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This Is How Our Nation's MLS System Aid In Over-Inflating Housing Markets and How Markets Get Over-Inflated!

This Is How Our Nation's MLS System Aid In Over-Inflating Housing Markets!

MLS Systems Across the USA Assist In Over-Inflating Home Values.

There's a major flaw built in to our MLS systems. MLS systems don't automatically deduct seller paid concessions, don't adjust for cash equivalency, nor do real estate practitioners understand their responsibility to do likewise. So, in the 2 examples below, the first is over-inflated by $7,000 and the second by $6,500 based on "reported seller paid concessions". When the next Agent pulls an MLS CMA to price their new listing, and they use either of these 2 sales which bumped the price per sq. ft. upward by $2/sf to $3/sf, which are not adjusted for cash equivalency, this new listing is automatically priced at an inflated value. And, therein lies a partial contributor to over-inflating home prices - The Nations' MLS Systems That Don't Adjust Seller Paid Concessions To Cash Equivalency. If this newly listed home receives a P.A. and the appraiser has a problem reaching this new inflated sales price, the real estate practitioner will say that the comps are selling for $110/sf based on an MLS CMA (not adjusted for cash equivalency), therefore supporting the sales price. However, when the appraiser applies the cash equivalency standard and has to deduct -$7,000 from comp. #1, -$6,500 from comp. #2 mentioned above and $0 for comp. #3, then the home doesn't appraise. The appraiser is labeled the bad person in the transaction because they didn't go along with "the deal". In reality, it was the real estate practitioner's responsibility to have subtracted (bring to cash equivalency) seller paid concessions from each comp they used to price this home.

CASH EQUIVALENCY.

In this seminar, it was stated that the correct school of thought taken is, "An impact on sale price caused by any sales or financing concessions, incentives or other schemes should be adjusted out of the sale prices of the comparables. Doing this would net a cash-equivalent price that is similar to the defined value. This essentially means that all comparable sales should be adjusted to a level where the price is equal to what a "cash" buyer would have paid. Without a doubt, seller concessions impact the contract price of a property. If the seller pays any of the closing costs that on virtually all transactions are paid by the buyer, or are deemed to be the buyer's closing costs, then the seller has paid concessions to the buyer." Cash Equivalency means that when a home is listed for $171,900, sells for $176,900 because $5,000 was added into the deal to pay the buyer's closing cost, when that new sale is used as a comp, the appraiser deducts $5,000 for a net sales price of $171,900. Although it's reported in the MLS system at a sales price of $176,900, this transaction worked to over-inflate that local housing market and the appraiser is duty-bound to correct this when using this sale as a comp.

***This section below was written based on my own opinion and was not exactly discussed in class.***

How Real Estate Practitioners Assist In Over-Inflating A Housing Market.

Here's An Example: I just used a sold comp in an appraisal where the home was listed for $179,900 and it closed for $186,900 with seller paying $7,000 in buyer's closing costs. My questions in this transaction are: If the seller wasn't willing to pay any closing cost, would this transaction have taken place? Also, in reality, the seller didn't pay closing cost. The sales price was raised by $7,000 by raising the appraised value, but the listing agent believed this home was only worth $179,900 when listed. Was the appraisal manipulated to seal this deal? To hit that target number? I'm not pointing the finger at anyone here. Remember that one of the helps of this seminar was to show and remind home appraisers "how" housing market become over-inflated and to properly adjust for such actions. This is how the housing market operates and this type of operation - of adding in seller paid concessions to bump up the sales price above listing price on a home for sale - is what assists in over inflating home prices.

Mortgage Lenders Assist In Over-Inflating Values.

With mortgage lenders, it all begins with the appraisal order having the target value needed on the appraisal order for refinance and 2nd mortgages. The Major National Banks, on refinance or 2nd mortgage orders, stopped stating target values needed on their appraisal orders about 5 years ago. Today, it's generally the local mortgage brokers that still state target values on their appraisal orders.

Real Estate Practitioners Assist In Over-Inflating the Market.

Have these seller paid concessions artificially inflated this National Real Estate Market? All of this discussion brings up an interesting question. It's been said that part of this national housing problem has to do with inflated home values. Well, one way home values become "inflated", is when real estate practitioners list a home for $159,900, it's on the market for over 6 months, lowers the price to $154,900, receives a P.A. and the appraiser receives the appraisal order with selling price of $166,400 with the seller paying $6,500 in buyer's closing cost plus contributing $5,000 toward a non-profit for down-payment assistance. There is opinion that says that appraisers that go along with this type of transaction are committing fraud (see Active Rain post: http://activerain.com/blogsview/109183/Are-You-Committing-Fraud ). After all, the home was listed initially for $159,900 believing that this home wasn't worth more than $159,900. This home was on the market for over 6 months and reduced to $154,900. When the lender goes to hire an appraiser, they get on the phone and call around until they can find an appraiser willing to go along with this type of deal. During the appraisal inspection, the buyer meets the appraiser and states that without the seller paying their closing cost, they couldn't afford to buy the home. Clearly, the market doesn't support this transaction, but with the "right appraiser", it's no problem.

This sale is recorded in the MLS for $166,400 with only $6,500 in seller paid concessions reported, not the correct total of $11,500 in seller paid concessions (the $5,000 in down payment generally isn't reported). So, the sale is actually recorded at an inflated sales price $11,500 more than the market was willing to pay. Based on cash equivalency standard, the appraiser will use this sale as a comp at $166,400 and subtract the $6,500 in "reported seller paid concessions" reflecting a net sales price of $159,900.

It's my understanding that after October 1, 2008, many of these non-profit down-payment assistance programs are being banned from use in home purchases, at least for FHA Financing. From what I have read, this move is believed to lessen the future number of foreclosures because, if a person has nothing invested in the home, then they're more willing to let the home go into foreclosure. This will help lessen the pressure applied to appraisers to hit the inflated and unsupportable target price. NOTE: There may be behind the scenes negotiations to save seller funded down-payment assistance programs. However, both lenders and Realtors will find it more difficult to find appraisers to go along with these situations when the purchase price is raised $10,000+ than listing price just for the purpose of trying to get a buyer into a home. If the home is listed for 3 to 6 months for $169,900 and finally receives a P.A. for $180,900 with seller paying $5,000 in closing cost plus $6,000 in seller paid down-payment assistance, $11,000 more than listing price, why is the appraiser obligated to hit this number? After all, the original listing price was $169,900.

Builders Also Assist In Over-Inflating Home Values.

As mentioned above, it's reported that some in the Southwestern US are being investigated for allegedly paying off buyer's debt to get buyers into new homes. It also shows up when the builder offers to pay $5,000 in buyer's closing for all homes in the new development across town. Without the builder paying $5,000 in closing cost, some buyers wouldn't be able to afford these new homes. Remember what was stated above, This essentially means that all comparable sales should be adjusted to a level where the price is equal to what a "cash" buyer would have paid. Without a doubt, seller concessions impact the contract price of a property. If the seller pays any of the closing costs that on virtually all transactions are paid by the buyer, or are deemed to be the buyer's closing costs, then the seller has paid concessions to the buyer....and those concessions should be deducted when that sale is used as a comp.

And, Yes, Home Appraisers Assist In Over-Inflating Home Values.

It's believed by this appraiser that all players in the real estate arena have helped assist in the current over valuing of the National Housing Market. Yes, appraisers have contributed as well by simply over-valuing homes in hopes of keeping the orders coming from that lender (Going Along With The Target Value On The Appraisal Order) and Failing To Adjust Sold Comps With Seller Paid Concessions To Cash Equivalency.

Posted by William D. Cobb FHA Home Appraiser on 03/17/2009 05:42 PM

Comments (29)

29 Comments on This Is How Our Nation's MLS System Aid In Over-Inflating Housing Markets and How Markets Get Over-Inflated!

MAR

I'm glad to see you included so many players. Many times the mainstream media, investment gurus, etc, all miss too many of the players, and most of them miss the involvment of of homebuilders entirely. I've even seen incredibly ignorant comments that builders had nothing to do with predatory lending, while all the while builders operated in-house lenders or had affiliated lenders, and some have been fined by HUD for lending law violations. The down payment assistance programs were used heavily by builders. Now they are pushing buyers to use the bailout tax credit as a down payment. I still see ads on TV of builders offering no-down financing, etc. This group was a much bigger part of the problem than mainstream media admits. I can't believe the CNN, FOX, MSNBC, etc sources do not KNOW builders were involved. Pretty shoddy reporting if they're really that clueless. And pretty crooked if they're deliberately omitting this information. Thanks.

MAR

When I do a CMA or teach our agents how to do one ,we do it like an appraisor does, with the plus and minus etc. I always look to see the to see if there was sellers consessions. The problem is, like stated in the article, not all agents report them to the MLS provider. The problem would be solved if the MLS provider not only made it a mandatory entry but fined offices that didn't report correctly. I've resorted to calling the listing agent to confirm when the sales price is more than the asking price and no seller conssessions were reported.

Well that is confusing to me as a broker/owner I use the mls to market my listings not to establish a price I do a BPO to find and acceptable listing price for the listing that I think an apprasier would approve, I some cases the apprasier dose not find the same comps.

In Tennessee the appraisers do not work with the listing or buying agents but the bank to find a way to verify the the value of the home. Our MLS has no bearing on what a house is worth but what a seller is asking. I know of no cases where the MLS was a consideration of what the property is really worth based on any part of the stated asking price from the seller. It seems to me that the mortgage crisis going on is bad management of banks and loans not the realtors fault or the buyers fault or the sellers fault or the real estate systems fault but the bad banks trying to make a fast buck and create products that they had to know would bankrupt an individual if they had a personal crisis. Example ARM loans that have prepayment penalties.

If you offer someone the oportunity to be a home owner they are going to take advantage of that. I think most consumers consider that you are the professionl and what you are telling me should be correct. I know we have to be smart enough to look for sharks but we also have to depend on our banks and mortgage companies to have enough since to know mortgages.

I would like to close with this, They miss managed it they tried to find the fast cash and I think they should have to pay everyone they envolved in their get rich quick efforts instead of getting bailed out.

Thanks for listening

First, my MLS has this as a required field when entering sold data. Secondly if I'm using a sale outside of my office as a comp I confirm price with public record and seller consections with listing agent.

Furthermore when my sellers were contributing to DPA programs I did report that also.

Seems like you are passing out a lot of blame on agents. I learned in real estate school that the value of a house is what someone is willing to pay for it. And I also learned the proper way to do a CMA and I practice it the right way. I don't know any realtors in my area that don't. And I don't know any local appraisers that don't call me when using a past sold of mine as a comp to verify what the MLS shows.

William,

It is interesting that you are looking at the inflation factor from one of the angles. Here is the Whopper of the inflation induced by the real estate industry and "proudly" boasted by NAR:

Real estate is currently controlled by three groups of "toll collectors", that is, real estate agents, mortgage brokers and banks. The larger amount of cash exchanged at closing, the large amount of toll these groups of people collect thus pushing the real estate prices up.

According to a NAR research from February 12, 2009, ( this goes in reference http://www.realtor.org/research/commentary_falling_fsbo ) Realtors sold real estate at up to 26% higher prices compared to real estate sold on For Sale by Onwer (FSBO) basis. A median home of 1515 square feet was sold at $116 per square foot in agent assited sales compared to $92 per square foot with in FSBP sales thus pushing the price up by $36,360.

A house which would have sold for $139,380 was sold for $175,740, thus creating a "bubble" of sorts. Where did this $36,360 come from and where did it go? In the case of an FHA loan, most of the purchase price came from the bank. In the case of a non-FHA loan, 80%-90% of it came from a bank and 10%-20% came from the buyer. Where did the bank get this money? The bank borrowed it from Fannie Mae, Freddie Mac or other sponsoring investors.

Where did the money go? Approximately 6% or $10,554 went to buyer and seller agents. According to BankRate.com the average closing costs for such home are $5745 in Connecticut. Most of it went into bank's junk fees, such as, application fee, commitment fee, processing fee, underwriting fee, etc. The rest of it went into the seller's pocket.

Since more than 90% of real estate sells through real estate agents, the insistence from banks to put 20% of the purchase price as down-payment exists to make sure that the 26% inflated price is mostly covered by buyer's money and not from the bank's money.

Please bear in mind that the price inflation of 26% is from a survey done in August 2008 when the credit market was tight, and according to the author of the report "inventory of homes for sale reached its highest point since the early 1980s."

What happens when money is easy, and the only requirement to get a loan is the ability of the borrower to fog a mirror? The sale price inflation is further exaggerated. As seller's agent, there is nothing wrong in getting the seller the highest price for her property. That's what a seller agent is supposed to do.

The problem is that in order to streamline their commission checks, buyer agents work very closely with banks. Banks, while working as the inflationary force, also make the buyers sign stringent mortgage contracts with the "15-day payment" leash and clauses, such as, "due on sale" which force the buyers to walk a tight financial rope, leading towards another real estate bust.

I was focusing on banks as the inflationary force http://www.bankfreeinvesting.com/blog/?p=223 , but after reading NAR's boastful report http://www.realtor.org/research/commentary_falling_fsbo , I am now contemplating how the real estate industry is responsible for real estate booms and busts.

Have you ever wondered why real estate agents are so enamored with the word "SOLD," and not with "BOUGHT."

I know some agents and brokers who don't like "dual agency." I don't think that even the "buyer agency" is doing much for the buyers.

Also, why is buyer told that she is NOT paying any commission, and that the seller pays the commission? If I were to believe NAR's report, the buyer is paying the commission and then some. 26% price inflation is a lot of dough. :)

Lee Ali

BankFreeInvesting.com/blog

Lee Ali is the author of "Crowdfunding: The Solution to Eliminate Booms and Busts in Real Estate Forever!"

They are probably banning different programs, but that is so the government can give the assistance 8000., 15000, 7500 depending on what part you can be fooled into believing.

regarding appraisals on those "gift programs", there was some allowance for "future value"...(a big problem, as that is not working out too well!)

Regarding the MLS problem of what is a true value, we just revised the offer to purchase with a clause that gives all parties permission to disclose all those seller concessions in mls and to other parties after the sale. Now, it will only work if all agents REPORT in mls if and how much the seller contributed.....but we are heading in the right direction!

We are required to report on this in our MLS when the home closes and it is right out there for public view.

When appraisers call they ask about them incase they were left off.

When I do a CMA, I adjust the sales price to reflect the sales price - the concessions.

That is only right to determine market value.

Personally I think itis sheer laziness NOT to keep accurate records.

(At least not in this area, those are not required fields when the information is being inputted into the MLS, (usually) company's require their administrative staff to complete as much as that information for their records to see who customers are doing business with.

If a field in a software program is not REQUIRED, it is SKIPPED. Thus, MLS are deficient in information by deliberate omission.

If MLS's want to correct this, it is a simple tweak of the system to make those fields required, and the agent or admin should have to sign off on the inputting.

To make sure company's are adhering to this, and fudging information, there should be random audits. If a company is found being neglectful, then they should be fined.

Interesting stuff!

Are you an engineer? Seriously - you have to know that in certain price ranges, concessions are standard up to the allowable amount (@3% of sales price). The overinflated values were from "the good ole days" when sellers did the downpayment assistance + closing costs which could inflate the price 6-7%. All of this whining from lenders and appraisers begs me to question - do you guys live in a total vacuum? Some of you assisted with creating the unaffordable housing issue. Don't tell me you didn't know the circumstances - we all did. Seller concessions have always been around, use your head, pick up the phone and ask the questions if you want the answers.

Our mls does not deduct the sellers concessions from the sales price either.

William - I also included a post about a month or two ago about the same issue. Our MLS does not include seller paid closing costs in the CMA report it generates. I'm glad that others realize the need for this important data to be included.

Luckily our MLS system is showing concessions....though you do have to look for it. I think the bigger problem is that agents are not educated about how to look for concessions and understand new home builder practices. I had worked for builders for 23 years and definitely know that a closed price is meaningless to someone doing a CMA as most builders stand as firm as they can on price and give away the farm on concessions. Nice post, but there is no fix on the MLS and education is nil on this subject.

I always adjust the sales price of comps to 'zero out' any seller paids that are listed in the MLS (as they are supposed to be)... but AVM (automated value models) that operate off of tax records DON'T have those adjustments because tax records here reflect the contract price.

So, maybe it is the municipalities that are inflating the prices...

Our area MLS does require entry of seller concessions and I always take them into consideration when doing a CMA for my clients.

As for driving up the selling price? It is good ol' Economics 101...Supply and Demand. Money was free flowing, and the market set its own prices.

Any Realtor who's client asks for seller concessions or DPA knows there is a chance that the appraiser may disagree with home value. The Realtor, in most cases, won't even write up a contract at a given price if they don't think it will appraise for it. That would be doing a disservice to our buyer clients.

There are a lot of factors involved in our current mess. Appraisers can "just say no" any time their professional opinion tells them to.

Thanks for the good discussion!

What's with the spam message above me?

Anyway, this is an interesting topic - on our MLS they do show seller concessions, but I don't know if they are always including any "down-payment assistance programs" etc. which definitely would skew the correct numbers.

I think that is why the average is better to go by...

Dear William, Thanks for a terrific article I couldn't have said it better myself. This is a topic I've considered posting. I'm both a certified residential appraiser and a broker owner and I see these problems all too often. The 2nd case senario is way more prevalent today than several years ago. It in most of the cases I've encountered it is prompted by the lender after the purchase price has been negotiated. In many cases I've told the lenders that the practice could be considered as bank fraud and that I had no intention to become room-mates with them in jail. Of which their comment is always "it's done all the time". I have an appraisal request sitting on my desk right now with a purchase price of $260,000. a $10,000. seller concession and a listing price of $249,900. that was a reduction from $254,900. about a month ago. It has been on the market for nearly 6 months. The lender suggested that they increase the price $10,000. to cover the closing costs. Oh did I mention the mortgage is a government backed mortgage for $260,000. I brought the bank fraud issue up to the lender and the buyer agent but it was greeted with deaf ears. Hasn't anyone learned anything in the past year?????? I know my ears will be ringing with the rants and raves from all parties when I submit the report.

Hi William, My Board's mls indicates concession & the amount. The practioner simply has to back it out.

This is something I was trying to figure out recently because it's not required in our MLS so we often don't have any of this information. I think some MLS do and some don't.

MAR

This is just one of many reasons that I am not a fan of the way our current MLS system is designed or functions. I really wish we could start from square one and rebuild the entire system so that it would do what it was originally intended to do.

Parking for a read later. Thanks

If this how it works, what about real estate commissions? One home may have sold by owner (FSBO), one may have sold with a flat fee agent, another at 5% and another at 7%.

Definitely something I'll have to take a more thorough look at later. Never thought of the price bubble in that light before. Thanks for the info...

You All Act As If Our Markets Are National--But Their Not--Their Local. If A "Local Market" Supports Concessions and Higher or Lower Commission Rates Than That Is The Market You Sell/Work In. And Of Course You Can Try A Strong Handed Approach With Those Sellers That Say: " I WANT (vs I Need) So Much Because That Is What It's Worth Based On Comps"--But It's A Realtors Job To Provide The Seller With As Much Disclosure Information On Those Comps As Possible. So If A FSBO Is Trying To Sell Their House At MLS Comp Values Shouldn't We Expect Them To Be +10% Below The MLS Market Rate For Similar Homes? Are People Choosing To GO FSBO To Be "Competitive" Or To Get As Much As They Can?

My Take Is This: We All Go Away With "List Price" MLS Systems and Simply Have "Available Property" MLS Systems (With No List Values) and Simply Upon Closing We Disclose The Details Of The Transaction (Inclusing Sales Price, Concessions, Etc.). Then True LOCAL Value Will Appear. We're All Asking About What Sold Anyway, And Not What's Active, To Determine Value.

But To Go After The Service Fees, Etc. Of All The Individual People It Takes To Perform A Real Estate Sale (Marketing-Transaction Negotiations-Transaction Management-Buyer Due Diligence (Inspectors/Contractors)-Lending-Appraisingr-Title Company-Insurance Provider) And Call Their Involvement "The Inflated Wrong" Is Wrong. Try Telling Your Local City/County/State Tax Revenue Departments That Because We're All Ticked Off At The System We're All Devaluing Our Real Estate Holdings Meaning You Collect Less Taxes Too? Doubt That Will Go Over Very Well. Government Needs Property Value To Increase & By Any Means Necessary Do It--As We All Just Witnessed.

Another *big* thing is that MLS comps/prices only reflect property sold through the MLS. A lot of property doen't go through the MLS.

I always pull my comps from a title company to get MLS and non-MLS sales. Much more accurate

It kinda sounds like this is an older post from the wording. Maybe not.

I think your argument is flawed somewhat. Not all MLSes are created equal. There is a big difference between what should be included and what's required to be included. Then there is some simply not doing the 'required' either. I'll leave it at that with the MLS, except that there is also variations in state laws concerning real estate and disclosures, as well, thus limiting some MLSes.

While I think that one should know about any seller concessions, as they could have affected the sale, I don't agree that having them somehow "artificially inflates" the value. If a property is sold for $250K with $10K in seller concessions, is the home worth $240 or $250K? Did it appraise for $250K? So did the seller have to 'discount' that $10K or not?

Flipside is if it's listed at $240K and sells for $250K ($10 added for concessions) is it still only worth $240K, or is it worth $250K because $10 can be added to the value?

You also mention that by not having the seller concessions available that other agents would over-price homes, again artificially inflating prices, yet this simply isn't true. If an agent lists a house that's overpriced, only one thing happens. NOTHING. It doesn't sale. So, the price must be lowered.

Another flaw (though it's not yours, but the basis of appraising per se) is the whole "cash buyer" theory in itself. What you're attempting to do is say that a cash buyer would not have needed, or wanted, any seller concessions, so any sales with them must be reduced by their amount to what a "cash buyer" would have paid. The truth is, THEY'RE ALL CASH BUYERS! Real cash must exchange hands for the deal to close.

What you mean is someone that doesn't need financing buying the house. The fallacy here is that 'real' cash buyers don't pay retail at all. Real cash buyers expect BIG discounts from retail. The purpose of an appraisal is really to determine a retail value (fair market). Using a "cash" buyer wouldn't be giving a retail value.

Finally, again state laws may vary, but the MLS is not the end-all in finding sold information, nor in most cases, should it be the primary method for determining the price that something sold for in the first place. County records generally suppy a more accurate accounting of price, yet most appraisers don't use them.

JUL

I don't know if raising the sales price to cover closing costs is fraud, how could it be if the home appraises for the higher amount? I agree that it's fraud if the appraiser purposely pads thier appraisal to get the appraisal in at the higher price. If this is really fraud we have a huge huge problem!

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