Transaction costs are added to every property transaction. Is this add-on a fair addition to the fundamental, intrinsic value a buyer gets? Is it part of the value of the home? Or is it something else? Is this a public policy issue? Is it an appraisal issue? And, is it yet one more question about the validity of the accepted (quasi-governmental) official ‘definition of value,’ where buyer’s price equals loan value?
Transaction costs (fees) may include loan application, escrow, credit report, title insurance, pest inspection, loan points, PMI, Appraisal, Appraisal management, Appraisal ‘technology’ fee, recording fee, transfer tax, underwriting and, of course, the broker/agent commission.
These are things we’re used to. Even some ‘garbage’ fees. It all goes into the value of a house.
But, but . . . are these things actually part of the actual value of a house? Or something else?
If those fees, costs, and commissions are not part of the real, intrinsic, fundamental part of a place to live, to cook, to entertain, to sleep and play, to raise children, to feel safe, to get mail – – – then why are they automatically part of the “value” of a house? The definition of market value says so.
The transaction price is the market price is the market value.
Or is it? It’s the price to the buyer. Or is it the price to the seller? Should ‘value’ be the buyer’s price, or the seller’s price?
The nationwide median closing costs for SFRs is around $8000. The broker’s fee is around $30,000. The median buyer’s price is around $550,000. This means that nearly 7% is added to the actual, intrinsic, fundamental value of a home.
This house sale then becomes a comparable sale price. It’s used to appraise other similar homes. The pressure is upward. The process repeats. Higher again. Each time this one home sells, there is an upward pressure of 7% on the buyer price.
After three go-around resales, the upward pressure is three times the 7%, or over 20% upward! Creepy!
Could it be that this constant upward pressure contributes to the unaffordability of housing? Could it be that this pressure and constant trend impacts the first-time buyer? Could this be a form of bias against the very thing we strive for in this country?
Higher ‘prices’ harm the first-time buyer, and the second-time buyer, and . . . But does it help ‘generational’ wealth? Hmmm. The generational seller is faced with the same ‘market’ – where the buyer price received is some 7% below the ‘market’ price.
The real question is: Should ‘market value’ be based on the price a seller gets, or the price including all the costs of transaction including the broker’s commission?
Question #2: How does the ‘market’ get to an equilibrium — given this relentless upward press?
Steven Smith
March 13, 2024 @ 7:22 am
George, I have seen properties that foreclosed on and resold 3-4 times in 10 years. People get packed into properties with 97% FHA loans they cannot afford, with the help of agents and loan agents. It creates huge amounts of commissions and fees. In some neighborhoods it happens over and over. In fact it happens a lot in certain cities, usually in lower income areas.
Tom Stowe
March 13, 2024 @ 8:11 am
Add this to your discussion. According to a Housing Affordability Study done May 6, 2021, by the National Association of Home Builders.
“Regulations imposed by all levels of government account for $93,870, or 23.8% of the current average sales price ($397,300) of a new single-family home, according to a new study by NAHB.
“Of the $93,870 figure, $41,330 is attributable to regulation during development, and $52,540 is due to regulation during construction.”
https://www.nahb.org/blog/2021/05/Regulatory-Costs-Add-a-Whopping-93870-to-New-Home-Prices
As to your second question, I have an unpublished study that answers that.
Michael V. Sanders, MAI, SRA
March 13, 2024 @ 2:04 pm
Transaction costs are part of what makes the real estate market less than perfect. From neoclassical economics, a perfectly competitive market has many buyers and sellers (no one can unduly influence the market), homogenous product, perfect information, no barriers to entry/NO TRANSACTION COSTS, and prices that tend towards equilibrium. It is easy to see that the market for real property fails the perfect market test in numerous respects. Transaction costs have been part of real estate deals for a long time; they are so ingrained, that appraisers will normally make an upward adjustment to a comparable sale if there is a commission waiver.
Whether commission rates and transaction fees are fair is another matter. No question that they negatively impact affordability. I’m not sure that costs as a percentage of price are higher now than they used to be, but the addition of new costs and fees is always an issue. Case in point is the new surcharge imposed by the City of Los Angeles on all transactions above $5 million (4% above $5 million, 5.5% above $10 million). What is important here is that market value is based on perception . . . and pretty much everyone perceives that transaction costs are part of the equation. Changing that would be swimming upstream against a strong current.
Vince Slupski
March 18, 2024 @ 10:48 am
Here’s another twist. In DCFs for commercial property, it’s common to adjust the sale price at the end of the projected holding period for transaction costs. But we don’t make that adjustment anywhere else.
Now, who is talking about equilibrium? Are you familiar with the Lotka-Volterra equations? They are a pair of differential equations to model predator-prey interactions. They were based on observations of sharks and fish, snowshoe hares and lynx, and other natural phenomenon. The number of fish increase when shark populations are low. Then the sharks are well fed, and their population increases. The large number of sharks eat the fish, and the fish population collapses, followed by the shark population collapsing. With few sharks around, the fish population increases. THERE IS NO EQUILIBRIUM, or we might say, the cycle is the equilibrium. What could be a better model for real estate markets than supply chasing demand, until it exhausts the last buyer and overshoots?