“When you create a new Comparative Market Analysis (CMA) a couple of months later on a similar home just down the street, don’t you want to know if that sales price included seller contributions?”
This is a quote from Jillayne Schlicke on her excellent post on today's Rain City Guide "Winds of Change; The Rise and Fall of the Subprime Market." Her post is a reflection on the changes in the mortgage industry. In it she asks this question I've which been thinking about for years regarding the seller contributions/CMA cycle. I'm glad to see someone else verbalizing the same concern. I've been wanting to write a post about it for a while.
To summarize what I'm about to write: comparable sales data are still being inflated by the 'seller contributions' mechanism and that is a problem.
Unless someone's got a secret that I don't know about I'd say there's been significant home appreciation created by lender guidelines that allowed for the inclusion of seller contributions.
Often when a deal is negotiated a borrower will look at the recent sales data for comparable homes. They use these comparable sales numbers to derive a price they're willing to pay for the property. Most of us are obviously very concerned about paying "too much" or, "more than it's worth."
With the price being established, the buyer can opt, with their bank's approval, to finance some or all of the closing costs and perhaps some other aspect of the purchase. In order to this, they purchase price is inflated. For example if the seller agrees to $100,000 a buyer may want to finance an additional %3 and offer the seller $103,000, with 3,000 going back to buyer.
It does open up the eligible buyer pool for the seller. However beyond that they don't receive much value. These 'contributions' are likely to cost the seller more in the form of taxes due to the increased price.
When the home is sold the number reported with the county and with the MLS is $103,000. Some MLS's make it possible to put in the actual purchase price. If you're a builder, the number you want to see recorded is the higher number. This is why builders offer bonuses, long before they'll lower the price. They want to be able to sell their other homes for the highest number they can even if they concede on the back end. Each property they sell at the higher number helps them sell the next unit for more. County records will only indicate the higher price, as the price paid. These are the numbers that companies like Zillow use to determine their estimates.
I had a deal in which some $20,000, was to go towards 'current and future updates,' which essentially meant the buyer wanted to finance the furnishing of the place. 20,000 is quite a bit of money to inflate a homes value, and I am not an appraiser, but I doubt many appraisers, or agents have been able to do much analysis these last few years without using these skewed numbers. This home passed appraisal, without a hitch. The appraiser is an employee for the bank, and everybody involved had full disclosure. But what about the next buyer/seller pair?
In the $100,000 example above when the next buyer is looking at comparable sales, they are looking at numbers that are based upon that 103,000 number. With a few homes selling in a given complex or neighborhood, each at greater inflated values, the neighborhood price could quickly be inflated 9% or more.
So how much property inflation can be attributed to this phenomenon? Of course low interest rates, and lax lending guidelines have been a part of the rapid rise in home prices. However, I know that this little tweak in the home purchase has helped push things up significantly.
In large part a home's value is really what someone is willing to pay. However with comparable numbers going up, what someone is willing to pay is being artificially inflated. Inflation of this sort, in the long run is harmful. This phenomenon could be a significant factor in adding to inflation of the over all economy.
I could be wrong but I think that real estate agents, appraisers, and county governments are responsible for collecting and utilizing what I consider to be skewed data. Perhaps the tide has been too strong, and we've all grown complacent. Lending guidelines are going to change as the industry corrects itself, but the problem will likely remain. The mechanism is here, it will likely be for a long time. Perhaps the price given to the county should be the true price, given that none of this money ever goes to the seller, and is not part of the seller's consideration. The data we now use to value homes however must be augmented to correct for this. I don't believe anyone has ever done that in a systematic way or on a large scale.
When doing my own CMA's I have called the agent's to check on whether or not there were seller contributions involved in a comparable sale. However after a while it didn't seem to be helpful. If I was the only one doing it, then it didn't help my case, someone was always prepared to pay more based upon the inflated numbers. If you're a buyer and aware of this you're likely the minority.
It's clear to me that something needs to be done about this. It's possible that with a tighter housing market this will be less of an issue, however determining whether it is or not, and what to do about it is still important.
I was first licensed over 10 years ago. At that time the industry was beginning to undergo significant changes. Listings came in optional paper catalogs. The main method of access was with a dial-up system.
Hello everyone. I realized today that I hadn't been around in a while so I'm here checking in. It seems as if I spend all my day with The Network, however it's IN The Network more than it is talking to the entire group.
Are part's of your website starting to look like a cluttered closet? Is your blog starting resemble a junk drawer? Tom at Real Estate Bloggers just put out a post 
This type of post will benefit you in a number of ways.
With over 20,000 member The ActiveRain Real Estate Network is getting city sized! It is truly awesome for me to see all of you come together here on this network interacting with each other and reaching out to your clients. I have personally come to learn a tremendous amount from all of you. Thank you.
