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
