I do not get it. I see some listings that talk about buyer bonus. Why do not they reduce the price instead? Is this naieve question? Same goes for perks like TV's.
... such as when a prospective buying looks at comparables within the development or neighborhood, prices look higher as they are artificially inflated. Then if the market makes a mini rebound, the developer can stay at the original listing price rather than relist at an increase (mls price bouncing up and down) which an observant buyer might wonder about.
It's all about the "comps". When appraising properties only the sale price of comps is considered, not seller concessions. For developers looking to move multiple properties they have a lot to gain by propping up the price of the early sales through a variety of schemes such as free upgrades, kickbacks (aka "down payment assistance"), and something I stumbled across recently, secret discounts (I blogged about it a few weeks ago here). In the simplest example, If they lower the price on house 1 by $5K the appraised value of house 2 will go down by $5K, and the cost to the seller across both houses is $10K. If they instead give $5K worth of non-price consideration (e.g. free TV, better kitchen appliances, etc.) the price of house 2 stays the same, and the cost to the seller is only $5K.
So does the common practice of hiding closing costs in the final sales price get rolled into the statistics for "ever increasing" prices that are reported? I would assume they are factored out somehow, otherwise the stat would be total BS.
It's a violation of law to inflate the price for other purposes, but something tells me there is a lot of gray area here. I think builders can get away with quite a bit, including rebates, "landscaping", appliances and furnishings, etc. I am not sure if used-house sellers can legally do the same things (though I would be willing to bet that there is a lot of stuff going on that is technically fraud.
Any stories from the trenches? And what % of house sales these days are arranged with the seller "covering" closing costs (and thereby pumping up the sales price data artificially)?
I always scratch my head when an ad for a house that's been on the market for months mentions something "appraised for $65K over asking price"--that appraisal was obviously wrong! There's no other way to explain the vast run up in prices recently other than gamed appraisals coupled with loose credit. Since there is a tremendous amount of subjectivity in appraisals (and pricing) it's nearly impossible to regulate them. It's really going to be up to the lenders to stop this behavior. Some of the more conservative ones are already asking for a "professional opinion" from an outside/disinterested party (such as another real estate agent) to figure out what the home could actually sell for on the open market without incentives/bonuses/etc.
Comments
Commission!
Also, keeping the price high helps inflate median value of sales in statistical reports.
It's a violation of law to inflate the price for other purposes, but something tells me there is a lot of gray area here. I think builders can get away with quite a bit, including rebates, "landscaping", appliances and furnishings, etc. I am not sure if used-house sellers can legally do the same things (though I would be willing to bet that there is a lot of stuff going on that is technically fraud.
Any stories from the trenches? And what % of house sales these days are arranged with the seller "covering" closing costs (and thereby pumping up the sales price data artificially)?
Femto-
Very nice post. Well worth reading. thanks for pointing to it.
Just wanted to give you a heads-up (or tail up, actually) on a very nasty problem with your deep-link to a radar graph. Ahem.