal fees, loan application fees, title fees, etc (those that are required fees included in the HUD but listed under the buyer's fees)? Given the direction within this exposure draft, the inclusion of points or buy downs would be more difficult to defend, but it is a fact of our current market in many neighborhoods. Even though these items are listed on the HUD under the buyer's column, they are in reality being paid by the seller in most, if not all, cases.
Line 51 through 59 in verifying concessions says:
Buyer – The buyer can be a source of information about the comparable sale in terms of any sales concessions granted, and how it affected the buying decision. For instance, the buyer can disclose whether they would have paid a different amount for the property were the concession not granted, and whether receiving a concession was the deciding factor for purchasing the property.
Seller – The seller can identify and confirm concessions and may disclose any impact the concessions had on the sale price, if any. If a property included $5,000 in concessions, an appraiser may question the seller and verify what they would have accepted had they not paid $5,000 in concessions.
I find this to be an interesting statement, however I have heard that DORA currently may use a similar litmus test for concessions, along with the net to seller idea.
Looking specifically at neighborhoods that have sales concessions in virtually all sales, I would be hard pressed to find a seller that would indicate that they would not have sold the property for less if they had not paid the concessions. But, on the flip side, I would also have the same difficulty finding a buyer who would say that receiving a concession was not the deciding factor for purchasing the property. Particularly since the preponderance of buyers within certain markets could not purchase a home without them.
With all of this said, it reiterates the need for us to fully document our conversations with the:
Listing agent – The listing agent can provide direct knowledge of market activity that is important in understanding whether a sales concession was necessary to entice a buyer to buy, if the price was influenced by the concession, or if the concession was insignificant.
Selling/Buyers agent – The selling or buyer’s agent may have knowledge of special buyer motivations; such as any specifics with regard to concessionary items and whether the buyer would have consummated the sale without the concession and any impact the concession may have had on the purchase price.
Fun reading and I look forward to your responses
So much to talk about but I'll just throw out a couple of observations/opinions.
Over the years we've learned to not use Cost figures to adjust for amenity variances in comparables - ie, adjusting for a deck at 50% of cost new -- or whatever. Mixing approaches is best to be avoided. Now I see they're suggesting using the Discounted Cash Flow (DCF) to estimate the effect of favorable concessions. The problem with utilizing an income approach procedure is that the typical buyer or seller is not going to think along these lines. It appears that considering the use of a DCF to find the apparent effect on the sales price is really just trying to provide quantification in an "impossible to quantify" situation. Asking the seller how much less he would have sold it for without the concessions is asking a pretty fuzzy question that likely has no clear answer. Using DCF to "nail down" that figure doesn't change the fact that such an analysis is NOT going on inside the head of the seller and is thus applying a figure for adjustment that simply may not be truly happening.
Seems to me that our group's discussion of Multiple Regression Analysis could be used to either determine what is normal for a neighborhood and/or the suggested impact on sales price. But could it also be shown that within a couple of standard deviations, does it really matter. Lets say all sales prices float around a 2-5% range that simply cannot be accounted for. If seller concessions fall within a small enough range, do they really effect the overall values or are we nit-picking small adjustments for the sake of simply making them. I'm not saying large significant concessions shouldn't be adjusted for; in fact, quite the opposite. I'm just wondering if over-analyzing concessions under say 3% is really doing any good if the typical error range for values is possibly as high as 5%.
I think this exposure is gonna be something similar to the 1004MC which caused appraisers to think about things they hadn't in the past; but, other then scenarios of larger significant concessions, is it really adding significant credibility and accuracy or is it just looking to add another layer of scope creep that may or may not be necessary to produce a credible analysis? I don't really know. Analyze seller concessions? Of course!! Over-anlyze a 2% concession given the lack of statistical accuracy of the final appraised value? We need to know how to accomplish this but must also be allowed to draw that line of reason.
Over the past few years the appraisal process has become more complicated and regulated. It feels to me that we, as appraisers, seem to be losing creditablity, not to mention our sanity. We now have to complete a new UAD form so a computer can read the appraisal. The reader has a full page of Definitions in order to decipher what the appraisal actually says about the home.
Now it appears a Discounted Cash Flow anaylsis is being looked at to establish Seller Concessions. Really??? Do we really think the Seller Concessions are considered to this extent during the negotation process? The majority of buyers and sellers, not to mention Real Estate Agents and Residential Appraisers, have probably not heard of Discounted Cash Flow, much less how to calculate it.
Listing and Selling Agents are fairly easy to contact to establish what kind of an impact the concessions may have had on the negotation process and the final purchase price, if in fact they do return phone calls or emails. The purchasers and sellers are much harder to contact. Do we really think a Seller is going to state that they would have NOT accepted the offer had they not paid the concessions?
If the concessions exceed the typical 0-3% an adjustment should be made. What is wrong with that simple calculation?