How are appraisers handling concessions to the buyer? Could a seller credit damage the chance of appraising at the purchase contract? These questions weren’t asked a year ago, but welcome to the 2023 housing market.
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GOOD NEWS FOR BUYERS
Buyers are getting more from sellers lately. Last month 51.5% of all sales in Sacramento County had some form of a concession. Sellers are tending to give things like credits for closing costs, credits for repairs, rate buydowns, etc… Sellers, be ready to negotiate with buyers and offer more if needed. And buyers, get all the market will give you.
HOW DO APPRAISERS VIEW CONCESSIONS?
Question: When a buyer comes in over list price and asks for a concession from the seller, how is that viewed from an appraiser’s mindset?
Answer:
1) No effect on value: The appraiser needs to look to the comps to establish value. Bottom line. The seller can give 3% or more if the lender allows, but this shouldn’t have any bearing on the appraised value theoretically because the proof of value is found in the comps – not the terms of the contract. In other words, if the comps suggest a value at $500,000, it doesn’t matter if the subject is in contract at $500,000 with the seller giving 3% back for closing costs. However, if the only comps at $500,000 are ones with fat credits, and comps without any concessions are coming in closer to $485,000, then that tells us the comps with concessions are maybe closing high due to the concessions. This is where an appraiser might adjust the comps down in the appraisal report if it looks like the market isn’t willing to pay $500,000 without the extra sweetener to get the deal done. And this is where agents establishing a list price really want to pay close attention to what’s happening with concessions in the comps. Don’t just look at the final sales price.
2) Inflated contract price: All that said, when a property has been on the market for a long time, and it gets into contract at a higher level with a huge credit, it’s only human to wonder whether it’s really worth that amount. It sounds a bit suspect, right? In other words, would buyers really pay the contract price if the seller wasn’t giving a fat concession? This is a viable question, and the appraiser is going to record the full listing history of the subject property and scrutinize the terms of the contract in the appraisal report. This means the underwriter is going to see everything too. But still, the most weight needs to be given to the comps, so even if the contract price initially looks iffy based on the listing history alone, appraisers have to be careful to be objective about looking to the comps for value rather than the listing history alone. There is no ignoring the listing history though because it might be a clue about value. But then again, maybe there was a problem tenant who wouldn’t allow access, a lack of open houses, or some other reason why the property was on the market for longer than expected.
3) But the seller wants a higher price: A strategy I see sometimes today is to raise the price and give the buyer a credit back for the amount the price was raised. The idea is to help the seller net more and keep the buyer happy with a credit. Look, it’s fine if the market allows the seller to do this, but sometimes properties are countered beyond what is able to be supported by the appraiser. Remember, the appraiser is looking at all the details of the comps – not just the closed price. Sometimes I hear people say, “Bro, the property closed at $500,000, so it’s a good comp.” Okay, but if this unit also had a 3% credit for closing costs, the appraiser has to consider if that credit inflated the price too. My advice? Be aware of countering too high beyond what the comps suggest is reasonable, and remember the appraiser’s job is NOT to ratify the contract price.
THE MARKET IS HEATING UP FOR THE SPRING:
By the way, the market is beginning to heat up for the spring. I’ve been talking about expecting this. Even during a declining trend, we historically see more attention on the market in the spring season. I’m hearing of more showings, some competition, and phones are ringing. Granted, it’s still crickets for lots of listings, so it would be a big mistake to say today has early 2022 aggressive vibes. The tough part about January is buyers are hungry for fresh listings, but they are slow to come to the market. More on that soon.
Thanks for being here.
MARKET STATS: I’ll have lots of market stats out this week on my social channels, so watch Twitter, Instagram, LinkedIn, and Facebook.
Questions: What sort of concessions are you seeing offered right now? Anything else to add? I’d love to hear your take.
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Great discussion. I get asked about concessions often and I think it’s important to point out that concessions for needed repairs after going into contract should get looked at different by an appraiser than concessions that simply pay down closing costs.
Thanks Gary. Solid point. I probably should have said that, but that’s what makes the comments so useful. Yeah, the house has to meet minimum guidelines before it closes. It seems like sometimes the idea is to just give a credit, but that’s not going to fly with financing in all cases.
We’re lucky that Metrolist allows for listing agents to report concessions. It’s very helpful to everyone trying to value properties using MLS to include as much information as possible regarding concessions. It’s not just appraisers out there who need to know about concessions. Your office mate pricing a home on the next street over will need to know about the $10,000 credit for rate buy-down to understand how much your sale actually sold for.
100% agree. Thanks Joe.
My appraiser math brain thinks like this: A seller willing to sell at $500,000 with a $15,000 seller paid concession, would accept $485,000. Comps with concessions are subject to this math in my reports. Does Zillow consider concessions in their Zestimates??…never mind, their mathematical algorithms cost them $800Mil
Thanks Mark. Yep, I get how your brain thinks. The seller in this case wants to walk away with $485K.
Hopefully we will see an amplication of this posting.
Thanks. This is a big topic right now.
I think Gary has a good point to a point and I also think Mark B is likely right in most cases. We are supposed to answer the question what would the property sell for unaffected by things like creative financing and other enticements a seller and/or lender used to woo a buyer to the consummation of a sale. Sometimes the seller concessions represent a seller leaving money on the table; but, most of the times Marks math is the scenario. As Gary said when the concession is supposed to be for repairs we may need to look at the concession differently keeping in mind that the sale price is supposed to be “as is” so if a seller is giving money back at closing for “repairs” in reality that is an admission that the property has some type of deferred maintenance and the amount the seller is creatively accepting “as is” is in reality the sale price minus the concession. There is no easy or verifiable way to discover if the buyer actually used the money to make a repair in the normal course of business.
Well stated. The comments are on fire today. Agreed that Mark and Gary’s points are solid. And back to one thing I’m trying to communicate. We need to be careful to look to the market to see value, and not get too caught up in the contract terms. Granted, the contract terms can be meaningful, but I’m just saying I think it can be easy to get hung up on the the terms if we’re not careful. We don’t want to be in a place of imposing terms on value instead of trying to discover value. But like you said, Bryan, in many cases we understand how this works out with the math. I get it.
Happy you brought this up, I’ll need to check around our local area to see if we are running into any challenges. I have always viewed concessions the following way- the value/comps/data should all support the contract price regardless of concessions. Home is listed say for $500,000 purchase contract is for $515,000 with $15,000 going towards NRCC/RCC’s as allowed by lender (ideally, allowing the seller to net out list price) – Home would need to appraise for $515,000. If it comes up short, purchase price and/or concessions would need to be reduced to fit appraisal amount, if both parties agree. I think more common, based on the downward pressure in the market, in the scenario above, contract would come in at $500,000, buyer asks for $15,000 towards closing costs, net being $485,000 to the seller but property then only needs to appraise for market value based on comps at the $500,000 mark. Much less concern for appraisal evaluation issues.
Thanks Ryan. I appreciate your thoughts. Concessions are sometimes a nothing burger, but sometimes they really do inflate or affect the price. It’s like a builder giving a $30,000 credit and other incentives. We have to ask if buyers would pay the contract price if the concessions weren’t given. This is particularly relevant as builders tend to want to keep their prices high and offer more incentives to do that over time when prices are dropping. Or what if a seller includes a Porsche in the garage in the transaction? Would the sale have closed at the same level had the personal property not been included? Maybe it’s a generous seller and the price was reasonable. But maybe the buyer is paying way more because of the property. I realize this is an extreme example, but sometimes we see personal property included, and it can make a difference by inflating the price (art, furniture, taxidermy….). And sometimes it’s 3% back to the buyer that inflated the price. It’s really important to ask these types of questions, and in a market like today when we’re seeing more concessions, we’re going to have to ask questions like this more often.
another thing to keep in mind is that most times a seller concession is put towards closing costs even if it is supposed to be for repairs to help the loan close smoother. a lot of times a seller concession for repairs can derail or delay the loan process so in general the concession is applied to closing costs so I can see it being hard for appraisers to know for sure what the concession was actually intended for.
Fair point. Thank you Brady. Appraisers certainly don’t always know all the details involved. I’m not saying parties in the transaction are trying to hide anything from the appraiser, but there are absolutely situations where some details don’t make it into the contract, repair items are pulled from MLS when a property gets into contract, etc…
“the appraiser’s job is NOT to ratify the contract price.”
… Very well said.
Definitely looking forward to your charts on this in the future, when that $500k house includes 5% back to the buyer, and a new roof, plumbing, and electrical credits. But hey, before we finalize, you know I think we need some sod in the backyard.
Haha. Buyers are getting more right now. That’s the truth. I’m anxious to keep crunching numbers ahead. The market is always moving.
Interesting discussion. You state the appraiser is NOT trying to ratify the contract, so if a property sold and comp’d for $500,000, why would using it in a comp after it has closed be so scrutinized for concessions? Concessions are a part of the contract that the appraiser is supposedly not digging into. If the appraiser’s role is to determine the value of the home, and it appraises for $500K, then why wouldn’t that be a legitimate value for that home and a potential usable comp at that value? This concession discussion seems a bit contradictory to what you’re saying the appraiser’s role is. If the $500K home is the only home that appraised that high out of all other legitimate comps, I could see the appraiser not even using that comp as it would seem to be an anomaly and I would think the type of payment, such as cash, would be much more insightful to the appraiser and agents. But the value, IMHO, should be the value on that day in time and should stand. Concessions be damned! lol ? I, for one, am in favor of re-engineering the whole appraisal process…as it has always seemed problematic to me. Thanks for the great post, as always!
Thank you Holly. I appreciate your thoughts and I welcome your critique. I understand what you are saying, but let’s say you are selling a home next door to one that just closed at $500,000, and the owner of your upcoming listing is now super excited to price according to that property next door that sold a little higher than anything else. But that home had a 3% credit that inflated the final closed price beyond other similar sales. On one hand, I get what you are saying here, but this is where it gets relevant for agents because all of the sudden a new listing wants to price according to a property that could have been inflated. Granted, if other comps without credits are coming in at $500,000, then there really isn’t any adjustment to give. This is why at the least the ideal is to compare homes with and without concessions to understand value in the neighborhood. Ultimately, in this theoretical example, your listing gets priced 3% higher than the other property in the midst of a market with a smaller buyer pool. All I’m saying is we need to think through the details of each transaction and scrutinize them. And yes, some sales we will just throw out and not use. We have to understand the story of each comparable though if we’re to understand the market, right?
A 3% example seems pretty tame, but now imagine new construction. What if a builder gave significant credits to the buyer in terms of money for closing costs and “free upgrades” as long as the price was kept high. The builder also bought down the mortgage rate. Wouldn’t that be a bigger deal that we should consider? Or to play devil’s advocate, should we ignore details like this that could be inflating today’s price? While I understand your critique, this is where we have to dig into the details because the fine print makes all the difference. I just had someone reach out wanting an appraisal on new construction that got into contract in early 2022 and is scheduled to close soon. This buyer is paying cash, and is concerned about value today. Is the market different now? In the surrounding county, we’ve seen a huge hit to value. But let’s look closely at the builder’s recent comps and listings to see what they are doing with their transactions. If today’s prices are still on par with March 2022, chances are the builder has increased some concessions to help make that happen. So where is value today? That’s the big question, and this is exactly why we have to scrutinize the details in the comps rather than blindly accepting the final closed price. I remember back in 2006 when builders were padding their purchases also. They did this as long as they could, and I recall one property that sold nearly $80K below others at the time because it didn’t have all the sweetener from the builder that kept the price high for the comps. That was a difference of close to 15% at the time. All I’m saying is concessions can sometimes be a really big deal.
I’m aware of a property that had hundreds of thousands of dollars in personal property within the acquisition price too, so using that home as a comp blindly without consideration of the details on concessions could end very badly for understanding value. The same holds true on a smaller level with 3% credits. It’s prudent to ask what effect the credit had on the purchase price. Would a buyer have paid the same amount for the house without the concession? Like I said in my post, I think the temptation at times is to only focus on the final price, but there is always a story to understand that can make a difference in how we perceive value. I wonder if ignoring details could lead to overpricing in some situations in a declining market too?
There are many ways the appraisal profession deserves critique, but I don’t think this is one of the ways because this is a reasonable process to embark on for understanding value. If anything, I wish the entire real estate community gave more consideration toward concessions because sometimes they’re glossed over. I mean, sometimes they’re no biggie, but other times that’s not the case. In short, I realize it can be frustrating or even complicated at times to consider if concessions had an impact, but this seems like a worthwhile venture when choosing comps.
My two cents. Thanks for the convo.
Hi following up on Holly’s point here, when doing comps do you consider the buyers closing costs in the final sales price when no concessions are given? Wouldn’t only considering them in certain transactions and not all transactions ultimately skew the numbers?
Hi Katherine. Thanks for chiming in. Every comp needs to be scrutinized. We don’t want to just look at the final sales price without asking questions. If concessions have influenced the price higher, then we need to be aware of that and maybe adjust for it too. If no concessions are given, there isn’t anything to consider. If I’m not understanding you correctly, please chime in. Thanks for the conversation.
Great post Ryan. But what if the MLS discourages agents from revealing concessions? Most of the counties in Washington are in NorthWestMLS and their legal counsel has advised members that concessions are private negotiations between buyer and seller. I love reviewing a report where the appraiser states that 3% discounts are “typical in this market and have no impact on the final value” but none of the 5 closed sales comps had a discount. When everything was appreciating at 1-1.5% per month in 2019-2021, that was not a problem, but in a stable or declining market more analysis is needed.
And very few of the reports I review show any analysis of the contract in the 1004. Just as we now have to explain why we adjusted GLA at $125/sf, bathroom count at $10,000 and site size at whatever, the contract analysis needs to be more than “I reviewed the 26 page P&SA provided by the client.”
Thanks Barry. The struggle is real. I’m a big fan of transparency where possible. I’m not on that side of things, so I cannot speak to this much. I’d have to defer to the legal experts and rule makers. I just know it could help everyone to be informed and really have the details of the transaction.
On a related note, I find in our MLS that there is confusion as to what a concession is at times, so having a field for concessions doesn’t solve everything either. As with all things, there is room to learn… and then more to learn after that.
Great post and very relevant. I will say that the Birmingham market has not gotten to the point where sellers are motivated to offer better than typical incentives to buyers. This may change as the year progresses. It’s important to know what is typical for the area.
Thank you Tom. Solid point for sure. And it’s fascinating to see how different markets have different trends. I think Sacramento has been one of the markets with sharper change lately.
Bottom Line:
It’s all Bull Shit??
What do you mean Peter?