Why don't seller credits come off a comp dollar for dollar?

A credit and a price bump are two different numbers

Here is the agent version of a rule most people learn the hard way. A seller credit is money the seller hands back. A price bump is how much more the buyer agreed to pay because of it. Those two numbers can match. They often do not.

Hypothetically, say a buyer needs help with closing costs and the seller gives a $15,000 credit. In a hot week with four offers, the buyer may have paid the full asking price with or without the credit, so the credit bumped the price by close to nothing. On a stale listing that had already been cut twice, the buyer may have agreed to a higher price only because the credit came back to them. Same credit, different effect.

That is why I do not subtract credits dollar for dollar by default. Neither does Fannie Mae. Its Selling Guide says dollar-for-dollar deductions equal to the cost of the concession are not appropriate under a strict cash equivalency approach, unless the appraiser's analysis shows the market's reaction is the full amount. The adjustment is whatever the market did. Someone has to go measure it.

What happens when a comp you sent had a credit

Fannie Mae defines market value as a price unaffected by special or creative financing or sales concessions, and it says adjustments to comparables must be made for them. So when a comp closed with a credit, the appraiser has to ask what the credit did to the price.

A few rules ride along, and they are worth knowing before you build a comp packet:

• The amount gets reported. Fannie Mae requires the dollar amount of seller-paid concessions to be reported for each comp, with the information coming from parties to that sale. If it cannot be found, the appraiser has to explain why.
• Never a plus adjustment. A comp that had no credit does not get bumped up. Positive concession adjustments are not acceptable.
• Popular does not mean harmless. Fannie Mae says the need for an adjustment is not based on how typical concessions are in that market. If every seller on the block is giving credits, the credits can still be inflating every price on the block.

For more on the rule itself, see how concessions affect comps. This post is about what you do with it.

What the appraiser sees on your own deal

On a Fannie Mae loan, the lender has to give the appraiser the complete, ratified contract. The appraiser then states whether the contract was analyzed and reports any financial help in the deal: seller credits, paid fees, gifts of personal property and the like, with the total dollar amount and what it pays for.

Your credit does not change what the house is worth. Market value is the price without the extra help. What the credit does is make the appraiser look harder at whether the contract price is market value or market value plus a coupon the seller is paying for.

The loan has its own limits too. For Fannie Mae, financing concessions are capped by occupancy and loan-to-value: 3% above 90% LTV, 6% from 75.01% to 90%, 9% at 75% or less, and 2% on investment property. Amounts over the cap become sales concessions, get deducted from the sales price, and the loan-to-value is recalculated. A credit also cannot be more than the buyer's closing costs. FHA, VA and other programs set their own rules, so ask the loan officer before the counteroffer goes out.

How to structure a credit so it doesn't backfire

1. Ask what the buyer actually needs. If the buyer has the cash, a lower price may do the same job with fewer questions.
2. Compare net, not gross. Hypothetically, $800,000 with a $20,000 credit and $780,000 with no credit put about the same money in the seller's pocket. The second one does not ask the appraiser to support $800,000.
3. Keep it inside the loan limits. Check the program's cap with the loan officer before you write it in.
4. Keep it inside closing costs. Money the buyer cannot use is a dead credit and a messy file.
5. Label repair credits. A credit for a known roof leak is a different story than a credit to make a price work. Say what it is for in writing.
6. Do not pump the price to cover the credit unless the sales support the higher number. If they do not, the appraisal will tell you, usually at the worst possible time.

What to disclose, and where

Every closed sale becomes someone else's comp. A $1.2 million sale with a hidden $40,000 credit tells the next appraiser the wrong story about your neighborhood, and the next seller pays for it.

• Put the credit in the MLS when the sale closes: the amount and what it covered.
• Note the timing. A credit that showed up after a price cut is useful context for anyone measuring its effect later.
• Mention credits on comps you send to the appraiser, through the lender or the proper channel along with the gross price.
• Ask how a concession adjustment was measured if a report subtracts a credit in full with no support. Fannie Mae says a statement that only notes an adjustment was made is not acceptable.

What I see in the field

The two shortcuts I run into are mirror images. One ignores the credit and treats the gross price as gospel. The other subtracts every dollar because it is fast. Both skip the only question that matters: did the credit change the price, and by how much?

The way I answer it is the same way I answer any adjustment. I look at sales with and without credits, close in time and place, and see whether the credit sales closed higher compared with their list prices. Then I check that against a bigger set of sales. When the evidence says the credit bought almost nothing, I adjust almost nothing. When it says buyers paid the full amount, I adjust the full amount. Facts over feelings, even when the feelings come with a closing statement attached.