Seller paid closing costs. Should they or shouldn't they be deducted? In most cases YES if they are not customary. Here are some reasons why : 1) These seller paid closing
costs are “NOT present in virtually
ALL transactions”. 2) They are only "customary" because the real estate agent told the seller they were customary
and the agent gets a larger commission by pushing them. 3) Many markets have shortages and multiple offers are common. Seller paid concessions should not be a factor in such a market. 4) I have "failed" numerous times in hitting the contract price largely
because of the seller paid concessions. The contracts would then be revised in almost all of the cases without the concessions proving that they need to be deducted dollar-for-dollar. 5) It's simple math - If you give me $100,000 and I'm giving you $5,000
back then I'm only putting $95,000 in my pocket and buyer has only paid you $95,000. 5) and this is the #1 reason;
BECAUSE FANNIE MAE NOW SAYS SO! Not unexpectedly, Fannie Mae has caught on and is concerned as this is the kind of practice that results in inflated values as most appraisers will do what
the agents and lenders want (ignore the concessions) and not do what they should (deduct them dollar-for-dollar).
Per Fannie Mae 2/28/17 Selling Guide revision:
Fannie Mae recognizes that the effect of
sales or financing concessions on sales prices can vary with the amount of the concessions and differences in various markets.
Adjustments must reflect the difference between what the comparables actually sold for with the sales or financing concessions and what they would have sold for without the concessions so that the dollar amount of the adjustments will approximate the
reaction of the market to the concessions. If the appraiser’s analysis determines that the market’s reaction is the full amount of the financing concession, a dollar-for-dollar adjustment is acceptable.
This is Fannie Mae’s polite way of saying “we see a problem developing due to these large and unnecessary
seller concessions and the appraiser needs to be deducting them dollar-for-dollar to avoid the overvaluation of the collateral and a repeat of 2007 down the road”. (my interpretation)
So if you were questioning whether you should or shouldn't this is a big resounding
SHOULD in my opinion straight from Fannie Mae. Don't forget that you own that appraisal for 5 years. NOT making the adjustment and stating that the concessions are "customary" might make more people happy in the short term, but in the long
term these same people will throw the appraiser under the bus and deny all culpability if something goes bad within that 5 years.
I'm sure everyone is now familiar with forensic retrospective appraisals and reviews. They are labeled "forensic" only because when they are ordered you can
assume that it is being used for potential litigation against an appraiser. Other than that, they are no different than other retrospective appraisals and reviews. By arguing these seller paid closing costs are "customary" you are saying that they appear in "virtually
all" sale transactions. What is "virtually all"? Well "all" is 100% so "virtually all" in my opinion would need to be 95%+. Maybe some would say it means just the majority so 51% and maybe you could successfully defend that. The reality at least in my
market is that these large seller paid closing costs appear in just 8% of all sale transactions. I do not want to be on the witness stand trying to explain how 8% is equal to "virtually all".
comments and thoughts please!
Apparently there is still a lot of appraisers, lenders and AMCs out there that believe that USPAP requires the appraiser to take photos of comparables. I had an AMC recently tell me that "comp photos are required by USPAP." My response was "please tell
me where in USPA it says that". I have yet to receive an answer. That is because there is no USPAP requirement for this nor does USPAP even require the appraiser to take ANY photos of anything. The requirement that an appraiser take photos of comparables
is actually an assignment condition of the client.
FNMA does not specifically require that photos of comps be taken by the appraiser. FNMA requires that the appraiser
"inspect each of the comparable sales from at least the street". It should be noted that FNMA does
NOT say the appraiser must "physically" inspect each of the comparables from the street. It might be implied because when the requirement was included in the work scope, Street View applications like Google Earth probably
did not yet exist or were not as advanced. Until FNMA revises their work scope; using a Street View application to "inspect comps from the street" should be considered. If you are not familiar with this feature you are missing out. You can drop down on
the street in front of the comp and walk around the neighborhood if you like. This is by far much more useful and safer than driving by a comp to "inspect it" for 2 seconds while taking a photo and fleeing the scene. It would not be surprising to see FNMA
address this and specifically require this in the future. However, clients will likely continue to include such requirements as "comp photos much be concurrent or be taken by the appraiser" in their assignment conditions so until then don't forget to charge
accordingly for those hour spent driving those country roads to get that perfect picture of that gate. Comments and thoughts please.