When the Sales Price Isn’t The Market Value
October 14, 2009 | By Kelley Koehler | Filed Under Home Selling
I was doing some market value research the other day for a little Central Tucson house, in a price range where home buyers wanting to use FHA financing tend to look.
I had two decent comparable sales to use – but I noticed one sold to a buyer who used FHA. And that’s a huge flag that more research needs to be done in order to use that sale as an indicator of market values.
See, many FHA home buyers in Tucson ask for closing cost assistance, if not also down payment assistance. And those are in the form of credits directly to the Buyer at close of escrow, which isn’t recorded as part of the sales price but comes directly off the Seller’s bottom line – the Seller actually walked away with less money than what the sales price would indicate.
It’s easier to understand with an example.
Let’s say you just sold your home for $200,000. With a regular home buyer, you’d get a check for $200,000. (We’re simplifying here for the example, and disregarding other sales costs and loan amounts.)
If you had an FHA buyer who needed 3% of the purchase price towards their closing costs, you’d get a check for $194,000.
If you had an FHA buyer who needed 3% towards closing costs and 3% towards their down payment, you get a check for $188,000.
The assistance just comes off the Seller’s bottom line. And if a Seller is willing to take less in the form of closing cost and down payment assistance, then it’s the same as if they sold their home for that lower value. Paying $12k in closing cost assistance is the same as taking $12k less for the house.
So if I’m using that house to find market value, and the seller took what equates to 6% less than what the sales price indicates, then clearly, that impacts market value.
The sales price isn’t always the whole story. There are all kinds of credits that can happen on the back end of the transaction that aren’t necessarily reflected in the record of the sale in the Tucson MLS. You always gotta do the research.
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Unfortunately it is reflected in the appraisal while the CMA (comparative market analysis) reporting feature in Rapattoni and Tempo ignore this concession.
The CMA list to sell ratio is based off the last reduced list price and not the original list price, another misleading number for potential sellers.
http://homebuysblog.com/2009/09/20/multiple-listing-service-flawed-data/
Guess I’m a bit confused about this. The home still has to appraise for the sales price right? And does not that indicate market value? If it does not appraise for sale price, then seller would not have money to cover closing costs.
Hi Rod – Yes, the home does have to appraise for the sales price, but the appraiser is ALSO going to look for those seller paid credits.
If it doesn’t appraise for the sales price, then the Buyer can walk away, though they typically try to renegotiate the sales price to the lower appraised value.