Is it going to be an appraisal problem if the buyer asks for a 3% credit back? Well, let me back up. Let’s imagine the original offer was $300,000, but through written negotiation the price has now increased to $310,000 with a $10,000 credit back to the buyer. Is that an issue? Here’s some quick thoughts.
1) Yeah, it looks bad: In some senses I think many of us would subjectively look at a situation like this and think, “Yeah, it looks bad. It seems like the price was just inflated so the seller can net more money.”
2) Contract vs market: While it’s easy to judge situations like this, we have to remember value is not found in the contact. It’s found in the market. Thus as an appraiser I need to be objective about contract negotiations. Even if I think the contract price was inflated to help the seller net more money, I still need to objectively look to the market for the proof of value. In other words, are similar properties selling around $310,000 without credits and concessions? If so, then value looks strong at $310,000. Maybe the buyer and seller were originally in contract too low, so it would be a shame for me to have put more weight on the contract than looking to the market for the answers. Yet if all the comps and pendings are at $300,000 or less, then value isn’t really supported at $310,000. Thus just because it would be convenient for a buyer or seller to negotiate the price up does not mean value is there.
3) After the contract: Sometimes a buyer and seller will negotiate a contract price up after the appraisal is already finished. Then the appraiser is asked to consider changing the appraised value. My advice? Do your price negotiations up before the appraiser gets involved. I think most appraisers are not going to amend the value to “hit” the new contract price after post-appraisal negotiations.
I hope that was interesting or helpful.
Questions: Anything else to add to the conversation? Did I miss something? I’d love to hear your take.
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I think it’s not just that the seller wants to net more, but the buyer really isn’t coming to the table with enough money to make the purchase. Parties to the transaction hope that the value is there when the closing costs are rolled into the price. I had an escrow go south because of this which hurt but I think the appraiser did the right thing and focused on the market value versus trying to make the value up from a buyer who wasn’t really qualified to buy at that price. (BTW – the buyers later lowered their expectations).
Nail on the head Jane. You said it perfectly. This is a two-sided issue for sure. It really is not the appraiser’s responsibility to help the deal work if the buyer cannot afford the home either. This reminds of what I hear from sellers sometimes, “I am priced at $750,000 because it’s what I need to sell for in order to move and make finances work.” That’s fine, but personal needs don’t always line up with the market. Thanks Jane.
This is a good topic that comes up often Ryan. Let us be clear about value because there are many types of value, in fact more than can be counted on both hands. The value required for most mortgage finance transactions is “market value”. The value derived from buyer & seller negotiations and stated in a purchase contract as the contract price is the value to a specific seller and a specific buyer. This type of value is typically the value realtors often associate with; however, this type of value does not meet the definition of “market value” stated in an appraisal. The purchase price of the subject property is not support of market value because again it does not meet the definition of market value; therefore, the seller concessions in the subject effect the contract price but not market value. Where seller contributions are relevant is in the closed sales that are comparable to the subject. Appraisers must analyze these sales and if they include concessions test the sale against the market to see if the concessions effected the sale price and make adjustment when the analysis demonstrates that the sale price was inconsistent with market value. I think Jane’s response is spot on. It is not unusual for an appraisal to come in below the contract price and a realtor involved in the transaction to tell me that they knew the appraisal was going to come in lower than contract price. An appraiser should never amend an opinion of value based on contract price because that would not meet the definition of market value and render the appraisal to be not compliant with USPAP or the expectations of the intended user.
Thank you Bryan. I really appreciate your take here and your comments on concessions too. Good stuff.
I very regularly hear the same thing from the real estate community. “We knew it was in contract too high,” or “We expected it to come in low.” At times if an appraiser “hits the number” I hear the opposite of “There is no way it is actually worth this amount.”
Thank you for the clarifying comments on my last point too. Appraisers are not contract price hitters. I think lenders and AMCs forget this sometimes. What do they expect an appraiser to do when saying, “Hey, I know your value is at $300,000, but the contract price is at $310,000. Can you please revisit value?” Sometimes the best answer in real estate is NO, and this is likely a prime example of when appraisers should say NO. Yet to be fair we have to recognize there is a reasonable range of value, so if there is a minor price change it could be completely reasonable to see value in sync with an amended contract price. But what a liability to change the value to meet the contract price. No thanks. 🙂
I agree with the logic , so here is what I’ve had a Buyer do when they overbid market value , due to multiple offers. I write into the contract that Buyer to make up the difference between contract price and appraised capped at $5000 or $10,000 , whatever their comfort zone. Conversely , when asking for credit , we write contract to offset some, nit all, of the credit to help seller net a bit
more and my buyers can compete
Thanks Karen. I appreciate hearing your take. It makes sense to see language like this in the market today. Buyers have to constantly consider what the strongest possible offers looks like (while being realistic too hopefully as you said). It must be interesting out there in the field as an agent…
Great post and topic Ryan. The other comments mostly covered my thoughts. The contract is an indicator of value and not market value. If closing costs are included in the contract price, then the analysis of the contract price by the appraiser should be that the indicator of value from the contract is something less than the full contract price unless those concessions are cash for necessary repairs to be made right after purchase.
Thank you Gary. I like how you said “indicator vs market”. The number of offers or even the history of negotiations is certainly something we ought to pay attention to as appraisers. Let’s just not let that be the end-all.
Ryan,
I am curious if you look at the closing costs negotiated on page 3 of the contract. If it is customary for the Seller to pay these fees but the Buyer agrees to pay do you make any adjustments in value for this?
Hi Angela. Good question. It’s important to look at all aspects of the contract. This is why when agents offer to send me the first page only, it’s a nice gesture, but I might not be seeing everything I need to see.
A concession is really something that is being given by the seller to help motivate the buyer to get the deal done. In my mind this is not really a seller concession, so it’s not something the appraiser would need to consider adjusting for since it is really just a strategy employed by the buyer to help get the deal closed. I suppose if this somehow inflated the price I’d have to consider that in my appraisal somehow, but I don’t think it would be prudent to technically call this a concession though. Now if the seller was offering a credit or somehow sweetening the deal with money, personal property, etc… then appraisers would need to consider adjusting for that if the concession made a difference in the price. In other words, if I’m choosing comps and I see some properties with concessions are selling higher than others without them, then it’s likely the ones with concessions need a downward adjustment because the price was essentially inflated due to the concessions. Yet if I’m looking at comps with and without concessions, and they are selling at similar levels, it’s probably best to not make an adjustment since the ones with concessions really aren’t selling for more. I hope that makes sense.
One last thing. The buyer for the subject property might agree to pay some of these costs, and it could very likely be more of a personal decision rather than something that impacts value. Let’s remember the real proof of value is found in the market rather than what the buyer is choosing to do here. When selecting comps though and buyers do this type of thing, it’s just important to be aware and consider if there is any impact to value somehow. If there are normative fees though and there is nothing beyond what is totally normal, it’s hard to think there is any real impact because these are costs that are going to be paid no matter what. I suppose if the fees are substantial rather than $500 here and there, I think that would really cause me to look more closely.
Any onlookers are welcome to pitch in two cents.
This is a timely post, Ryan. I think I have one of these situations right now. It will be interesting to see if the market agrees with the contract.
Thanks so much Tom.