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A Government Sale Concession - $7,000 Tax Credit

The Foreclosure Prevention Act of 2008 has been passed by both the House and the Senate. Congress is now resolving differences in amendments passed. Once this process is complete, the bill will go to the President to be signed into law. However, the President's senior advisors are recommending a veto if it reaches his desk. So, this may never come to fruition, but it poses an interesting situation for appraisers.

Appraisers are supposed to report any and all concessions in a purchase transaction. The bill includes a $7,000 tax credit for buyers of foreclosed properties. Whether this tax credit will actually help or hurt the market is a totally separate discussion. In this post, I'd like to discuss whether or not this should be considered as a sale concession that should be reported.

This tax credit will only be given to those buyers intending to occupy the property as a principle residence for two years, so we can automatically eliminate the "concession" for investors, but what about the others? Obviously buyers of foreclosures aren't getting this concession at the close of escrow, but they will be receiving $7,000 over the next one or two years, depending on how the buyer(s) file. That $7,000 makes foreclosures more affordable compared to other listings.

So, how should appraisers handle this tax credit? Concession or not?

The Bakersfield Appraiser

Posted by John Fariss - Appraiser Bakersfield, CA on 06/26/2008 11:19 PM

Comments (19)

appraisal, foreclosures, tax credit, concessions

Post is included in group: Appraisers
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19 Comments on A Government Sale Concession - $7,000 Tax Credit

JUN

2008

If it passes, it should be considered a tax credit if they really want it to be effective to eliminate some of the inventory and help more first time homebuyers afraid to get into the market right now.

Sure that 7k makes the home more affordable than others, but I don't think an appraisser should handle it as a concession. I dont' have a real strong argument for this except that it just doesn't fit the mold of a normal seller concession.

Michael - I think it's a great incentive for first time buyers. Who wouldn't want a $7,000 tax credit. I wonder if they will make the credit retroactive for those who may have bought a foreclosure in the past two years.

James - I agree, it certainly doesn't fit the traditional mold of a concession, but does it influence the decision of a buyer and does it make the purchase more affordable. In that case, I'd have to say yes.

Sounds like some attorney will make some money writing a decision on this one. By the time it is law, maybe several lawyers will make a living on just this issue. The lawyers keep making money.

JUN

2008

I'm going to have to eveluate that question as if this legislation passed. I have an apprasial class to teach this fall and it is fitting to use this as a project if it becomes law.

John,

I think the short answer is no; they won't retro or the tax credit. I'm not sure they should consider it.

JUN

2008

Tony, I'm sure they will be throwing this one around for some time. Someone's going to make money on it, and that's usually the lawyers. Sometimes i think I chose the wrong profession! :)

Notary: this should definitely raise quite a few questions in an appraisal class. Does the tax credit influence the decision of buyers. All things being equal, if the exact house was a typical market offering or a foreclosed offering, which would a buyer choose? If I was making the buying decision, and all other things were equal, I'd buy the foreclosure just for the tax credit. So, does that make it a sale concession?

JUL

2008

Great question, John - I hadn't thought of energy saving appliance credits either. I would assume that they would fall under the same potential concession on tax credits if they are new and the (previous) home owner hands the paperwork over to the buyer.

JUL

2008

Thanks for you for taking the time to comment on this subject in the Active Rain network. AR is the new "cyber backbone" of the industry, and with it's uplink to Localism.com it is transforming the real estate marketplace. Agents who don't see which way the cyberwind is blowing are going to find themselves at a considerable disadvantage inside of three to five years.

JUL

2008

Sara - I would think that most sellers would take the energy rebate prior to selling, but if it's new construction, they may not. I don't know how many would actually pass on all the paperwork and receipts though. But it definitely brings up another possible concession.

Michael - I think you're right that most buyers wouldn't pay more for one house versus an exact copy. However, how many times do we see exact copies. Most REOs are vacant and need a little work. So, compare that to a house of similar condition that is not an REO; will a buyer pay more for the REO? They know they are getting some money back, so they'd have extra money for repairs down the line. It's a great incentive to buy the one over the other, on that we most definitely agree, but I'm not so sure that it shouldn't be considered a concession.

Rob - This is a great forum for industry news and trends. I'm glad you found this post worthwhile.

JUL

2008

The tax credit as to be repaid over a period of time and if the house is sold sooner than paid off, then it is due immediately. I usually adjust for concessions, but don't think I'll be considering this one.

JUL

2008

The bill that passed the senate today has it at $8,000 and my take on it is that it is a tax credit and not seller paid nor contributed by the seller nor would it be disclosed in the sales agreement, therefore would not be considered a concession.

Michael - Do you want me to answer your question as a current Appraisal Consultant? or as a previous CPA Tax Consultant? or perhaps as both!!

I suppose you could consider it as a deferred concession to be utilized at a later date as an incentive, and wouldn't be considered when the property is viewed as a comparable to other appraised transactions, unless the under-writter requires the appraiser to pro-rate the concession amount over the time period from the date of comparable sale to appraised date of the current subject or when the credit is taken. However, if the comparable is sold before the 2 year period is up, the deferred concession would have to be accelerated from the purchase date to the sale date, and reported on the current subject properties appraisal report grid.

EDIT ---- DO NOT BELIEVE THIS PROCEDURE ---- I WAS JUST KIDDING --- But it does sound good :)

JUL

2008

Michael - Yes I was just kidding and posted it for your benefit - I posted an edit to the comment :) :) -- You did ask though !!!

JUL

2008

Justin - As it is written, the credit must be taken in the two years following the purchase. So, if the buyer sells within that two year period, he may or may not get the entire tax credit...it will depend on how the bill is passed.

David - I haven't checked on the status of the bill lately, so I assume the $1,000 increase to $8,000 must have been one of the Senate's amendments, I'll have to look into that. The question isn't whether the buyer gets the credit over the next two years, but how will real estate agents present the listings. Does the agent present this offering as comparable to other properties, or does the agent indicate that this REO is a better deal because they'll get $8,000 later versus the property listed by the owner-occupant?

Michael - Thanks for egging David on. Thankfully David's analysis, although very convincing, was just a joke. As you said, the credit is married to the original buyer, so we wouldn't have to worry about subsequent transactions...thank goodness since using David's technique will be a nightmare. ;)

Seriously, what do you really think about this tax credit? If it affects the actions of buyers, shouldn't it be considered as a concession?

JUL

2008

It looks like the House and Senate are still resolving differences, so who knows what the tax credit will be by the time this bill actually gets sent to the President.

John - This is where I read about the credit being "up to $8,000" among other things. http://www.azcentral.com/realestate/articles/2008/07/11/20080711biz-CongressHousing0711.html

According to my email notifications, it looks like some comments did not post either.

Thanks for the link David. Apparently what passed on Friday was a motion by the Senate to disagree with the amendments from the House. So, although that was an interesting AP article, the bill is still in committee. Right now there are five versions of H.R. 3221: two versions deal specifically with the Foreclosure Prevention Act (one version from each chamber).

The version from the Senate looks like it will allow for the tax credit to any purchaser of a foreclosed SFR, and the House version looks like the credit will only go to "first-time" buyers.

Michael, I don't think the tax credit could hold water as a concession because it's not funded by the seller, and the buyers may or may not get it depending on a number of factors (is the property eligible, what if they sell, etc.). I'll check out your analysis.

APR

I wrote a blog on the updated $8,000 tax credit and is it a concession?

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