Understanding Concessions, Commissions, and Their Impact on Property Value
Understanding the Impact of Concessions and Commissions on Property Value
In real estate, misconceptions about concessions and commissions often lead to confusion when determining property values. Many agents and loan officers believe that concessions or removing commissions directly reduce property value by the same amount, but this isn’t the case. Let’s unpack why.
What Are Concessions and How Do They Affect Value?
A concession, such as a seller credit toward closing costs or repairs, doesn’t automatically reduce a home’s value by the exact amount of the concession. For example, consider a property with a true market value of $700,000. The seller offers a $20,000 concession at closing.
You might assume the adjusted value of the home is now $680,000, but that’s not accurate. The impact of the concession is tied to the final sale price. Here’s why:
- Example 1: If the home sells for $710,000 and includes a $20,000 credit, the net effect of the concession is only $10,000.
- Example 2: If the property sells for $720,000, the net effect of the concession is $20,000 because the sale price was inflated to account for it.
How Do Commissions Play Into This?
The same concept applies to commissions. Let’s say the true value of the home is $700,000, but the seller provides a $20,000 commission credit. If the home still sells for $700,000, the seller absorbed the full cost, and the market value remains unaffected by the concession.
Many agents mistakenly believe removing the buyer’s side commission will reduce the price by that amount, but the net effect isn’t always dollar-for-dollar. As more markets move toward models where buyers pay their own commissions, understanding this nuance is critical.
Fannie Mae Selling Guidelines on Adjusting for Concessions
Fannie Mae has clear guidelines on adjusting for concessions. Appraisers must consider the market’s reaction, not just the concession amount. Key takeaways from Fannie Mae’s guidelines include:
- Concessions should be adjusted based on their effect on the sales price, not just the dollar amount.
- Dollar-for-dollar adjustments are typically inappropriate since the market doesn’t always react to the full concession.
- Appraisers must evaluate whether the sales price was inflated to cover the concession, which can impact the adjustment amount.
In short, appraisers should analyze how the concession influenced buyer and seller behavior within the overall market.
Why This Matters to You
Grasping how concessions and commissions affect value will help you:
- Confidently explain pricing to clients.
- Analyze appraisals accurately and catch potential mistakes.
- Navigate market trends as the industry shifts toward buyers covering their own commissions.
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Also, don’t forget to check out my self-paced masterclass, where I combine 25 years of appraisal and pricing knowledge tailored for agents and loan officers. You can find it at www.ValuedAudit.com.
Pro Tip: When reviewing appraisal reports, always consider the net effect of concessions and commissions—it’s rarely a simple dollar-for-dollar adjustment!
Anthony Young, SCREA
Chief Appraiser | Price Consultant
925-999-0144
Our team covers the Greater San Francisco Bay Area and surrounding counties.
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