Real Estate Sales Comparisons: Seller & Financing Concessions

Instructor: Eileen Cappelloni

Eileen worked for the Orange County Asssociation of Realtors for 31 years. She has written real estate courses and exams for other publishing companies

What are concessions in real estate? This lesson will cover why sellers offer concessions and how appraisers use them in arriving at a fair market value for their subject property.

What Are Concessions?

Amy and John Hanaford were looking for a home to buy. They finally found one that appeared to be just what they wanted, and one they could afford. They tried not to show their excitement, but the sellers could see how interested this couple was in their beautifully decorated and attractive colonial home.

The Hanafords made a full price offer on the home because they didn't want to lose the opportunity to buy it. The sellers were thrilled with the possibility of downsizing to a smaller home that was easier to care for.

Everything was going fine until the home inspector came and discovered that the house had an ant infestation, the air conditioner needed replacing, and the basement became wet when there was heavy rain. The Hanafords could not afford to make the necessary repairs. After some discussion, the sellers offered the Hanafords a concession of $20,000 so that all the problems that were discovered by the home inspector could be remedied.

A concession is something of value that is granted to another person in response to demands, or a preferential allowance or rate extended to someone. In real estate, there several reasons for sellers to offer concessions to prospective buyers.

A seller concession might not be in the form of a lowered price, but rather in a seller paying more of the closing costs. Jacqueline was moving away from Montana to New York. She found a house for $270,000. Both she and the sellers were satisfied with the negotiated price, but when Jacqueline discovered that closing costs in New York would be many thousands of dollars more than they were in Montana, she realized she could not afford the house after all.

The sellers agreed to pay more than 75 percent of her closing costs as a concession, which meant that the price of the house reflected the original price they had all agreed to, but the actual net proceeds of the sale were much less than the sellers had originally anticipated.

The Appraiser's Role

For an appraiser who must adhere to Fannie Mae and Freddie Mac (the two principal secondary lenders) guidelines, comparable sales that include concessions must be adjusted to reflect the impact, if any, on the selling price of comparable properties at the time of the sale. Concessions may affect the property's selling price, which is the price someone has paid for it, but that cannot be confused with the property's market value, which is the price the property should sell for on the open market.

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