To provide the most accurate appraisal, real estate appraisers need to know as much as you can tell them about your deal.
Real estate appraisers need to take everything about your property into consideration when trying to determine how much it’s worth, and your concessions are no exception. An important part of any real estate transaction, unreported or unmentioned concessions have the potential to drastically change your property’s value during an appraisal- and more often than not, that change is for the worse.
What is a Concession?
In layman’s terms, a concession is anything the seller offers to help sway a buyer into putting their signature down on a deal. The seller walks away with a little less, and the buyer walks away with a little more. You could call it a little back-scratching. Some common forms of concessions:
– Paying the loan origination fees or closing costs
– Giving cash back for repair costs
– Non-realty transaction items (personal property).
– Cold hard cash back to the buyer
Here’s 2 Quick Examples:
A Cash Concession (the most common):
Let’s say you want to buy a new home for $100,000, but are a little unsure of the price- and the front porch needs some work. You need to put 10% down and $5,000 in closing costs on that new home- you would need $15,000 at closing. The seller knows you are a bit uncertain, and offers you $5,000 to pay the closing costs. Whether they pay the closing costs out of their pocket, or give you the cash at the closing table- you still only need $10,000 at closing.
A Concession for Repairs:
Let’s say you’re negotiating with the same seller on a deal. You’re still fairly sure you want to buy, but still can’t get over the god-awful condition of the age-old wood and chipping paint on the front. The seller doesn’t have the $5,000 cash to offer in the above example for repairs. Since he can get a discount from one of his friends at the hardware store, he instead offers to replace all the pillars on the porch and have it repainted himself.
This type of concession works out great for everyone:
the seller spends less money than he would have if they’d given the buyers cash to repair the porch themselves.
The buyers get to enjoy lemonade during the housewarming party on their new(ish) front porch without searching for the best quote on repairs.
These are common examples, but concessions can take many forms.
Why Does This Matter to an Appraiser?
Appraisers need to take concessions into consideration to determine exactly how much the buyer and seller really exchanged during the purchase. In the example of the $100,000 home, after concessions, the buyers only paid out $95,000. When real estate appraisers use the comparable approach to determine the value of a home- they look at similar-style homes in the area, comparing their listing or sale prices to the features of the subject home. They will also look at how much other sellers are paying to buyers in the form of concessions.
They may have to adjust the sale prices of the other sold houses to account for the concessions that were paid. How much do they adjust? It really depends on market conditions at the time of the appraisal.
We are in the habit of calling agents and asking them how the price was adjusted to account for adjustments. Based on our quarterly polls, we will determine what adjustments need to be made for seller concessions.
To sum it all up- tell your appraiser about any and everything the seller is doing to accommodate the buyer. Concessions can often go unreported. Sometimes with a simple verbal agreement like “oh yeah, we’ll fix up that porch for you – no problem – before you buy.” While this may not show up in a contract, it still affects the monetary value of the home, and the appraiser needs to know.
Jonathan Montgomery is the founder and president of the The Real Estate Appraisal Group, and has been a real estate professional since 1998. He has been a broker, an investor, and currently works full-time as an appraiser. He enjoys handling real estate appraisals in Washington D.C., Southern Maryland, and Northern Virginia.