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July 19th, 2017 12:44 PM

Seller Concessions:  Seller paid closing costs. Should they or shouldn't they be deducted?  In most cases YES if they are not customary.  Here are some reasons why :   1) These seller paid closing costs are “NOT present in virtually ALL transactions”.  2)  They are only "customary" because the real estate agent told the seller they were customary and the agent gets a larger commission by pushing them.  3)  Many markets have shortages and multiple offers are common.   Seller paid concessions should not be a factor in such a market.   4) I have "failed" numerous times in hitting the contract price largely because of the seller paid concessions.  The contracts would then be revised in almost all of the cases without the concessions proving that they need to be deducted dollar-for-dollar. 5)  It's simple math - If you give me $100,000 and I'm giving you $5,000 back then I'm only putting $95,000 in my pocket and buyer has only paid you $95,000.  5) and this is the #1 reason; BECAUSE FANNIE MAE NOW SAYS SO!   Not unexpectedly, Fannie Mae has caught on and is concerned as this is the kind of practice that results in inflated values as most appraisers will do what the agents and lenders want (ignore the concessions) and not do what they should (deduct them dollar-for-dollar).   Per Fannie Mae 2/28/17 Selling Guide revision: 

             Fannie Mae recognizes that the effect of sales or financing concessions on sales prices can vary with the amount of the concessions and differences in various markets.  Adjustments must reflect the difference between what the comparables actually sold for with the sales or financing concessions and what they would have sold for without the concessions so that the dollar amount of the adjustments will approximate the reaction of the market to the concessions.  If the appraiser’s analysis determines that the market’s reaction is the full amount of the financing concession, a dollar-for-dollar adjustment is acceptable.

This is Fannie Mae’s polite way of saying “we see a problem developing due to these large and unnecessary seller concessions and the appraiser needs to be deducting them dollar-for-dollar to avoid the overvaluation of the collateral and a repeat of 2007 down the road”.  (my interpretation)

So if you were questioning whether you should or shouldn't this is a big resounding SHOULD in my opinion straight from Fannie Mae.  Don't forget that you own that appraisal for 5 years.  NOT making the adjustment and stating that the concessions are "customary" might make more people happy in the short term, but in the long term these same people will throw the appraiser under the bus and deny all culpability if something goes bad within that 5 years. 

I'm sure everyone is now familiar with forensic retrospective appraisals and reviews.  They are labeled "forensic" only because when they are ordered you can assume that it is being used for potential litigation against an appraiser. Other than that, they are no different than other retrospective appraisals and reviews.  By arguing these seller paid closing costs are "customary" you are saying that they appear in "virtually all" sale transactions.   What is "virtually all"?  Well "all" is 100% so "virtually all" in my opinion would need to be 95%+.  Maybe some would say it means just the majority so 51% and maybe you could successfully defend that. The reality at least in my market is that these large seller paid closing costs appear in just 8% of all sale transactions.  I do not want to be on the witness stand trying to explain how 8% is equal to "virtually all".     


comments and thoughts please!


Posted by Michael Jones on July 19th, 2017 12:44 PMLeave a Comment

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February 3rd, 2017 9:57 AM
Apparently there is still a lot of appraisers, lenders and AMCs out there that believe that USPAP requires the appraiser to take photos of comparables.  There is no USPAP requirement for this nor does USPAP even require the appraiser to take ANY photos of anything.  The requirement that an appraiser take photos of comparables is actually an assignment condition of the client as FNMA does not specifically require that photos be taken by the appraiser.  FNMA requires that the appraiser "inspect each of the comparable sales from at least the street" .  Presumably if you do this then you will take a photo.  Therefore, if the appraisal is NOT for the secondary market AND your client has not made it an assignment condition then photos taken by the appraiser are NOT required and you are NOT required to inspect the comparables.  BUT if you are using the FNMA forms then you will have to modify the scope of work as the preprinted FNMA scope of work says you  "drove by each of the comps".  Some appraisers have argued that FNMA does not allow changes to the preprinted forms.  What I have found is that FNMA does not allow any part of the certification or limiting conditions to be deleted or altered but it can be expanded to allow for additional certifications or limiting conditions.  None of this is applicable because the only thing that is being changed if you choose to use MLS photos and not drive by each of the comparables is the "Scope of Work". The following is directly from FNMA "Although the scope of work for the appraisal or the extent of the appraisal process is guided by Fannie Mae’s appraisal report forms, the forms do not limit or control the appraisal process."  The short of it is this:  Taking photos of the comparables adds nothing but time to the appraisal with few exceptions.  Unless you are still living in the 90's, technology such as Google Earth, online aerials, USDA web surveys, and expanded MLS systems that now have dozens of photos instead of just one of the front; have all made "driving by the comp" a waste of time.  But If I have to do it, I am going to get paid to do it as this can add a few hours to the appraisal especially for rural properties where I often find myself taking a photo of a gate, driveway or woods.  There was a time that this was necessary.  That time has passed.  In the last 5 years not once did driving by the comparable have an impact on the appraised value.  A part of that might be because I've been doing this way too long (32 years) but mostly because of the great technology that we have today that allows me get up close and personal not just to the comp, but to the entire neighborhood of the comp. With Google Earth I can walk down a street while sitting in my office and not worried about getting shot or confronted. With the aerials available online I can see anything and everything near a property including things that you are not going to see if you drive by it. Of course if you are in an area where this technology is not available (if such a place still exists) then driving by might be your only option.  On the other hand, getting rid of this requirement would eliminate one of may favorite things about this job.  Driving around in the country (Kentucky is amazingly beautiful), listening to my favorite music, and taking a photo of a gate.  Comments and thoughts please.

Posted in:USPAP and tagged: Fannie Maecomparable photos
Posted by Michael Jones on February 3rd, 2017 9:57 AMLeave a Comment

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