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Financing and sales concessions: do we adjust or not? Can paired data analysis work if we don't?

Article Excerpt
Sellers, whether they are individuals, brokers, or developers, may make sales concessions to induce a sale. When a buyer wants to purchase a house but cannot qualify for a loan because of excess debt or lack of a down payment, the seller may offer a method to provide cash for the debt payoff or down payment.

In many markets, the lack of needed cash is the biggest obstacle to homeownership. One of the most common tools used by brokers and builders alike is the provision of financial assistance to the buyer. This is a type of sale concession. (1) These inducements paid by the sellers or builders cause an additional cost of sale, which is usually compensated for by raising the negotiated sale price. However, the higher price of a comparable sale causes the indicated value of the subject property to be artificially higher unless an adjustment is made, as shown in Example 1.

Example 1

Suppose the subject is in a market where prices are declining, and sellers and builders are offering a variety of incentives. An appraiser researching comparable sales may find the following market information for sales of properties that have attributes nearly identical to the subject and have closed within the last few months.

* Comparable 1: A residential property sold for $525,000 with the buyer obtaining a new mortgage of $500,000. The seller paid the real estate brokerage fee, title preparation fee, title insurance fee, and 50% of the closing fee.

* Comparable 2: This property sold for $350,000 with the buyer obtaining a new mortgage for $332,500. The seller paid the real estate brokerage fee, title preparation fee, title insurance fee, 50% of the closing fee, and $25,000 in points for the buyer to buy down the interest rate.

* Comparable 3: This residential property recently sold for $375,000 with a conventional mortgage of $325,000. The seller paid the real estate brokerage fee, title preparation fee, title insurance fee, and 50% of the closing fee. Additionally, the seller took back a "forgivable" $50,000 second mortgage from the buyer. The broker reported that the buyer and the seller shredded the second mortgage documents right after closing.

* Comparable 4: This property sold for $400,000. The buyer provided 10% for a down payment and financed the remaining 90%. The seller paid the real estate brokerage fee, title preparation fee, title insurance fee, and 50% of the closing fee. The listing agent indicated that all the furnishings in the residence, plus an antique car, were included in the sale. The agent estimated that the personal property had a value of about $75,000.

What do these sales indicate about the value of the subject? If adjustments are made for the extra cost incurred by the seller, the sales all indicate the same value: $325,000. If the adjustments are not made, the value indications range from $325,000 to $400,000, which is substantial for sales of nearly identical properties.

There are some appraisers who state that if these concessions are typical, then they need not be adjusted for. The problem with this thinking is that there is no limit as to how much an appraiser can assume is a typical concession. Example 2 illustrates the problem that can arise with this approach.

Example 2

Suppose the subject real estate is located in a platted subdivision and is improved with a new residence. The reported sale price on the purchase agreement is $375,000, which is the entry...

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