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Cash Sale

Discussion in 'General Appraisal Discussion' started by Real3992004, Nov 22, 2003.

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  1. Real3992004

    Real3992004 Sophomore Member

    1
    Mar 24, 2002
    Professional Status:
    Certified Residential Appraiser
    State:
    Colorado
    2 comparables sold with conventional financing
    1 comparable sold cash at a 5% discount under market

    Question: Is the adjustment to the cash sale comparable positive because it would have sold for more if purchased by conventional financing, or negative because seller gave a discount to the buyer?
     
  2. Dee Dee

    Dee Dee Elite Member

    1
    Jan 16, 2002
    Professional Status:
    Certified Residential Appraiser
    State:
    Colorado
    The sales price is the sales price, regardless of whether the buyer paid in cash or not. You cannot assume that the home would have sold for more if a buyer had used conventional financing.

    Unless the cash purchase contract specifically states a contingency that would be a seller concession, such as replacing the roof up to a certain dollar amount, no adjustments are warranted.
     
  3. Chris Colston

    Chris Colston Elite Member

    0
    Jul 24, 2003
    Professional Status:
    Certified Residential Appraiser
    State:
    Florida
    Neither positive or negative. The grid calls for adjustments to FINANCING in order to bring the sale back to its CASH EQUIVALENCY. CASH, in theory, is how all sales are supposed to be.
     
  4. Ed Woodruff SRA

    Ed Woodruff SRA Junior Member

    0
    Mar 12, 2003
    Professional Status:
    Certified Residential Appraiser
    State:
    Texas
    somewhere in the definition of what we do (maybe it's in the definition of Market Value - I'm too lazy too look it up, and very tired after measuring houses all over town since 7:00 this morning - I just got in), it states that we are looking for a Cash Equivalence for the subject property - meaning, that in a perfect world all comps would be cash. After all, it makes no difference to the Seller where the buyer gets his money - whether he borrows it from a bank or digs it up from the back yard, he gets cash either way. Now, it would make a difference if a Seller was owner financing, but if a buyer is borrowing the money, all sales are cash as far as the seller is concerened - he may pay a little bit more in closing costs, but that's just a matter of negotiation, as the buyer could pay all costs if that's how the transaction is structured.

    It's just like that old argument real estate agents like to make that because somebody sells a house without using an agent, and no commission is paid, that is a 3% to 6% discount, and we should adjust upwards for that. They really believe that, too. We all know that is the feces of the bovine species.
     
  5. Real3992004

    Real3992004 Sophomore Member

    1
    Mar 24, 2002
    Professional Status:
    Certified Residential Appraiser
    State:
    Colorado
    Thank you for your replies. The subject's market indicates a 2-5% discount for cash. For whatever reason, a fast closing, no financing contingency, less chance the deal will fall through. When a property sells for less than the comparables due to a cash sale, it just seems like there should be some adjustment.
     
  6. Dee Dee

    Dee Dee Elite Member

    1
    Jan 16, 2002
    Professional Status:
    Certified Residential Appraiser
    State:
    Colorado
    Russ,
    Looking at it another way....
    Maybe the sellers are willing to take less than the list price and accept a cash sale because it's quicker (no hold up for financing approval) and the wolves are at their door.
    Not sure where you're located, but homeowners are starting to wise up in many areas around Colorado. Holding out for list price could mean months of extra waiting only to end up dropping their price 2% or more anyway, so if they want to bail for whatever reason (job transfer, mounting bills, etc.) many are starting to figure out that the smartest move may be to take the money and move on.
     
  7. Ed Woodruff SRA

    Ed Woodruff SRA Junior Member

    0
    Mar 12, 2003
    Professional Status:
    Certified Residential Appraiser
    State:
    Texas
    If you just have 1 sale that sells 2 -5% less than all the other comps, what you probably have is an anomaly - a non-comparable sale - that only should be used as a 4th or 5th comp. If there really is such a large difference in a number of cash sales verses the financed sales, you should adjust the financed sales down and not the cash up, because what you're looking for is a cash equivalency, and cash is just that - equal to cash. I have never been in a position to do this - this is just food for thought.
     
  8. Mike Garrett RAA

    Mike Garrett RAA Elite Member

    17
    Jan 14, 2002
    Professional Status:
    Certified Residential Appraiser
    State:
    Colorado
    In years past, cash sales were less because the seller did not have to pay discount points for government insured or guaranteed loans. Now, the discount points are so low it really does not figure into the problem. Sales with financing should be taken to "cash equalivancy"...that is adjusting them downwards for any special financing. In today's market in MOST LOCATIONS... financing is more the norm than cash. Fannie Mae does not like to see any positive financing adjustments; therefore, just let it be what it is...probably the lower end of your indicated value range.

    I also agree with the person who said....."maybe the cash sale shouldn't be used if it was much lower", probably other conditions of the sale you don't know about. If 95% of your market sales are financed, wouldn't those be a better indicator of the true market?
     
  9. Pat Butler

    Pat Butler Senior Member

    10
    Jan 17, 2002
    Professional Status:
    Certified Residential Appraiser
    State:
    Illinois
    Fannie Mae's market value definition includes, in part, "payment is made in terms of cash...or in terms of financial arrangements made comparable thereto." The problem is that the definition does not include enough detail to tell us how to proceed. For example, even when a buyer secures financing, the seller is still paid CASH at closing. So the majority of sellers are receiving cash anyway. Is this what Fannie meant?

    However, if a buyer has cash up front and doesn't need any outside financing then that buyer will usually try to get more of a discount off the selling price and most sellers will oblige because there are no financing contingencies and the transaction can close much quicker. So there's obviously a difference in most markets between the price a property will sell for when the buyer has to get approved for financing versus what that property will sell for if the buyer has all cash. I think that needs to be accounted for somewhere.

    So what are you to do? If you are convinced that that particular comp sold for less because it was a cash sale then I would adjust it upward to account for that. Fannie's definition also tells you that "adjustments to the comparables MUST be made for special or creative financing or sales concessions." I would argue that a cash sale is probably SPECIAL in any market where the majority of buyers are securing financing.

    Some would argue that the financed sales should probably be adjusted as compared to the cash sale. But remember, in both situations the seller is stil receiving cash. So that takes care of the cash equivilancey situation. But you need to adjust for the fact that, above and beyond cash equivalency, the market is showing that houses sell for less when the buyer has all cash because of a lack of contingencies, quicker closing, no appraisal problems (esp. FHA...)
     
  10. Richard Carlsen

    Richard Carlsen Elite Member

    0
    Jan 15, 2002
    Professional Status:
    Licensed Appraiser
    State:
    Michigan
    Russ

    I think your problem is that you are attempting to compare the comps to each other rather than to the subject. You must remember that in an open market, prices will be what they are (that is, what the buyer and the seller agree on). It therefore follows that the sales prices will most likely not be the same, even for three identical houses. Just the normal variation of differences in buyer/seller negotiation.
     
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