Earlier this month, The Appraisal Foundation’s newly-created Appraisal Practices Board released its first Exposure Draft, Adjusting Comparable Sales for Seller Concessions. The draft has been released for appraisers to review and make scholarly comments and recommendations for modifications to the Appraisal Practices Board.
This first Exposure Draft covers six important topics:
- Definitions of sales concessions and financing concessions
- Important considerations when verifying concessions
- Determining when to adjust for concessions
- Methodology for special and creative financing, seller paid loan discount points or buy-down programs, inclusion of personal property and cash incentives, settlement assistances or seller contributions, and statistical analysis
- Considerations for concessions and non-residential property
- Working with concessions in the cost approach and income approach
Historically there have been multiple approaches and opinions related to identifying and adjusting for concessions. This draft is significant because it not only emphasizes The Appraisal Foundation’s attention to this issue, but also the value it places on your opinion, the appraiser, who is actively dealing with concessions.
Some approaches worth reviewing are as follows:
Fannie Mae’s Guidance for Lenders and Appraisers says that sales and financing concessions should be adjusted to the market at the time of the sale, and that dollar adjustments should reflect the market reaction to the difference rather than the cost of the difference. In Question 15 of Fannie Mae’s recent Appraisal and Property Report Policies and Forms FAQs, it is explained that sales concessions must be analyzed for impact on the sale price and that an appraiser must make adjustments for what the property would have sold for without the concession, rather than the dollar amount of the concession itself. They do not suggest across the board adjustments but instead note that each comparable property must be analyzed individually for its differences and similarities to the property in question.
The FHA, in Question 31 of its Frequently Asked Questions, offers clarification on its guidance for concessions, explaining that each individual comparable sale must be analyzed on a cash-equivalent basis that reflects the market difference in sale prices. FHA notes specifically that dollar for dollar cash equivalency adjustments are not reliable for buyers. Adjustments for concessions should not be based on how typical a concession is in its market segment, but rather only by how it affected the sale price. Adjustments also need to be made for special or creative financing. Appraisers should compare the financing terms of the comparable property to those offered by a third party lender who is not involved in the current transaction. Adjustments are to be made in terms of market reaction and not by dollar for dollar cost of financing nor concessions.
The Appraisal Institute’s Appraisal Journal, Winter 2009 offers solid guidance and detailed examples on concessions. The article also refers to the Uniform Standards of Professional Appraisal Practice’s Standards Rule 1-2(c), which states that any financing terms with unusual conditions or incentives must be clearly identified and their impact on the property’s selling price thoroughly analyzed. AI recommends compliance with USPAP and places an emphasis on full disclosure. Appraisers should specifically indicate where concessions are included and whether the appraisal is based on cash or cash equivalent. Appraisals also need to indicate in their reports whether concessions have been assumed to be typical. See the article, it is worth your time.
Appraisers are reminded to consult the “Definition of Market Value” on page 4 of the Uniform Residential Appraisal Report and review the language that addresses market value and concessions.
It’s worth reviewing these opinions, but don’t pass up this opportunity to inform yourself, generate your own opinion, and share it with the APB!
The Appraisal Practices Board is looking for your comments on this first Exposure Draft. The Board plans to take these comments under consideration and will then vote on adopting suggestions and making revisions to guidance that will be reflected in future exposure drafts.
All comments will be thoroughly read and considered by each member of the Board. Send comments by December 2, 2011, to:
Appraisal Practices Board
The Appraisal Foundation
1155 15th Street NW, Suite 1111
Washington, DC 20005
Comments can also be faxed to 202-347-7727, or emailed to APBcomments@appraisalfoundation.org.
Commenters should include references to line numbers, thorough explanations about your concerns, examples or illustrations, suggestions for change, and finally, any other issues you think the APB should take under consideration.
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