Are Concessions Part of the Sales Price?

Everyone understands that the purpose of a professional appraisal is to determine the actual value of the property. There are many reasons why appraisals are ordered but the most common reason is to determine the actual value of a property for a new home loan.
When a home is sold, both buyer and seller agree on a sales price and enter into a contract for sale. At this point the buyer’s lender orders an independent appraisal to review the sales price and ensure it reflects the true value of the home. The lender wants to confirm that in the event the borrower defaults on the loan, that they can sell the property and recoup their losses. It’s a function of their risk management program.
One of the least understood aspects of the appraisal process is how concessions are treated in the final value. Concessions are simply defined as a monetary contribution by the seller to the buyer. Seller concessions have taken many different forms over the years; anything from money to replace old carpets to appliances have been popular and the buyer would receive a check at closing to pay for these items.
Today, the most common concession is for closing costs. A buyer can save out-of-pocket dollars by asking the seller to assume the cost of some of the buyer’s closing costs. In essence, the buyer is “financing” the cost of the loan by rolling this cost into the final home loan.
The seller agrees to sell their property for $200,000. The buyer’s closing costs are $4000. Rather than pay the $4000 from their savings, the buyer asks the seller to pay them and add this to the sales price. This results in a final sales price on the contract of $204,000.
In this case, the lender is asked to approve a sales price which is $4000 higher than the actual amount the buyer is willing to pay for the home. Tasked with creating an appraisal that accurately reflects the true value of the property, it’s important for all parties to understand how concessions are treated during the appraisal valuation.
Adjustments to Value Based on Concessions
When considering the stated concessions, the appraiser needs to understand whether they are truly part of the sales price or not. If it’s determined that the concession, or lack thereof, would change the value of the property, then adjustments to the final value is made.
One example would be a concession for damaged carpet or paint. In this case, the seller is giving the buyer a dollar amount to allow the buyer to bring the home up to a better condition. Clearly this implies that without the credit, the property is not worth what the buyer is paying and this type of concession should be adjusted in the current valuation. During the boom of the early 1990s, sellers were providing credits for a wide variety of items and with property values on the rise, lenders were less concerned with the risk these kinds of credits created. With the stabilization of the real estate market, most lenders will not allow property improvement credits at all, so these are increasingly rare. To compensate for the new regulations, sellers will offer a “closing cost” credit instead, even if the purpose is to allow for less-than-perfect property condition.
Adjustments Based on Closing Cost Credits
So how does the appraisal handle the closing cost credit on the final valuation? The simple answer is it varies. The purpose of the appraisal is to provide the lender with the current value of a property as accurately as possible. To determine the impact of a closing cost concession, they must first decide if the credit is really part of the purchase price or not.
One of the easiest ways to do this is to see how sales commissions are determined. If commissions are paid after removing concessions, then it’s clear the parties do not consider this number as part of the sales price and an adjustment is made.
Every real estate market is local and its common for the division to vary from one part of the country to the other. An appraiser must consider the customary division when determining whether to adjust for concessions or not.
I have noticed a lot of comments in our MLS listings lately stating, “Commission to be paid after all PPCC” or some such term. Closings costs wrapped into the sale price are becoming more common. (More on this topic in another post.) However, reporting concessions happens about 70% of the time at my best estimate. It’s a double standard: they aren’t considered a part of the sale for commission purposes, but they are being reported in the sale price, which falsely inflates the numbers.
It happens every day.

I would love to hear your comments on this. Please post any thoughts you might have below.

As always, thank you for letting the Moore Appraisal Firm be your residential and commercial appraisal experts.

7 Comments on “Are Concessions Part of the Sales Price?”

  1. Shaun, this makes no sense to me. This is becoming a big issue. We now have a field to report seller concessions in MLS at your request. Had I known this would be the result, I would have voted against adding the field. It is not relevant information. If the lender is okay with buyers financing in their costs, why should the appraisers care? Some agents are reporting seller concessions, some aren’t. Some appraisers are subtracting out, some aren’t. The bottom line to me is that regardless of whether buyer costs were financed, the property still sold (and presumably appraised) for that price. That’s market value. Willing buyer, willing seller. The issue of commissions is irrelevant. Should appraisers adjust based on the amount of commission charged? For example, should the appraiser adjust up if I only charge 1% to broker a transaction when all the other comps are 5% or 6%?

    1. Hi Mark, thank you for your comment. I agree, this has become an issue.

      First off, I want to clarify one thing: appraised values are never adjusted for concessions. The appraised value should never be discounted for closing costs, or any other sort of concession being made in a transaction. Market value is market value, regardless of concessions or commissions. The adjustments we are talking about are for comparable sales.

      A willing buyer and willing seller is only part of the equation for market value. It’s an important part, but we also have to consider the motivations of each party, and whether either is acting under duress. We also assume both parties are knowledgeable in the market.

      I don’t recall the concessions field being part of what I requested. I could be wrong. The field I requested to report was the conditions of sale (arms-length, non arms-length, estate, etc..) and this is important as well, for reasons I’ll explain in a minute.

      Concession adjustments for comparables may or may not be warranted in the market. The correct answer to the question is that it depends on how the market perceives them. My point with the example of commission is that commission is paid from the sales price, so if agents aren’t including the closing costs in what they’re being paid on, why should the closing costs be considered a part of the sales price? The amount of commission paid is irrelevant, as long as its consistent with what’s typical for the market. If it were a rate that was twice what was normal, or maybe none at all, there may be conditions of the sale that exist that the appraiser needs to investigate to determine if that sale is even representative of market value. (This investigation is greatly helped when the “conditions of sale” filed is marked appropriately indicating something other than an arms-length sale occurred.)

      Let me give you just one example on the concessions though. Say there were three identical houses on the same block, all having sold in the past few months. House #1 sold for $200,000, no concessions. House #2 sold for $200,000, no concessions. House #3 sold for $205,000, seller paid $5,000 in buyer’s closing costs that they then wrapped into their loan. Is house #3 really worth more than the other two?

      Let me know if you want to discuss it further. Here, or in the office. Thanks again.

  2. Lets look at this domino effect. Say a seller pays or conceeds 5k to buyer for cc’s and the commission paid to buyer and seller agent is their rate x’s the sale price (not minus concession) Then that seller buys their replacement home having that seller conceeding closing costs but still paying commission on the sales price (not minus concession). Then the buyers in both scenario pay their county property tax based on the fair cash value , which is just the sale price (again, not minus concession) All parties on buying and or selling end are paying an incresaed ammount by higher commisions on higher sales prices and higher fair cash value by taxes being determined on purchase price (not minus concession) Do the equasion in reverse where buyers dont roll in cc’s and all values are decreased. Obviously this is causing a false increase in property values advantaging poperty tax collection and unethical increases on sales commissions. If this is percieved as market norms, all values include the seller having conceeded to the buyer, then it is now a standard that seller pays closing costs on the purchase. even if the buyer has cash to pay their costs, it is percieved that the purchase price will include that the seller will pay your closing costs. Hmmmmm….. If they would just rule that concession for closing costs not be included in the fair cash value on the sale but rather a separate issue, there would be no unintended consequences and or false market inflations. This is triple dipping!!

  3. I agree with Carl. I am a realtor in southern AZ. We have seen the unintended consequences spread through our local market. Seller concessions used to be safe, legal and rare. Everyone expected to pay their own closing costs of a transaction that size and people actually saved up for months or years to prepare for the exciting step of a home purchase. Concessions for closing costs originated from an occasional unfortunate scenario where AFTER two parties entered into a contract, something unforeseen and expensive drained the buyers’ savings, say a child’s broken arm, or a traffic accident totaling a household car, or an elderly parent needing surgery, or heaven forbid, a funeral. We still had two willing parties but the buyer may not now be an “able buyer” with their down payment or closing cost reserves drained. The seller doesn’t want to go back to square one to venture the market, so they ask if the buyer is qualified to borrow a bit more from the lender to finance the amount of cash needed and the closing costs can be tacked onto the final sales price raising it a bit, and the seller can push that extra cash across the table to the buyer to be able to close the deal after all. But the point is, the seller’s end net amount didn’t drain away at all! He still stands to net what he would have BEFORE the unfortunate circumstance which rocked the buyer’s ability to close the deal.
    We have now seen buyers mostly at Fanny and Freddy’s urging, & USDA assistance, now feel entitled to sap the seller’s net gain to have both sides of all closing costs in addition to both sides of agent commission sucked out of the seller’s side. They see the seller as standing in the way of their American dream to become homeowners; they see the seller as being stingy with all his money as they only see the high number of the home value, never mind knowing what his mortgage is at. Fanny, Freddy, USDA do a great disservice to taxpayers as irresponsibility is subsidized inadvertently and defaults must be covered by taxes. Bad formula mathematically. We already saw this in 2008. (I do not begrudge VA at all however; it is my opinion that taxpayers owe veterans a great deal for their monumental sacrifices)
    These buyers of today should probably be required to show proof of funds for closing costs as well as a first and last month’s mortgage payment-at least as much preparation as a renter—before a prequal is issued by a lender. Sadly, most often they only have to scrape together a measly $1K to open escrow with as any skin in the game and sometimes even have that returned to them after close of escrow, which makes for flighty buyers and a very shaky mortgage market prone to rampant default and foreclosure. Not much was invested, so we now see many examples of very little loyalty and woeful preparation for being responsible buyers.

    This also sadly is leaving sellers to react to this tactic by inflating their sales prices to anticipate the lowball offers 10-30K below asking price PLUS with the same audacity on the other end to require the sellers to pay all of the buyers’ closing costs. Sellers are dealing with their rejection of such piddly offers creating the false impression that there is something wrong with their homes for sitting on the market longer going unsold.

    I asked a buyer’s agent if her buyer really had no savings during the months of his looking for just the right home, in preparation to close the transaction and guess what she told me? Her buyer had saved up all that time for new furniture and could not use that amount for closing costs!
    We had negotiated to add on 4K for a seller concession to push buyer’s own financed funds across to close with, but then USDA appraiser set the value at 5K BELOW our sales price. He didn’t account for a high demand and low low supply of homes in the area, nor did he show the concession as an adjustment on comps which were selling so fast. Nor that the little city is landlocked, and has run out of buildable empty tracts of land, but still in high demand to live in city limits. My seller just had a baby, vacated weekend before, squeezed his family into a extended fam living room, anticipating closing on a new home also under contract and USDA underwriters ended up delaying 4 weeks which delayed both contracts closing, Any valuation complaint request would have sent it back to square one with USDA whose appraisal stands for 6 months, to start the underwriting qualification all over again.
    My seller took a big hit on his net amount because of uneducated buyer agents not knowing to explain to their clients the proper use to trigger the use of a seller concession for closing costs, as well as the appraiser in the low supply/strong demand & concession adjusting of comps. We agents should be more ethically in tune with how we wittingly or unwittingly manipulate markets for good or ill of the collective. We can have those educational conversations with our buyer clients. Bring back safe, legal and rare.

  4. I am under contract with a new construction and the appraisal just came in at roughly $6,000 under the purchase price. When I looked at the appraisal, the three comps used were all new constructions by the same builder, which is appropriate. This builder offers 2.5% of the purchase price in CLOSING COST assistance if you use his lender and title company. The contract specifies that it can be used toward loan points, title insurance (lender and personal), survey, county recording fees, attorney costs, etc. The appraiser deducted the value of the 2.5% for each comp from their sales prices, thereby bringing down their appraised values and the subject vale below the purchase price. It makes no sense! The money is for closing costs (which in this area are around 3% of the purchase price) and have absolutely nothing to do with the value of the real property. I had sold one of those comps and I know for a fact that (less than two months ago) it appraised fully and that appraiser did NOT deduce the closing cost assistance. It’s a mess.

  5. Sellers concessions:

    I understand that an appraiser should not consider concessions on the subject home because an appraiser values the house not the contract.
    Impact on comparables.
    Recently Builders have been offering substantial concessions to buyers and often they buy Interest rates down.
    This in my opinion is all part of the. Surely if a house sells for $400,000 and the seller gives a concession of say $30,000 then the amount paid is $370,000 which the appraiser should use as the price paid for the house. (It ias also arguable regards the value of any rate buy down that the seller / builder offers.

    It is important because if not the builders have a golden opportunity to increase the value of their houses by artificially inflating / deflating the sale price (by utilising sellers concessions). This in turn increases the appraised value of other houses in the community which buyers are forced to pay.

    Please tell me this isnt happening or explain why comparable prices are being artificially inflated.

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