Ask Henry

Model Home Center Leaseback

Good Morning, Henry,

I am doing an appraisal on a property that is a model home center. The buyer is leasing back the property to the seller for a period of at least 12 months. This is stipulated in the contract, and I am wondering if the leaseback is considered a Sales Concession and inserted on page 1 of the appraisal report under Seller Concessions since the buyer is in effect contracting with the seller. The seller is paying 2% of the buyer's closing costs which obviously is a sales concessions, but I'm unsure if this is the area of the report where I should insert the information regarding the leaseback as well. The purchase price is $550,000 and the monthly leaseback is $5,350.

Thanks in advance for your input,
Ben Powell

Dear Ben,

In answer your question, paying 2% of the buyer's closing costs is not a very big sales concession if the seller is going to get to use the property for another year. However, if the rent the seller is paying to the buyer is above market rent, then that would make it a sales concession as well. You need to consider both the payment of part of the closing costs and the terms of the leaseback in order to decide if it is a sales concession. Then you have the tricky job of putting a dollar value on both types of sales concessions.

If you think the leaseback rental is above market rent, then it is a seller concession. It is a judgment you must make based on comparable rentals in your market area. What about the price? Was it adjusted downward so the developer could have the use of the house for the year? If so, that would also be a type of sales concession. My advice is to carefully note each of these concessions separately, including all terms that apply, along with your opinion about their impact on your value estimate for the subject property. Where you put the information is less important than being sure you are including it all. You may do best if you add a custom addendum regarding the concessions.