Concessions – When & How Much to Adjust
There is a lack of consensus or understanding among appraisers regarding concessions paid to a buyer in a sales transaction.
The focus here is on appraisals communicated via a current Fannie Mae/Freddie Mac form. The intent of this article is to bring some clarity to this topic, whether you’re appraising the property as a purchase transaction or using it as a comparable sale after it has closed.
First, in your appraisal due to purchase, a concession to the buyer of the subject of your appraisal must be reported in the contract section of the appraisal report. However, you must remember this concession is not relevant in the sales comparison analysis. This is the reason why the “sales or financing concession” field for the subject property on a Fannie Mae form is “shaded out” in the sales comparison analysis section. That is, any concession found in your subject’s transaction is not relevant in your analysis of the sales comparisons. The sales comparisons will reflect an adjusted sales price range for the subject property regardless of what the buyer and seller of the subject have negotiated in the contract. Remember: You are appraising the subject property, you are not appraising the subject’s contract of sale.
That’s the easy part.
Now, let’s discuss what appears to be the area of disagreement, or misunderstanding, among many appraisers.
In what follows, we assume that the appraisal is being communicated using one of the current Fannie Mae/Freddie Mac forms. An integral part of these forms is Fannie’s definition of Market Value. In one part of the definition, Fannie provides a directive to the appraiser as to how “sales concessions* granted by anyone associated with the sale” are to be considered and analyzed.
It’s the asterisk (see sales concessions* above) section of the definition that requires our attention when concessions are present in the sales comparisons.
Quoting from a current (March 2005) Fannie Mae form:
*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 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 concession based on the appraiser’s judgment.”
So, then, what would not constitute a seller paid item that would be understood as a “concession” (and thus NOT requiring adjustment)?
In some market areas, it is customary for sellers to pay for, and provide to the buyer at closing, a current plat of survey. This seller paid item is present in the market as a “result of tradition or law” and is found in “virtually all sales transactions”: yesterday, today, and, most likely, tomorrow.
The seller paying for the plat of survey and giving it to the buyer at the closing is typical in a “seller’s market” and a “buyer’s market”. The fact that this seller-paid item is present under all market conditions is very important. It is obvious that such a seller paid (as found in the sold comparisons) item is not something that is considered as a “seller concession” requiring adjustment in the sales comparison analysis.
From the above, it is apparent that many, or most concessions to buyers present in a “buyer’s markets” do not meet the test of having been present in “Virtually all sales transactions” as a “result of tradition or law”. Thus, “adjustments must be made…”
The above is where many appraisers make an error in judgment in their analysis of sales comparisons.
Some appraisers believe that because many (or, even most) recent and current sales have concessions to the buyer, such is common or typical of the market and that no adjustment for the concession need be considered.
Such thinking is erroneous.
Now let’s take a peek at a couple of illustrations of how some appraisers today —in market’s characterized as a buyer’s market— incorrectly consider concessions to the buyer:
#1: The sold comparison had a concession to the buyer in the amount of $7,500, but many —or even most— sales transactions today have a seller concession. Thus, such concessions are typical of today’s market and there is no need to consider an adjustment for the concession —even though such a concession was not typical a few short years ago.
#2: The subject has a seller concession of $10,000 and the sold comparison has a seller concession of $10,000. Hey, no adjustment is necessary because the concessions are equal.
The thinking of these two appraisers indicates that they are not incorporating the previously cited directive from Fannie Mae into their approach!
Keep in mind:
a) Any concession to the buyer in the sales contract for the subject of your appraisal is irrelevant when it comes to the analysis in the Sales Comparison Approach. You are appraising the Subject for its Market Value —you are not appraising its contract of sale.
b) Any pay-back (concession) to the buyer —granted by anyone associated with the sale— or cost paid on the buyer’s behalf must be considered as a concession unless such is found in the market as a result of tradition or law in virtually all sales transactions (virtually all as in yesterday, today, and, likely tomorrow and under all market conditions).
c) Don’t confuse what is typical today with what is typical (by custom or law) all of the time.
Others have offered their thoughts on the topic of concessions to the buyer:
A chief appraiser with a major national bank offered this regarding concessions in the sold comparisons:
“I have long believed that concessions simply reduce the effective net to the seller so all ought to be discounted to find the true MV. While it may be prevalent in a specific market, I’ve never ever seen a market in which they virtually all get the concession.” (My note: the comment is specific to the concessions as found in the sold comparisons)
And, a former chief appraiser with a large national investor:
“It is my belief that discount points should be adjusted for.” (My note: the comment is specific to the concessions as found in the sold comparisons)
Also, a prominent HUD employee, posting in a discussion on this topic at the AppraisersForum website:
“We are finding appraisers who are failing to adjust/report concessions in the range of $10K-$100K, new automobiles etc. Their reasoning is currently typical for the market.”
Typical/customary…fees (seller-paid items) are found in either a seller or buyer market. (My note: the comment is specific to the concessions as found in the sold comparisons)
Finally, how much to adjust when a seller concession is present in a sales comparison?
From Fannie Mae (definition of MV—the asterisk section):
“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.”
By Lee Lansford – Illinois Appraiser Newsletters – Volume 2, Issue 12