http://batonrougerealestateappraisers.com/ – Baton Rouge Real Estate Appraiser Attends Appraisal Institute’s “Appraisal Challenges: Declining Markets and Sales Concessions”, Part 3
Financing and Sales Concessions
This section begins with this quote, “In a downturn market, real estate practitioners often develop new tools to facilitate sales that would not otherwise be transacted. One of the most common tools used by brokers and builders alike is to have the seller provide financial assistance to the buyer. These concessions almost always have an effect on the sales price paid and must be recognized and adjusted properly by appraisers.”
My comment is that this method isn’t only used during market downturns. This method – having sellers pay buyer’s closing cost (sometimes excessive $6,000, $8,000, $10,000 just in closing cost) plus sometimes contributing to some type of non-profit for down-payment assistance – has been used ever since I entered the appraisal business in 1991, either all or in part.
However, during this particular downturn, we’re learning that the FBI is investigating transactions in the southwestern US where some incentives to buy new homes were up to $100,000 in paying off buyer’s debt to lower their debt-to-income ratio enough to afford the higher payment. The $100,000 is supposed to have paid off student loans, auto loans, credit cards, etc.. The problem here is that when the buyers closed on a $450,000 home that is now 14 months later worth only $325,000; the buyer is now miserably upside down. This is why there is a whole new industry being developed called “Mortgage Auditing”. This particular slant of Mortgage Auditing seeks to prove fraud within the closing documents versus good faith estimates, and if fraud can be proven, help these “buyer victims” walk away from their mortgages. Lawsuits in the coming years in both the sub-prime and B & C paper market are expected to reach the billions and billions of dollars in litigation, helping to stall any housing recovery. Is this new industry for real? Just Read this Active Rain Post I Found: “Rescind Your Mortgage Loan and Save Your Home From Foreclosure!” http://activerain.com/blogsview/689790/Rescind-Your-Mortgage-Loan
In this seminar, it was stated that the correct school of thought taken is, “An impact on sale price caused by any sales or financing concessions, incentives or other schemes should be adjusted out of the sale prices of the comparables. Doing this would net a cash-equivalent price that is similar to the defined value. This essentially means that all comparable sales should be adjusted to a level where the price is equal to what a “cash” buyer would have paid. Without a doubt, seller concessions impact the contract price of a property. If the seller pays any of the closing costs that on virtually all transactions are paid by the buyer, or are deemed to be the buyer’s closing costs, then the seller has paid concessions to the buyer.” Cash Equivalency means that when a home is listed for $171,900, sells for $176,900 because $5,000 was added into the deal to pay the buyer’s closing cost, when that new sale is used as a comp, the appraiser deducts $5,000 for a net sales price of $171,900. Although it’s reported in the MLS system at a sales price of $176,900, this transaction worked to over-inflate that local housing market and the appraiser is duty-bound to correct this when using this sale as a comp.
***This section below was written based on my own opinion and was not exactly discussed in class.***
How Real Estate Practitioners Assist In Over-Inflating A Housing Market.
Here’s An Example: I just used a sold comp in an appraisal where the home was listed for $179,900 and it closed for $186,900 with seller paying $7,000 in buyer’s closing costs. My questions in this transaction are: If the seller wasn’t willing to pay any closing cost, would this transaction have taken place? Also, in reality, the seller didn’t pay closing cost. The sales price was raised by $7,000 by raising the appraised value, but the listing agent believed this home was only worth $179,900 when listed. Was the appraisal manipulated to seal this deal? To hit that target number? I’m not pointing the finger at anyone here. Remember that one of the helps of this seminar was to show and remind home appraisers “how” housing market become over-inflated and to properly adjust for such actions. This is how the housing market operates and this type of operation – of adding in seller paid concessions to bump up the sales price above listing price on a home for sale – is what assists in over inflating home prices.
Mortgage Lenders Assist In Over-Inflating Values.
With mortgage lenders, it all begins with the appraisal order having the target value needed on the appraisal order for refinance and 2nd mortgages. The Major National Banks, on refinance or 2nd mortgage orders, stopped stating target values needed on their appraisal orders about 5 years ago. Today, it’s generally the local mortgage brokers that still state target values on their appraisal orders.
Real Estate Practitioners Assist In Over-Inflating the Market.
Have these seller paid concessions artificially inflated this National Real Estate Market? All of this discussion brings up an interesting question. It’s been said that part of this national housing problem has to do with inflated home values. Well, one way home values become “inflated”, is when real estate practitioners list a home for $159,900, it’s on the market for over 6 months, lowers the price to $154,900, receives a P.A. and the appraiser receives the appraisal order with selling price of $166,400 with the seller paying $6,500 in buyer’s closing cost plus contributing $5,000 toward a non-profit for down-payment assistance. There is opinion that says that appraisers that go along with this type of transaction are committing fraud (see Active Rain post: http://activerain.com/blogsview/109183/Are-You-Committing-Fraud ). After all, the home was listed initially for $159,900 believing that this home wasn’t worth more than $159,900. This home was on the market for over 6 months and reduced to $154,900. When the lender goes to hire an appraiser, they get on the phone and call around until they can find an appraiser willing to go along with this type of deal. During the appraisal inspection, the buyer meets the appraiser and states that without the seller paying their closing cost, they couldn’t afford to buy the home. Clearly, the market doesn’t support this transaction, but with the “right appraiser”, it’s no problem.
This sale is recorded in the MLS for $166,400 with only $6,500 in seller paid concessions reported, not the correct total of $11,500 in seller paid concessions (the $5,000 in down payment generally isn’t reported). So, the sale is actually recorded at an inflated sales price $11,500 more than the market was willing to pay. Based on cash equivalency standard, the appraiser will use this sale as a comp at $166,400 and subtract the $6,500 in “reported seller paid concessions” reflecting a net sales price of $159,900.
MLS Systems Across the USA Assist In Over-Inflating Home Values.
But, there’s another problem here built in to our MLS systems. MLS systems don’t automatically deduct seller paid concessions, don’t adjust for cash equivalency, nor do real estate practitioners understand their responsibility to do likewise. So, in the 2 examples above, the first is over-inflated by $7,000 and the second by $6,500 based on “reported seller paid concessions”. When the next Agent pulls an MLS CMA to price their new listing, and they use either of these 2 sales, which are not adjusted for cash equivalency, this new listing is automatically priced at an inflated value. And, therein lies a partial contributor to over-inflating home prices – The Nations’ MLS Systems That Don’t Adjust Seller Paid Concessions To Cash Equivalency. If this newly listed home receives a P.A. and the appraiser has a problem reaching this new inflated sales price, the real estate practitioner will say that the comps are selling for $110/sf based on an MLS CMA (not adjusted for cash equivalency), therefore supporting the sales price. However, when the appraiser applies the cash equivalency standard and has to deduct -$7,000 from comp. #1, -$6,500 from comp. #2 mentioned above and $0 for comp. #3, then the home doesn’t appraise. The appraiser is labeled the bad person in the transaction because they didn’t go along with “the deal”. In reality, it was the real estate practitioner’s responsibility to have subtracted (bring to cash equivalency) seller paid concessions from each comp they used to price this home.
It’s my understanding that after October 1, 2008, many of these non-profit down-payment assistance programs are being banned from use in home purchases, at least for FHA Financing. From what I have read, this move is believed to lessen the future number of foreclosures because, if a person has nothing invested in the home, then they’re more willing to let the home go into foreclosure. This will help lessen the pressure applied to appraisers to hit the inflated and unsupportable target price. NOTE: There may be behind the scenes negotiations to save seller funded down-payment assistance programs. However, both lenders and Realtors will find it more difficult to find appraisers to go along with these situations when the purchase price is raised $10,000+ than listing price just for the purpose of trying to get a buyer into a home. If the home is listed for 3 to 6 months for $169,900 and finally receives a P.A. for $180,900 with seller paying $5,000 in closing cost plus $6,000 in seller paid down-payment assistance, $11,000 more than listing price, why is the appraiser obligated to hit this number? After all, the original listing price was $169,900.
Builders Also Assist In Over-Inflating Home Values.
As mentioned above, it’s reported that some in the Southwestern US are being investigated for allegedly paying off buyer’s debt to get buyers into new homes. It also shows up when the builder offers to pay $5,000 in buyer’s closing for all homes in the new development across town. Without the builder paying $5,000 in closing cost, some buyers wouldn’t be able to afford these new homes. Remember what was stated above, This essentially means that all comparable sales should be adjusted to a level where the price is equal to what a “cash” buyer would have paid. Without a doubt, seller concessions impact the contract price of a property. If the seller pays any of the closing costs that on virtually all transactions are paid by the buyer, or are deemed to be the buyer’s closing costs, then the seller has paid concessions to the buyer….and those concessions should be deducted when that sale is used as a comp.
And, Yes, Home Appraisers Assist In Over-Inflating Home Values.
It’s believed by this appraiser that all players in the real estate arena have helped assist in the current over valuing of the National Housing Market. Yes, appraisers have contributed as well by simply over-valuing homes in hopes of keeping the orders coming from that lender (Going Along With The Target Value On The Appraisal Order) and Failing To Adjust Sold Comps With Seller Paid Concessions To Cash Equivalency.