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Incentives Skew The Market

(In a housing market where it is tough to sell just about any property, in any location, sellers are becoming more creative in their quests to unload properties. )

Discounts, incentives and special promotions are all the norm as sellers become desperate to get rid of their property. But now research is finding that these incentives (such as cars, trips and boats) are skewing the data on our housing market, in terms of what the going rate really is for homes.

Most of these “presents” are given to homebuyers so that individual sellers and big home building companies are not forced to lower their prices.

Instead of cutting the price, the seller just offers some sort of incentive to lure-in the buyer. There is nothing illegal about this, expect for the fact that most of these incentives are not factored in during the appraisal, and cause a lot of problems in the long run.

A November 19, 2006 article by Lew Sichelman of United Feature Syndicate and published in The Los Angles Times, “Giveaways to buyers skew home values, affect loan and taxes,” discusses how these incentives could actually hurt the buyer in the long run.

“In the eyes of lenders, the new cars and other ‘concessions’ that sellers are dangling in front of buyers have a dollar value that should be accounted for by the appraiser when determining the true market value of the property.”

“If the appraiser does his work properly, the mortgage company may not be willing to lend as much as the buyer needs to make the deal work. And if that's the case, the buyer will have to come up with some extra cash he didn't expect he'd need, or walk away from the deal altogether.”

The article sites a $500,000 home that is newly built but has not been selling. Instead of lowering the price and risking the possibility of upsetting neighbors who recently purchase a similar home at that price, the buyer decides to include a $50,000 luxury SUV with the sale.

“If the buyer bites, the house he agrees to pay half-a-million dollars for is really worth only $450,000. And if the buyer is seeking an 80% loan, he'd be able to borrow only $360,000 instead of the $400,000 he thought he could. Now the transaction is $40,000 short, and the difference has to come out of the buyer's pocket.”

“If the appraiser is aware of the concession, he'll make the adjustment accordingly. But if he somehow misses the incentive, the lender ends up ‘mispricing’ the loan for the risk involved.”

That is why it is important for appraisers to be very aware of any concessions or incentives that may have helped secure the deal; because these things not only hurt the lenders, but the buyers as well.

A buyer could actually end up owing more on the property than it is really worth in the long run.

“Buyers of properties that are overvalued because sales incentives are not part of the calculation end up paying higher taxes than they otherwise should. Exactly how much the buyer overpays depends on how the levies are calculated. But it isn't just a onetime occurrence. He overpays each and every year.”

“Overvalued properties become false readings on which future valuations of other properties are based, thereby continuing the cycle.”

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