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.
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