How do seller concessions and closing cost credits affect comps?

Why concessions change a comp

Say a house sold for $900,000 and the seller paid $20,000 toward the buyer's closing costs. Did that house really sell for $900,000? Sort of. The buyer may have agreed to a higher price because the seller was handing some of it back. (That example is hypothetical.)

That is why an appraiser cannot take the sale price of a comp at face value when concessions were involved. Fannie Mae's rules say comparable sales with sales or financing concessions must be adjusted for the effect of those concessions on the sale price. The goal is to get back to what the house would have sold for without the extra help.

Concessions come in many outfits: closing cost credits, rate buydowns, repair credits, paid HOA dues, and the occasional "we'll leave the hot tub" that turns out to mean "please take the hot tub." Personal property is its own issue. Here we are talking about money and terms that may have nudged the price.

Not dollar for dollar unless the market says so

This is the part most people get wrong, including some appraisers. A $20,000 credit does not automatically mean a $20,000 adjustment.

Fannie Mae says adjustments based on dollar-for-dollar deductions equal to the cost of the concession to the seller are not appropriate under a strict cash equivalency approach. The negative adjustment should equal the increase in price the concession caused. If the appraiser's analysis shows the market reacted to the full amount, then a dollar-for-dollar adjustment is acceptable. The point is that it has to be shown, not assumed.

That is my position too. Seller credits are not worth dollar for dollar by default. In our hypothetical, if the evidence shows buyers paid about $12,000 more because of that $20,000 credit, the adjustment is minus $12,000, not minus $20,000. If the evidence shows buyers paid the full $20,000 more, then minus $20,000 is right.

A seller credit is like a coupon. Whether it changed the price depends on whether anyone would have paid full price without it.

Three rules agents should know

• Concession adjustments are never positive. Fannie Mae says positive adjustments for sales or financing concessions are not acceptable. A comp's price can be adjusted down for a concession, never up.
• How common concessions are does not decide whether to adjust. Fannie Mae says the need for negative adjustments, and their size, is not based on how typical concessions are in that part of the market. A credit that everyone gets can still inflate price.
• Some local customs are treated as cash equivalent. If virtually all sellers in a market pay certain costs by local practice, a sale without those payments would be considered a cash equivalent sale in that market. Fannie Mae also expects appraisers to recognize all-cash and cash-equivalent sales and use them when they are the best indicators of value.

If you take one thing to your next listing appointment, take the first rule. Nobody gets a bonus on a comp because the seller did not give a credit.

How the market reaction gets measured

Measuring a concession is the same kind of work as measuring any other feature. You look for sales that show what buyers actually did.

• Paired sales. Similar homes, similar time, one with a credit and one without. Compare the prices after other adjustments.
• Patterns in the wider market. Do homes that closed with credits sell at higher prices relative to their list price than similar homes without them? Look across a big enough set of sales to trust the answer.
• The listing history. A credit that showed up after a price cut on a stale listing may have bought nothing but a closing date. A credit negotiated in a hot week may have been built right into the offer.

When the data is thin, the report should say so and explain how the adjustment was set. Fannie Mae says a statement that only notes an adjustment was made is not acceptable. Agents can ask for that support, politely, through the lender.

What agents can do

1. Report concessions accurately in the MLS, with the amount and what they were for. Hidden credits make every future appraisal in the neighborhood worse.
2. Tell the appraiser about concessions on your own comps when you send sales, through the proper channel.
3. Know the difference between a repair credit for a known defect and a credit used to prop up price. They may affect value differently.
4. Watch for dollar-for-dollar adjustments with no support in a report. Ask how the amount was measured.
5. Price your listings with net proceeds in mind. A higher price with a big credit and a lower price with no credit can land in the same place, and the next appraiser may treat them that way.

What I see in the field

I see two habits that cause trouble. One is ignoring concessions entirely and treating the gross price as gospel. The other is subtracting every credit in full because it is easy. Both skip the real question: what did the credit do to the price?

Sometimes the answer is nearly nothing. A modest closing cost credit on a well-priced house may not have moved the price much. Sometimes the answer is most of it. Facts over feelings, and in this case the facts live in the sales.

The best agents I work with put the full story of each sale in the record. When the credits, the price cuts and the terms are all there, the next appraisal gets better, and so does the next listing price.