REALTORS® often express concern over property values that appear to be artificially inflated through creative financing techniques. Properties frequently sell above the price originally agreed upon by the parties, with seller concessions netting the seller the original price. Higher purchase prices may permit buyers to obtain more favorable financing, but the buyers are left with higher assessed values, higher property taxes, potentially higher insurance costs and higher mortgage payments. When appraisers and assessors use the sales data from these transactions as comparables to establish values for other properties, there may be a domino effect resulting in the overvaluation of other properties.
This will stop if the assessors and appraisers are alerted that the sales price may involve concessions or other creative financing. The Uniform Standards of Professional Appraisal Practice (USPAP), in Standards Rules 1-2(c), requires appraisers to clearly identify sales or financing concessions and analyze their impact on value. In addition, some groups, such as Fannie Mae, specify how sales or financing concessions are to be addressed with the use of comparables in the appraisal. The Fannie Mae/Freddie Mac appraisal report forms, for instance, direct that, “Adjustments to comparables must be made for special or creative financing or sales concessions.”
Appraisers are often frustrated because information regarding sales concessions is very hard to find. One potential source is the Wisconsin Department of Revenue (DOR) Real Estate Transfer Return (RETR). The RETR Instructions (PE-500a R. 7-07), found at www.dor.state.wi.us/ust/pe-500a.pdf, require that the total actual consideration paid be reported as the value, but also requires that a box be checked if there is any type of seller financing such as a credit, gift, donation to nonprofit/charity, second mortgage, land contract, etc. Similar instructions are given for the Wisconsin Electronic RETR, found at ww2.revenue.wi.gov/GenericFile/help/eRetr/detail.htm. This will alert assessors and appraisers accessing DOR data to investigate further to see if concessions or creative financing had an affect on the sales price instead of just accepting the price on its face.
One source of additional sales concession information is the MLS sold data. Some MLSs have various fields for reporting sales concessions.
Appraisers who are alerted by the RETR or MLS sold data that a sales concession was involved will, as required by USPAP and Fannie Mae standards, search for further transaction information so that the price may be appropriately analyzed and adjusted before using it as a comp for an appraisal. They will ask the brokers from the transaction for sales concession or financing information.
Unfortunately, many brokers do not provide this assistance due to confidentiality or authorization concerns. REALTORS® have the duty to preserve confidential information under Wis. Stat. § 452.133(1)(d) and Standard of Practice 1-9 of the REALTOR® Code of Ethics. Whether financing information is confidential may vary based upon the parties, lender, brokers and other circumstances, and thus cannot be determined on a wholesale basis.
Confidentiality is not a concern if the parties authorize the release of sales concession information. While the state-approved offers to purchase currently authorize licensees to give a copy of the offer to appraisers for purposes of the transaction, they do not authorize the post-closing release of concession information to appraisers researching comps for subsequent transactions.
The best thing that REALTORS® can do to address all of these problems is to add a provision to each of their offers whereby the parties consent to the disclosure of the financing data needed by appraisers to adjust for sales concessions when using the sales price to appraise other properties. This alleviates the need for brokers to determine whether or not this information is confidential and helps appraisers set fair values.
The following language could be added to each offer to purchase or offer addendum to obtain party consent: “Buyer and Seller authorize the agents of Buyer and Seller to report sales concessions and other financing information to the MLS sold database, as applicable, and provide appraisers or brokers researching comps, upon inquiry, with similar information to the extent necessary to adjust price to reflect market value.”
Making creative financing information available to appraisers will help maintain accurate property values for the benefit of Wisconsin consumers, lenders and REALTORS® alike.
Debbi Conrad is Director of Legal Affairs for the WRA.