Concessions, Kickbacks, and the Appraiser’s Nightmare

by Richard Hagar, SRA

A s we all know, the market has changed—homes are taking longer to sell. On top of that, many of the current real estate agents have not been through a downturn like we experienced in 2007–2012, nor the criminal indictments that followed. Agents today become panicked when their listings haven’t sold in the first two hours of being listed. When I tell them “Back in the day it took 90–120 days to sell a home” they get a glazed look in their eyes. Instead of simply inputting information into the MLS and collecting a check, they are now faced with interacting with an owner for a couple of months and might have to figure out how to properly market and price a property (Oh the horror).

So, it begins, the panic and scramble to figure out how to sell a house without reducing the sales price…and their commission. A listing agent first suggests that their seller offer to pay for a buyer’s closing costs. The agent then inserts the offer into the MLS listing comments or an online ad. Then on the other side of town, a different agent sees the concessions offer and decides that they will do the same for their listing. The snowball is starting to roll downhill. One listing in town is followed by two, then three, and so on.

When a house hasn’t sold in 30 days the agent panics further and convinces the seller that they should offer more incentives: “Buy this home and the seller will pay for the buyer’s closing costs and furniture or toss in a new car, or down payment assistance!” Or whatever you can imagine. First off cars, furniture, and monetary gifts are personal property, not real estate. The marketing snowball is getting larger, rolling faster and is about to roll over the appraiser. A seller paying for the buyer’s closing costs, providing a new car, money for the down payment, etc. are called concessions. The term concessions is used because it sounds pretty and less nefarious, but it is simply another term indicating an appraisal problem. These concessions are actually considered kickbacks in criminal law (and by HUD!) and they create all sorts of nightmares for appraisers.

Kickback ~ noun:

• a return of a part of a sum received often because of a confidential agreement.

• a rebate, by a seller to a buyer or to one who influenced the buyer

• a bribe or payment given to someone as a reward for an action

Think of it this way: if an agent can convince a buyer to overpay for a house, the seller will give a kickback to the buyer. In other words, the agent and seller are bribing the buyer to pay more than market value for the house. Now, maybe the kickback is beneficial to the buyer—it likely changes the price of “the deal” but does it really change the value of the real estate? No, and no matter the reason or terminology, it creates a nightmare for appraisers. If we don’t come in at the inflated sales price, we get nasty phone calls and threats from the agent, mortgage broker and/or unscrupulous AMC.

Making things even more complex is when agents or loan officers fail to provide the appraiser with the addendum that lists the concessions. Numerous times I’ve asked my client/ AMC to send over a copy of the purchase contract only to be told: “Obtain a copy from the agent.” The agent? The agent isn’t required to furnish a copy, it’s the responsibility of the lender/client to furnish a complete copy of the fully signed purchase contract to the appraiser. However, by keeping the appraiser in the dark, many agents and loan officers hope that the appraised value will magically come in at the inflated sales price.

Kickbacks, or concessions, always result in an inflated purchase price for the home. Is the higher purchase price above “market value”? That’s a different question every appraiser must answer.

What many don’t understand, or want to acknowledge, is that a sales price might not equal market value— the value appraisers are required to state in their reports. Agents just want the appraisal to come in at the sales price so that they can make the seller happy, plus receive a larger commission.

What Appraisers Must Do

There are many steps appraisers must follow, more than I can list here. However, you should start off by listing and describing the concessions. Learn how to provide an accurate value conclusion that protects the appraiser from the potential ramifications of their bad acts.

On the first page of FNMA’s form, they ask this question:

“Is there any financial assistance [loan charges, sales concessions, gift or down payment assistance, etc.] to be paid by any party on behalf of the borrower?”

The appraiser has no choice when faced with this question, they must answer and if they get it wrong… then the appraiser is in trouble. After disclosing the information, the appraiser’s next task is to determine how the concessions have impacted the sales price. Federal law, FNMA/ FHLMaC guidelines and USPAP all point to a solution.

USPAP / Standards Rule 1-2 states: In developing a real property appraisal, an appraiser must:

• (c) …ascertain whether the value is to be the most probable price: in terms of cash; or if the opinion of value is to be based on non-market financing or financing with unusual conditions or incentives, the terms of such financing must be clearly identified and the appraiser’s opinion of their contributions to or negative influence on value must be developed by analysis of relevant market data;

Freddie Mac (Bulletin 2009-18) states:

• The appraiser’s opinion of value must reflect the value of the subject property without concessions.

Every time I teach a class on this topic someone in the room yells out that “We don’t have to make adjustments because a seller paying the buyer’s closing costs is common.” Statements like this tell me (and FNMA) that the appraiser is: a) unaware of what’s happening in the market, b) has been taught incorrectly, c) doesn’t want to spend time figuring out the adjustment or, d) doesn’t know how to properly determine the adjustment.

Concessions being paid by a seller are not the majority in any market. No matter where you are located the totality of sales includes cash purchases, sales of highly priced properties by rich people, sales between related parties, and foreclosure auctions; none of which require the seller to pay for the buyer’s closing costs or provide personal property as incentives to complete the purchase. In every study I’ve read and every market I’ve analyzed, concessions are usually only used in the lower-end of the price spectrum, and even in this segment are a small portion of the sales. In other words, they are not as “common” as some appraisers believe.

The value conclusion that most appraisals must be based on is defined in federal law. I won’t bore you with the full federal definition of market value, since it’s already listed in the Certification section of your appraisal, you know the one you’ve read several times and memorized. However, paragraph five includes the following requirement that reinforces what Freddie Mac previously indicated:

• the price [appraised value] represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale and;

• Adjustments to the comparables must be made for special or creative financing or sales concessions. So, if concessions of any kind are included in the sale of property, the appraiser must, by law, consider their impact on the sales price which usually results in a lower appraised value. (Hey, don’t yell at me, I didn’t make this stuff up.)

Solutions to Keep you Safe

• Make sure you have a complete signed purchase contract.

• In the appraisal, list how many pages of the contract you have in your possession (In case someone is hiding pages from you).

• List the concessions on page 1 and in the final reconciliation.

• In the sales grid, list any known concessions that were involved with the purchase of a comparable.

• If a comparables’ sale price includes concessions, then make a supported adjustment.

• In the final reconciliation section state the subject’s market value excluding the concessions (If you are lucky and have sufficient data, there’s a chance that your value conclusion may still equal the sales price).

• How concessions are listed in the cost approach is a whole other problem I can’t describe in the allotted space here.

I know a lot of people have diverse opinions on this topic however, I have hundreds of criminal indictments and state actions against buyers, sellers, loan officers, and appraisers that backs up every point I’ve stated (we go through a few of them in my live classes). This article is a quick overview of a complex problem that appraisers are facing on a regular basis. Education can help untangle the complexity and reduce confusion so it’s up to you to take the first step towards enlightenment.

If you don’t fully understand the definition of market value or how to determine and make an appropriate transactional adjustment, I understand. For years I’ve been teaching a 4-hour class called Defining Market Value and How to Adjust for Concessions I’ve taught the class to prosecutors, state officials and appraisers all over the United States. Since I can’t teach live in every state, I created a webinar and state approved CE version of the class. No matter which version you take I’ll explain the laws, Fannie Mae guidelines, and USPAP requirements, plus take you step-by-step through the options that are available. The webinar and CE class are available at OREPEducation.org/hagar

Understanding kickbacks and how to handle them in an appraisal is going to become very important over the next year or two, so avoid the nightmare. Keep yourself safe and learn how to handle the issue.

I’m trying to keep you safe out there. WRE