How does a reduced commission from a real estate agent end up impacting the appraised value? Does it matter? Let’s talk about that.
1) Comps vs contract: We have to remember value is found in the comps rather than the contract price. Thus imagine if both agents gave up their commission because they were feeling generous (and wanted to work for free). Does this mean the subject is now worth 6% less? Not at all because we find value from the comps rather than what the subject property is in contract for.
2) Add back in the reduction: When choosing comps and I read in MLS, “Buyer’s agent reduced commission”, it’s a tell I need to call for more information and find out what went on. In the case to the right the buyer’s agent was the buyer and waived the commission. Being that this $850,000 home sold about 3% lower than other sales, it was prudent for me to give an upward 3% adjustment to account for the commission that normally would’ve been padded into the contract price. Otherwise if I blindly used this comp without accounting for the reality that it closed lower for a reason, I could have undervalued the subject property.
UPDATE: I’ve received some grief from a few appraisers over point #2. Fannie Mae does not allow positive adjustments for concessions (though are my examples financing or sales concessions since the seller really didn’t give anything to the buyer?). Here’s the thing. If a sale legitimately sold too low because the agent waived a commission, appraisers have to consider if there was any impact to the price. Bottom line. I find many agents waive their commissions when they are buyers, so these “comps” may need to be given less weight in the overall value (or maybe adjusted up somehow). Ultimately we have to know the story of the comps so we can tell the story of value for the subject property. Don’t lose sight of that in the midst of my example – even if you disagree with the methodology.
3) No impact: There are times when I read in MLS that one of the agents waived or reduced a commission, but the property really closed right where it should have. In a case like this it can be frustrating that an appraiser doesn’t give an upward adjustment, but there’s not really one to give if the property sold on par with everything else. The truth is some agents who are buyers waive a commission without really getting a price discount. It happens.
4) Rubber stamping: Appraisers have to be cautious to not “rubber stamp” a lower contract price when there is a waived commission on the subject property. For instance, a property was listed around $950,000 and had multiple offers at that level. A cash buyer ended up getting into contract at $900,000. However, the real price would have been $960,000, but the buyer paid $60,000 of commissions and fees outside of escrow so the sales price would be lower (smart move to get a lower tax base). Anyway, as an appraiser I have to be careful to be objective and weigh the market in the comps rather than “rubber stamp” a property like this at the contract price at $900,000.
Advice to real estate agents:
1) Make it clear in MLS: Be clear in MLS when a commission has been waived or reduced. This helps appraisers when they are choosing comps.
2) Tell the story: When you’re talking with appraisers about critical neighborhood sales during a listing, I would definitely recommend pointing out any commission reductions in important comps because at times it’s easy to miss the fine print in MLS about waived commissions. In point #2 above I was appraising something for a cash buyer and I was told, “The buyer’s agent was actually the buyer on the house a few doors down and she waived the commission. You can definitely call to verify.” I appreciated the heads-up – especially since this detail was not in MLS.
I hope that was helpful.
How to Think Like an Appraiser: I’m teaching a class at SAR on May 18th from 9-12pm called How to Think Like an Appraiser. Click here for details.
Questions: What point above stands out to you most? Anything else to add? I’d love to hear your take.
If you liked this post, subscribe by email (or RSS). Thanks for being here.
Cynthia says
Per Fannie Mae – Positive adjustments for sales or financing concessions are not acceptable.
Fannie Mae is clear they do not accept positive adjustments for sales or financing concessions.
Ryan Lundquist says
Thanks Cynthia. They do not allow an adjustment at the top of the grid for financing. That is true. This adjustment was made at the bottom and I labeled the issue as “marketing” in one of the open boxes. That seems legit in my book. Had I made this adjustment at the top though, it would be kicked back by a lender because you are correct. This was for a private appraisal too. It makes complete sense to be able to adjust like this. Of course if an adjustment is not given, an appraiser can always simply give less weight to that comp. Any thoughts?
Jean says
You are simply finding a “loop hole” to apply an adjustment FNMA does not allow. I find this tobe misleading at best.
Ryan Lundquist says
Wow, I was not expecting this type of reaction. What I am doing is finding a way to account for why this comp sold too low. If no adjustment is given, that is fine as long as I account for why this one sold too low in the final reconciliation. I have given adjustments upward for short sales at times too when they simply sold too low. I am comfortable labeling a box as “marketing” and making an upward adjustment if need be. In no way am I attempting to mislead because I am VERY clearly explaining what I am doing and supporting that adjustment. If this was for a lender assignment and the lender kicked it back, I would simply remove it and explain why I gave that comp less weight. Imagine the case of the sale that closed at $900,000 but $960,000 was the real price. How should an appraiser account for this one on the grid?
Keep in mind this was for a private appraisal if that means anything. But even with Fannie Mae rules, are we rendering a true value if we do not account for a situation where a property closed 3-6% lower than it should have? Is it good appraisal methodology to not consider this and/or adjust for this? This is a good conversation because at times it’s easy to let Fannie Mae rules be a trump card for value. So to any onlookers, how do we deal with situations when the comps legitimately closed lower? Do we simply blindly use that $900,000 sale without an adjustment? This is very real.
Cynthia says
There is an argument to be made that if the agent had to reduce their commission to make the deal work it should be deducted from the sales price not added as the buyer would not pay that sales amount unless this additional credit was applied.
Ryan Lundquist says
Excellent point. I find these types of commission reductions take place fairly regularly when the agent is also the buyer. In these cases we really have to entertain whether the property sold too low. In the $850,000 example above, that was the case when comparing this one with others. In other cases I think you are spot on and we really have to do exactly as you say.
Matt The Mortgage Guy says
I enjoy the conversation and it benefits us all to discuss. I’m curious why you find it misleading Jean? If a seller nets the same amount by selling at $400k paying buying agent or $388k if agent waives commission it makes sense to me that the latter sale of $388k isn’t truly saying the property is worth $388k. I’m sure the seller wouldn’t take the offer at $388k and pay the buyers agent commission in that scenario. Food for thought at least.
Ryan Lundquist says
Thanks Matt. Good question. In an example like this $388,000 probably doesn’t reflect the market if the rest of the sales are at $400K. So appraisers just have to account for that somehow. There is always a story behind the final price and it’s good to know that.
Cynthia says
Ryan – Fannie Mae say no positive concessions adjustments, they do not say they care where you make the adjustment. I do mainly lender work. My understanding is that you do mainly non federally related transaction appraisals. None of the lenders I work with would allow the type of adjustment you suggest regardless of where or how you label it.
Ryan Lundquist says
Cynthia, I am always open to correction if I am wrong on the nitty gritty of a Fannie Mae rule. Let me ask you this. If we see a sale that closed at $900,000 but the real price was $960,000 because the cash buyer paid $60,000 outside of pocket to pay for commission and such, how should an appraiser account for the $60,000 in the appraisal if using the $960,000 comp in a report? Let’s assume $960,000 is the real value.
Cynthia says
That would be a “assumption” that is too big of a leap and I see no way to prove it’s effect on the sales price. There could be many other factors for this. You appear to be taking the angle that what the seller gets is the “value” not what the buyer pays. Market value definition per The Dictionary of Real Estate Appraisal – fifth edition – states the definition of market value as “the most probable price that a specific property interest should sell for in a competitive market after a reasonable exposure time, as of a specified date, in cash, or in terms equivalent to cash, under all conditions requisite to a fair sale, with the BUYER and seller each acting prudently, knowledgeably, for self-interest, and assuming neither is under duress.” Therefore you must take into account not just what the “seller got”. In your non lending work you may take liberties that are not allowed for lending work as it does not go thru underwriting or other types of scrutiny. If I felt there were factors that are clearly unusual and cannot be “proven” as to their effect or intent then I would not use the sale as a comparable.
Tim Savage says
Can you please show me in the FANNIE MAE seller guidelines what page I can find where they sale adjustments for commissions are not allowed. I need to show it to a real estate agent and I can’t find it. Thanks.
Ryan Lundquist says
Hi Tim. I am not aware of any such place. I am doubtful whether such a place exists that discusses adjustments for commissions. Fannie Mae clearly says we cannot give positive adjustments for concessions though. That’s all I know. In this post and in my practice I have accounted for a reduced commission in the appraisal by making an adjustment in the report if it is necessary. In my mind this is not a concession because the seller is not giving anything to the buyer. This is why I typically give an adjustment like this at the bottom of the grid (in a box I create and label as I see fit). Some in this post do not agree with this practice, and that’s fine. In my mind it comes down to whether it is a concession or not, and I do not believe that is the case. In short, I don’t think you’re going to find something in Fannie Mae regarding commissions. But if you do, I’m open ears. Best wishes.
Jeffrey A Patterson says
No you can not make a adjustment for reduction in real estate commission charged.
The cost of selling a property regardless if represented in the sellers cost of advertising…marketing… and etc or the real estate agents commission or the lack of… is not adjusted for.
Second thing: Maine MLS did a survey back of a real estate agency charging $500.00 plus a monthly fee of $50.00 per listing and found those listing were selling for 07% less than properties represented by a licensed real estate broker.
So your theory would not hold by paired sales analysis in my area.
Ryan Lundquist says
Thanks Jeffrey. I appreciate your thoughts. If a comp legitimately sold too low because of a reduction in a commission, how do you propose an appraiser to account for the value? I had someone on LinkedIn tell me he would rather deal with it in the final reconciliation (that works for me), but an adjustment would be off limits. On a related note, why are we willing to deal with something in the final reconciliation but not in the grid? Just an honest philosophical question.
I’m not sure I follow how your second point relates to what I wrote. I am sharing a couple examples of how a final sales price of a comp was definitely impacted because of the reduction of a commission. These sales simply closed too low and they are real examples in a market. I get we can just avoid them or not use them, but sometimes we will. One of my points above was included to specifically mention just because there was a reduced commission does not mean we need to make an adjustment (or deal with the lower price in the reconciliation). I don’t think we should make blanket adjustments at all, and that’s my point (see #3 above). The thing is though, when we encounter properties that did sell too low, and we use them as comps, we have to reconcile the value somehow. I am getting heat for making an actual adjustment, and I’ll consider that more. My thing is there is so much more to the story of a final price of a comp, and I’m after understanding the story and/or making adjustments if needed.
Thoughts?
Ryan Lundquist says
Thanks Cynthia. I appreciate it. It looks like I cannot respond directly to your comment. I probably just need to adjust how long reply threads are on the blog. Anyway, the seller did get $960K in this case. It’s just on paper the property closed at $900K because $60K paid all the customary real estate fees outside of escrow. This was a brilliant move on the part of the buyer. So here’s where this begins to matter.
Imagine this property closes all cash and then the owner decides to do a conventional refinance one month later. The appraiser is obviously looking to the market for value (like I mentioned in the first point) but the appraiser does have a data point too in that the subject just sold on the open market, had multiple offers around the original list price around $950,000, etc…. This is not something to ignore and clearly the appraiser is going to have to address this. So the appraiser uses Comps 1-3 and decides to use the subject property as Comp 4 in the report (which we’ve probably all done at one time or another). In this case the seller actually did get $960,000, but for reasons above it closed in Tax Records at $900,000. Thus if true value really was around $960,000 (let’s assume that is true), an appraiser could do two things: 1) Explain the reason it closed lower is because of the aforementioned information. This would probably be done in the final reconciliation and no adjustment would be given; Or 2) Do #1 and/or also give an adjustment on the grid to account for this difference. I have gotten flack today for suggesting this, but what I am after is telling the story of value in a way that is clear and accounts for an interesting transaction.
In all of this it would be a bummer for an appraiser to penalize a property’s value because of a previous sale closing lower on paper when it really did sell higher (or should have). Agents given up commissions all the time, and we have to consider if the property would have sold higher or not had the commission been intact. This seems prudent and professional to do. How each appraiser handles this is going to be up to the appraiser. I’ll seriously consider my positive adjustments in lender reports. Thank God I can give an adjustment in a private report though to help explain market behavior like this. I sure don’t want a concessions rule to get in the way of explaining or seeing value.
Here’s one more thing to consider for any onlookers. Based on the Fannie Mae Seller’s Guide, would you call the $60,000 a sales or financing concession? Please quote a specific page in the Seller’s Guide.
Page 463-464 talks about concessions
Cynthia says
Wow is all I can say. This onion keeps peeling and changing. Now it sounds like the buyer is a real estate agent that waived their fee? Not how it was originally portrayed. Or did someone pay commissions outside of escrow to record the sales price lower to escape from taxes. A real slippery slope there, not brilliant in my book and depending on the actual facts can be a violation of RESPA. The prior sales price should not effect a subsequent appraisal, the appraiser is suppose to analyze any prior sale and if they do their job would state this is the shenanigan that was pulled and why it was recorded as a sale at xx and maybe “not to be considered market value”. No way would I use a sale with such a unclear story. Appraisers are not suppose to decide “what something should have sold at”, we can use market adjustments that can be market derived but not decide on one sale that is unconventional at best that it should have sold at x.
Ryan Lundquist says
Cynthia, if you read the post carefully you’ll see I further explained that it was an agent who bought the property. There is no changing here. See Point #2 in my advice to agents. I really appreciate you and respect you, but sometimes you seem like you do not give the benefit of doubt.
Ryan Lundquist says
It was actually clear under the top #2 too.
Cynthia says
Ah, I did not follow what you wrote well. You are correct in re reading it I now see that your item 2 under part 2 clarifies the first part. (Are you an attorney too?) Just kidding. I would stear clear of using a comp with this type of creative sale as it is not typical, i.e. indicative of the market. You did get some folks thinking. I hear from one County Assessor if they feel a sale manipulated the sales price they will/can reassess the home at market value rather than assess off sales price. You have what I think are 2 separate examples. The $60,000 difference you mention seems to be significant enough possibly catch some eyes in that regard.
Ryan Lundquist says
Thank you Cynthia. I am always open to your critique and I truly welcome your opinion. I always welcome your encouragement too.
You are so right about the Assessor. Just because something closes at a certain level does not guarantee the Prop 13 value will be on that level. “But I bought it for $1,000 from my Grandma. That’s market value…” 🙂
There are two different examples here. I’m honestly not even sure they are concessions per Fannie Mae either based on the reading I’ve done. I’m open to hear what others think on that. In my mind these are two examples where a purchase price was clearly discounted, so I chose to recognize that and deal with the discount with an adjustment. This conversation has been happening on Facebook and LinkedIn today and it’s certainly been full of flavor so to speak. There are appraisers who say, “Yo, you can’t be giving upward concessions adjustments. Did your mother drop you or something?” While others say, “I get what you are doing and it makes sense to account for the price reduction in the appraisal.” It seems most appraisers said they would rather account for the reduction in the final reconciliation. For me I wouldn’t split hairs either way. In these examples I researched the sales and deliberately gave an adjustment in light of the clear reductions that impacted the sales price (Obviously through research I came to believe the reduction or way the contract was set up clearly led to a lower final price). It’s interesting to me that we so readily will give a negative adjustment when there is a sales concession that impacted a purchase price, but we are hesitant to act the other way. When we step back from the world of value and think about approaches we take, it’s a bit curious I’ll say. Granted, if we are lucky we can just ignore the low comps that sold too low. But sometimes we don’t have that luxury. If only our appraisals were always neat and tidy….
Thanks again for your insight. I appreciate the conversation.
Wes Blackwell says
As an agent, I wonder if lowered commissions affect property values without anyone even knowing. Most of the downward pressure on commissions is on the listing side, because if you lower the buyer’s agents commissions the agents simply won’t show your listing to their buyers.
So, if you were to use a flat rate agent, or a discount agent who is being paid a salary by the listing company (like Redfin often does), they really don’t have any incentive to negotiate for a higher sales price. They’re paid the same whether your home sells for $250k or $350k.
How many properties could’ve sold for $5-10k more (or greater) if the agent was being paid a higher commission? If agents were paid 10% commission, would homes sell for more than they already do now?
I know, I know… not necessarily the conversation you were trying to start with this posting, but I thought it was worth mentioning and is a viewpoint coming from an agent’s perspective. Great post!
Ryan Lundquist says
That’s interesting to hear Wes. Thanks for bringing a different angle here. I think 10% commissions would bring a huge level of traffic to the home. I hear this happens when 4% commissions are advertised, though agents would have to back that up. At the same time we might expect to see 0.05% commissions would probably do the opposite. So it does matter. Markets are always changing and so are commissions (and appraiser fees). That’s always interesting to watch.
I know an agent who did a flat monthly fee for a certain investor instead of a commission and it was a hardship in terms of making money. It’s easy to think everyone who works in real estate is rich, but that’s certainly not true.
Gary Kristensen says
This is an interesting conversation. I have not heard any rule about Fannie not allowing upward concession adjustments. I no longer do lender work, but I used to make upward concession grid line adjustment when a buyer had to spend money immediately after the sale to repair something (usually the price is reduced by $X so that that buyer can replace Y). That means that if the property had not needed repairs, the buyer would have paid more for it. This seems like a similar situation where the agent gave up the commission to result in a lower price. If the price was effected, it seems like an upward adjustment is warranted. Fannie’s definition of market value says “(5) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions* granted by anyone associated with the sale.” The hard part is not knowing what happened here, it is knowing if the commission actually effected the price. A study done by Northwestern University looking at the sales of 15,606 homes over the course of seven years found essentially no real difference in price for real estate agent sold homes with commissions and FSBO homes (This is not the silly NAR statistic that simply looks as median prices of FSBO homes and compares that to agent sold homes). Maybe the commission does nothing? https://www.econstor.eu/bitstream/10419/38634/1/574941975.pdf
Ryan Lundquist says
Thank you Gary. I appreciate your thoughts. The key here for me was the observation of a price reduction when comparing the subject property with other sales. If there was no observable price difference, then it would have been a situation where the agent waived something but the property still sold on par with others (like my example 3). But in the case of a clear price reduction, it seemed clear the property would have sold for more.
I’m not sure if my last example was as clear as I’d like it to be in the post itself, but hopefully it is even more clear in the comments.
That’s an interesting study. I’ll have to check that out and consider the implications. Thanks for sharing.
Tom Horn says
Great post, and great discussion Ryan. After reading all of the comments it seems like this topic is like many others in appraising in that some agree and some do not. This goes to show you that appraising is not an exact science and it takes the thinking and reasoning of a live person to arrive at an accurate market value. Who knows what kind of value an AVM would have come up with? This is exactly why it is necessary for the appraiser to speak with a party to the transaction to find out exactly what happened in order to be able to tell the true story of value. I think this is one of those situations that you cannot really say it is wrong and there is no real “rule” about this type of scenario. It sounds like you’ve put a lot of thought into your final value estimate. As always Ryan you’ve been able to start some meaningful discussions on how and why appaisers do what they do, and for that I will say “nice job”!
Ryan Lundquist says
Tom, thank you so much. I think you’re so right that there is often more than one way to approach a valuation. We just have to know the story of the comps so we can tell the story of value for the subject property. This is a good discussion and I welcome any further insight.