What appraisers should know about concessions
Seller concessions are one of the more commonly misunderstood topics in real estate appraisal. In an interview with Appraisal Buzz, valuation professional Lee Lansford chalked this up to inconsistent education for new appraisers. In order to get the most complete picture of a home's value, appraisers need to understand how to use concessions effectively. Homebuyers and sellers would also benefit from enhanced knowledge on the process so they can take a leading role in negotiations on price.
The most basic definition of a concession is any offer the seller makes to the buyer to convince them to sign on the dotted line. These are usually incentives to motivate the buyer to close the deal in a timely manner. While this may mean the seller will lose something, this could benefit them if time is of the essence. According to Fannie Mae, concessions can take many different forms. The seller may offer loan discount points or even cover origination fees. They may offer to pay some of the homeowners association fees, if applicable. Concessions may also take the form of repair credits if a buyer-authorized home inspection has uncovered damage or errors that need to be fixed. A seller may even offer to cover closing costs as a concession.
"Concessions work to convince a buyer to sign on the dotted line."
The important thing about concessions is they may affect the home's final sale price, but cannot be interpreted as the home's market value. This is where an appraiser steps in to differentiate between seller-offered concessions and the market value of the property. If using a property as a comparable sale, or assessing the value of a home currently on the market, concessions must be properly noted so their effect on the home's final sale price can be known. Concessions show up as adjustments on comps. In parsing out this information, appraisers must ask themselves this question: Would the comp have sold for the same price without any concessions?
The effect of concessions can be seen at the local level. As the Sacramento Appraisal Blog noted, valuation experts can research the prices of recent sales in a single neighborhood to get an accurate idea of concessions' effects on final sales prices. If many recent sales include credits to buyers, and also sold for noticeably more money than homes of similar type and size, it can be deduced that concessions are raising those prices. This is where adjustments come into play. In this case, an adjustment can be made to the comp for an amount equal to how much the concession raises the final sale price. However, an appraiser doesn't always need to make adjustments, even if concessions were made in a sale.
Keeping in contact
Ideally, when a concession is made, it is fully documented and thus known to all appropriate parties. However, sometimes concessions can happen off the books. In these cases, an appraiser may not know about how much the final sale price is being adjusted, which can throw loan approval and other factors out of whack. Sellers and real estate agents need to keep appraisers informed of any and all concessions being made to a sale, even if it takes the form of a simple verbal agreement, according to The Real Estate Appraisal Group. Some agents may be unfamiliar with the specifics of the appraisal process, or how to effectively handle concessions. Sacramento Appraisal Blog included a few tips that appraisers can share with agents in order to make the process smoother. Primarily, agents must specifically disclose concessions in multi-listing services. Agents should feel compelled to write a detailed explanation of factors affecting final sales price. This will greatly help appraisers, and result in far fewer follow-up calls or emails.
Ultimately, appraisers are relying on sellers and agents to be truthful when it comes to concessions. Without accurate information regarding this facet of a real estate transaction, the appraiser cannot do their job effectively. Appraisers should also always maintain a student mentality, and not just when it comes to adjusting for concessions. Every assignment can be treated as a learning experience, and thus allow for constant professional growth.