It’s been a heated week of conversation in light of the NAR lawsuit, and one part that feels misunderstood or even controversial is how appraisers might handle concessions ahead. Let’s talk about it. Any thoughts?
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UPDATE:
See new information from Fannie Mae, Freddie Mac and FHA below.
WE’RE IN NEW TERRITORY
Commissions for the buying and selling side have been baked into the market, so it’s not really something appraisers have had to consider because it’s been normative for sellers to cover these fees. Well, with a buyer’s agent commission now potentially being handled as a concession, we may have to think about this differently now. In short, everyone in real estate may need to ask a new question: Is there a price difference between homes with and without the seller paying for the buyer’s agent commission?
A QUICK VIDEO I MADE TO TALK ABOUT THIS
The NAR lawsuit isn’t even ratified yet, but I think it’s important to be proactive about thinking through some of the nuts and bolts of changes.
- How do appraisers handle concessions?
- Do appraisers deduct value if the seller gives concessions?
- How does the NAR lawsuit come into play?
- Closing thoughts
BRO, EVERYONE TALKS FOR APPRAISERS
One problem we have today is everyone has an opinion about what appraisers do and don’t do, but very few people in real estate understand what appraisers actually do. That’s been my observation this week in so many threads when people say stuff like, “Dude, appraisers won’t adjust,” or “Appraisers cannot do this or that.” My advice? Get familiar with how concessions are handled in appraisal reports, be open to new ideas, and talk to smart practicing appraisers about how they handle concessions and what they’re thinking about the future. Remember, not all opinions are going to be the same, and I don’t speak for every appraiser either.
DO APPRAISERS DEDUCT VALUE IF THE SELLER GIVES CONCESSIONS?
No. I talked about this in the video above (or here). Any adjustment given for concessions happens to the comps. NOT the subject property. In short, if a seller gives a credit for a commission or whatever, that doesn’t mean the subject property is worth less. We have to look to the comps to understand what a property is worth – not the contract price or terms.
SEE WHAT FANNIE MAE SAYS
Look, I’m not sure what Fannie Mae is going to say about the seller paying for the buyer’s agent commission, so this conversation right now is simply trying to be proactive. I suspect we’ll eventually get some direction from Fannie Mae, Freddie Mac, VA, and FHA.
This is straight from Fannie Mae’s Selling Guide.
“Comparable sales that include sales or financing concessions must be adjusted to reflect the impact, if any, on the sales price of the comparables based on the market at the time of sale. Examples of sales or financing concessions include:
- interest rate buydowns or other below-market rate financing;
- loan discount points;
- loan origination fees;
- closing costs customarily paid by the buyer;
- payment of condo, co-op, or PUD fees or assessment charges;
- refunds of (or credit for) the borrower’s expenses;
- absorption of monthly payments;
- assignment of rent payments; and
- inclusion of non-realty items in the transaction.”
THE BIG QUESTION
Will the buyer’s side commission be added to this list? That’s the question, and we’ll only know as time unfolds. Like I said, this is new territory, and if the commission is no longer baked into the purchase price like it has been, we may have to think differently about this. No matter what Fannie Mae says, we still have a new layer of analysis to consider. Is there a price difference when commissions are paid or not paid by the seller? Keep in mind buyers could think about this differently too. If I was a buyer, do you know what I’d like to know? How was the commission handled in the comps? That could influence my perception of value or what I might want to offer.
UPDATE FROM FHA (added on 03/28/2024):
Real Estate News has reported that FHA said in an email, “If sellers continue to pay buyer-side real estate agent commissions and fees as a manner of state and local law or custom, and if the commissions and fees are reasonable in amount, existing policy would not treat those payments as interested party contributions provided all other requirements are met.”
Did you hear that? It sounds like a commission won’t count within the allotted 6% concessions, and it also sounds like part of this comes down to what is normal in the market. So, this provides clarity, but it also means we need to watch the market to understand how things change.
UPDATE FROM FREDDIE MAC (added on 04/15/2024):
Freddie Mac is basically doing the same thing as FHA. See press release.
UPDATED FROM FANNIE MAE (added on 04/15/2024):
The big dog has spoken. Here is their press release.
THE GOOD NEWS
The market will figure this out. Real estate professionals will figure this out. Buyers and sellers will figure this out. We need time to see the trend.
Thanks for being here.
Questions: How do you think concessions are going to be handled ahead? How are you thinking about this? I’d love to hear your take.
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Ryan,
How were the damages determined in this case? Who was being harmed by the way commisions were handled before? NAR cannot afford to pay the multi-miliion dollar award. Will we all (appraisers included) have to pay for this? Will the so called victims get any of the money? Maybe I should have been a class action attorney. I am having trouble understanding what it was all about. Your perspectives on the market are so interesting. You are so level headed about the issues and encourage others to be less reactive. Thanks for all you do for the profession.
Dave, thanks for the kind words. These are all great questions. I can’t really speak too much to that. I do question who this lawsuit is going to really help. At the least, lawyers have done well. Time will tell how this really affects the market and buyers and sellers though.
Hey Ryan, timely post. We had a discussion of this last night. Another question to add to the list is how this information will be reported. Will MLS report on commissions paid to buyers agents? I would not be surprised if the answer is no.
As an appraiser, should I ask for copies of compensation agreements to include in my contract analysis?
The appraiser and agent industries will need to adjust to the new reality.
Thanks Joe. I would think a concession has to be listed. I really hope that’s the case. We need this information as real estate professionals (including agents). I know a commission cannot be advertised when a property is listed, but to me it doesn’t sound like advertisement after a property has closed to list concessions. But I’m not a lawyer. There is a learning curve ahead.
Timely conversation as always Ryan. While the “Sale Price” is a fact that is not adjusted, what about the “Total Consideration” paid by the buyer?
Based on past practices and the concept that “price” and/or “value” incorporates all sales commissions, what about the buyer-paid commission not incorporated into the contract price and/or seller concessions reported in MLS? To reflect the “Total Consideration” or “Total Sale Price”, should the buyer-paid commission be reported separately in MLS? Or added to reflect the Total Sale Price (with a notation)?
Another twist will be on the part of Assessors and how this impacts what Assessed Value gets enrolled on the new owner’s purchase. Assessors in California look at the Documentary Transfer Tax on the Grant Deed, as well as what is stated on the Preliminary Change In Ownership (PCOR) signed by the buyer at closing, and what is reported in MLS. And be aware that the three source documents do not always match up. In the end, Assessors should enroll Market Value, but minor concessions and/or buyer-paid commissions may not be reflected in the actual assessed value enrollment when certain Mass Appraisal processes are utilized by individual Assessors.
Bottom line, I foresee a future with larger discrepancies between reported sales prices (MLS, etc.), value estimates by appraisers, the “public record”, and Assessed Values on the same transaction.
Thank you Jim. I always appreciate your take with a different perspective than mine. Solid points. I’m eager to see how this unfolds. I’m not crazy about some of these changes here. I’m not happy if this ends up leading to less transparency in real estate data too.
Thank you for that video giving an explanation of the concessions. I think in the end, at least in our local market, I think most sellers of lower priced properties will need to pay a buyer’s agent commission because lower end buyers are often short of up front cash. In the higher end properties we’ll have to see. I don’t see the price of housing coming down regardless of who is paying the commission because the biggest influence is supply and demand. If the NAR settlement decreases demand or increases supply then maybe prices will adjust, but I wouldn’t hold my breath.
Thanks Carol. We’ll find out eventually how it all shakes out. I concur with you about buyers at lower prices. It’s hard enough to make things work, and coming up with a potential commission payment is a tall order. There will be options ahead, and the real estate community will be busy communicating whatever those are.
Retired Res & Comm Appr specialized in Eminent Domain here.
Concessions reply:
Of course, concessions are adjusted for – whatever they are. The hard part is establishing what everyone agrees is the value of the concession.
I once appraised a high-end Luxury condo that only had 30 comps in the start-up development. I knew the range of values and I got an assignment to appraise on – but it was $100K above ANY sale. I thought I might be in trouble.
I did my measurement & inspection of the property and noted a 10 yr old Ferrari in the garage. Me being a car guy, I noted the model & year. Yes, it was RED.
The car was included in the sale!! And everyone agreed to the value – market value then slid right
in line with the existing sale!!!
– All was well with the universe –
Thanks Ed. Nice to have a Ferrari included in the sale. Wild.
The seller has historically paid the buyers agent; therefore, [IF] sellers continue to pay the realtor fees including the buyers agent then the payment would fall under those costs normally paid by the seller and no deduction would be warranted. However, we will have to wait to see what the market participants will do. If the sellers become zealous about not paying this part of the commission, then they will break the cycle of “normally paid” and it would effectively become a concession.
*Adjustments to the comparables must be made for special or creative financing or sales concessions. No adjustments are necessary for those costs which are normally paid by sellers as a result of tradition or law in a market area; these costs are readily identifiable since the seller pays these costs in virtually all sales transactions. Special or creative financing
adjustments can be made to the comparable property by comparisons to financing terms offered by a third party institutional
lender that is not already involved in the property or transaction. Any adjustment should not be calculated on a mechanical dollar for dollar cost of the financing or concession but the dollar amount of any adjustment should approximate the market’s reaction to the financing or concessions based on the appraiser’s judgment.
Notice the second sentence: “No adjustments are necessary for those costs which are normally paid by sellers as a result of tradition or law in a market area; these costs are readily identifiable since the seller pays these costs in virtually all sales transactions.”
Excellent commentary. What are you quoting directly? Fannie Selling Guide? Wasn’t sure without citation. Thanks.
How will the market respond or change? That’s the part that we’ll have to see how it shakes out. Will a lender treat this like a normative thing too? This is where we need some clarity. But backing up, we’ll have to watch this very closely in the comps no matter what. This is simply a new layer of analysis since we are likely to have some comps with differing degrees of what the seller paid. In the past, it was basically all one thing, but ahead that may not be the case. Time will tell.
That is the preprinted statement on the 1004 form page 4
Excellent. Thanks Bryan. You always add helpful details.
Thank you for staying out in front of this conversation.
Thanks Gary. Doing my best to do so. I wrote about it last week, but felt it wasn’t quite enough to say something in passing. And now we’ll see what the market does ahead. So many questions. Only time will tell.
Opens the door for more attorney involvement changing the compensation equilibrium by decreasing realtor percentage. Attorneys will become part of brokerages offering packages and because appraisers are independent and unbiased will be somehow included in this mix.
That’ll be interesting to watch. Thanks David.
This may not feel germaine but I will add to the conversation. I sold a home recently off market. The Seller said that they would not pay for a Buyers Agent if we sold off market. So I cast out a few emails to previous clients and people I knew that were in the market and got a bite.
I met the prospective buyers at the home and I discussed with them how representation worked (ie. Agency). They opted to hire their own agent to represent them. I will add that I have done other transactions like this and have represented both buyer and seller. My experience has been positive. But, as an agent in the middle you do need to explain very clearly what your position is and the fact that a conflict of interest can raise a problem.
Why did we do it this way? The Sellers wanted to save on expenses and and let me add that I didn’t get paid more that if it had been a market sale. Also, they sold the house off market for less than they would have If we had sold through MLS, their choice.
My background is in Builder world. Not all builders will pay a buyers agent. In fact Builders that do pay a buyers agent call it a referral fee and then politely tell the buyers agent that they have no position in the transaction. The contract and meetings for options, etc are all done by the Builder’s representative.
So, I add all this just as a note that there are examples out there already where a buyers agent isn’t used.
Thank you Georgina. I appreciate you taking the time to share your perspective. You know, the truth is there isn’t just one way to do things. There isn’t just one model. It’s the same in the valuation space where maybe it’s a full-fledged appraisal, maybe it’s a desktop, maybe it’s an appraisal waiver instead. There will be a learning curve ahead, and I’m eager to see how it all shakes out.
Oh, and there is a local builder who does not like to pay referral fees to agents. From what I hear, it’s not in every single one of their communities though, so I’d be curious to see what criteria they use to either offer it or not.
I appreciate what you are saying and it will be interesting to see how things roll. Oh and with respect to the builder that does referrals at some communities? My guess is, grounded in experience , bottom line there aren’t the sales he/she needs to proforma so let’s get resale agents to help us. 🙂
I’m not in the RE business, however I am in the Financial Advisory business. What doesn’t make sense to me is that the fee’s paid to RE agents are baked into the Home Price. If I see a home that just sold, the average person just looks at the price it sold for. I liken it to buying a publicly traded security. Meaning when a client wants to purchase let’s say 1 share of APPL via a financial registered representative, they clearly pay the offering price + a commission, which is clearly stated on confirmation to client. If commission paid to the financial firm or agent were added to price of security it would artificially inflate price of Apple stock. Over time, hasn’t the home valuations risen due to buyers/sellers fee being included in price of home. I’ve asked this question on other blogs & the answer I have received had to due with the MLS showing what is being offered as a buyers concession. However, unless you have access to the MLS that brokers and agents have, the general public is not privy to that info. Also I’m pretty sure if I see a house that just sold on my street for 600k & I feel my house is a tad bit nicer or has more sq feet, whatever, I would ask $620k. Why isn’t the TRUE price of the home (what a seller accepted) shown on the MLS- with whatever fees paid to seller/buyer agent? I don’t know any other financial service that doesn’t have full disclosure requirements.
Thanks Rebecca. Yeah, this is the system. I have to think someone has done an extensive study on prices and commissions to determine what happens, but it’s not hard to think logically that commissions boost the price overall. However, they get the deal done too, so while we can look at it as inflating the price, it also enables a transaction to even happen. It would be very tough on consumers to pay out of pocket for one or both sides because real estate is just expensive. Right or wrong. It’s possible it’s done differently in other countries too, so I don’t think there is just one model here. When a car sells, there is a commission baked within the price too. I doubt the dealer says, “We didn’t really sell the Accord for $28K, but we really sold it for $25K after considering commissions (no idea what a car commission is). Maybe not the perfect example, but that’s what came to mind pre-6am when typing. 🙂 If you sell your home for $620K, I think onlookers in the know are aware that part of that involved commissions. You may have even offered some concessions to the buyer.