Sellers’ incentives skewing property values, appraisers fear

Appraisers are sounding the alarm over the practice of concessions and other, increasingly more creative, incentives that artificially inflate home sale prices.

The practice of offering incentives and concessions is nothing new. But as more and more of the country turns into a buyer's market, with more housing inventory listing for longer, incentives can more radically skew a market's' values.

Mary Umberger of the Chicago Tribune wrote about how the phenomenon is affecting real estate values in Chicagoland recently. (See the article online by clicking here; website registration may be required.)

The article included examples of recent offers for sale in the area:

Buy a rehabbed bungalow listed for $475,000 in the Beverly/Morgan Park area and get a 1990 Saab turbo convertible.

In Bloomingdale, get all closing costs plus six months of mortgage payments on a $550,000 four-bedroom home.

A week's stay for four in a beachfront condo on Maui was offered with a $739,000 home in Glen Ellyn.

In a market where homes sell shortly after listing, sometimes for more than the asking price, incentives don't happen as often. In today's market many sellers have the attitude of a seller quoted in the Tribune piece: "I said, 'Well, why not?' If it's apples to apples – if it's between my house and somebody else's house – why wouldn't somebody want the incentive of the car?" The seller is offering a 2007 Ford Focus to the buyer if the sale closes this year.

A Focus sedan might list for as much as $17,000. If a buyer agrees to buy a house for $400,000 with the promise of a new Focus, that will show up in the public records, MLS and, of course, AVM databases as a $400,000 sale, when in reality the sale was for $383,000. A four percent difference that only an appraiser with a phone who's not afraid to use it will ever notice. If the profession is not diligent about discovering and reporting incentives, a cycle of overvaluation is sure to result – at a time when the housing economy can least bear it.

Issues like this were creating problems as many as four years ago, when the Real Estate Commission and Board of Real Estate Appraisers in Colorado jointly aired their concerns over the inflationary effect of concessions and incentives on property values in the state. They recommended, among other things:

• Researching and confirming subject property and comparable sales, including obtaining details of the contract and financing terms.
• Researching and confirming all relevant information about a transaction.
• Utilizing all available data search tools, including the listing history and seller contributions features of multiple listing services.
• Making appropriate adjustments to comparables with seller contributions and inducements to purchase when developing work products.

Sound advice that's even more valuable in today's market.