An Appraisal Blind Spot: Adjusting for Seller Concessions

The December 2023 Fannie Mae Appraiser Update highlights an important issue in real estate appraisals that deserves more attention - properly accounting for seller concessions and their potential impact on sale prices. As the housing market cools in some areas due to higher interest rates, the use of seller concessions has increased as sellers try to entice buyers. The key point is that these concessions should be analyzed to determine if they are potentially inflating sale prices, which could skew appraisal valuations if not adequately accounted for.

On the positive side, the update provides good practical guidance for appraisers on addressing this risk. It rightly notes appraisal standards require isolating the impact of concessions so valuations purely reflect real estate considerations. The expectation is the inclusion of concessions likely increases sale prices, meaning adjustments should offset the concession amount. Appropriately, the article advocates vigilance in reporting concessions and the acceptability of making dollar-for-dollar adjustments.

What is concerning is the data showing a majority of appraisers currently fail to make any adjustments for reported concessions. This demonstrates a systematic blind spot that undercuts appraisal credibility and objectivity. With concessions influencing over 7 million recent sales, the valuation impact cannot be ignored.

Moving forward, better enforcement and education of adjustment norms are needed to instill discipline around this issue. The guidance itself is sound, appraisers simply need to apply it consistently. Increased scrutiny of concession adjustments in appraisal reviews could help promote better practices. Inflated valuations have cascading impacts on mortgage lending and possibly micro markets themselves.

While guidance for addressing concessions is sufficient, compliance and consistency in practice remain lacking. By highlighting this risk and providing clarity around appropriate adjustments, the December 2023 FNMA update helpfully pushes the appraisal industry to confront an objectivity challenge. The principles are straightforward, but consistent execution still requires more work and accountability. Proper adjustments for concessions will bolster credibility and lead to sounder valuations overall.