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  #1  
Old 07-23-2005, 02:20 AM
David R Jensen David R Jensen is offline
 
Join Date: Dec 2004
State: New Hampshire
Professional Status: Certified Residential Appraiser
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OK, Im going to get this out in the open once in for all as I see a great deal of
talk around the subject but never directly and difintively addressing the dilemma.

My question to everyone is this, do you all believe that SIGNED purchase and sales contract indicate EVIDENCE of value or PROOF of value?

If comps indicate a lower value than the SIGNED purchase and sales contract how do you all handle it?

Do you find comps that support value, based on the belief that a signed purchase and sales contract indicates PROOF of value if the buyers are acting in a way that they believe to be within their best interest?

or,

Do you use the best comps available and let the chips fall where they may?

In my 4 years of appraising I have only run into a situation once as a trainee where the signed purchase and sales contract was, in my opinion for a higher value than what the best comps supported.

to make a long story short, my superivisor/mentor found comps to support the value and my name never went on the report per my request.

With the changing times in my market I know I will be running into this alot more.

So, what is truth and what is fiction?

Im anxious to see the responses.

Dave
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Old 07-23-2005, 02:52 AM
Richard Carlsen's Avatar
Richard Carlsen Richard Carlsen is offline
 
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State: Michigan
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Geographic competence should give you an idea if the purchase price is close to value. Quite frankly, the purchase price is generally the starting point for my searches when the properties are listed since it is highly unlikely in my service area that a property listed for sale is going to sell 20% or even 10% above the established market levels for value. If you know your market, read the MLS data sheet and/or talk to the listing broker, you will know when a property is a distress sale and sells below the established market levels.

So I typically start with the sales price and work from that. On private appraisals, I typically do attribute searches (sf, acreage, basements, garages, bedrooms, baths, etc.) to locate properties that proximate the subject. My searches will often mean that I will enter 6 to 10 comps that are similar and start working through them, discarding those that are out of range in any of the critical areas on the grid or have excess adjustments. Of course, all of those I enter go into my comp data base for future use.

You ask about the sales price being proof of the property's value. Yes, this is proof of the value in the transaction between the buyer and the seller. However, it is not proof of value in the market place. That is what we do as appraisers. We read the market and attempt to put forward a justified value based on what we see in the market. This justification process only comes into play when there is financing on the property. A cash buyer will not need any justification of value as the meeting of the minds between buyers and sellers, as defined in the definition of market value, has established a value for this transaction. There is no need for any external confirmation or approval of the agreed value.
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  #3  
Old 07-23-2005, 02:56 AM
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KD247 KD247 is offline
 
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Hey, my favorite topic!

A current contract is just another piece of data to throw into the pile. But, if you are confident that it represents a "typical transaction" (arm's length, knowledgeable buyer and seller, adequate marketing time, bla, bla, bla, ad nauseam), it would be negligent not to consider it, the weight of your consideration based on its strength relative to the other data you have available.

If you take the time to read further, think about how your approach to value fits into this scenario (true story)...

A friend just sold her house. 1,200 sf cottage with a notable "cuteness" factor. A couple of months ago, I guessed that the sales price would be somewhere around $800,000. (I've seen almost every listing around here and spent a little time thinking about how the property relates to some very recent sales.) At this point, you can assume that you would probably also believe the value to be about $800,000.

Ok, how about if I tell you that before the house goes on the market, she's offered $925,000? Now what's the value? Before you answer, you should know that the buyers accepted her counter of $1,005,000. Now what's the value?

Wait, this deal didn't fly - cold feet by the buyers, I think. Now what's the value? A month or two later, they decide to list the house at $1,175,000 and within a few weeks get an offer for $1,150,000. Has the value changed? The appraisal comes in at about $800,000 - just what I figured, based on recent sales. The buyers want a huge reduction in price and end up walking. The value is obviously $800,000; right?

I'm worried, my friends are already moved to Maine and they need the money to buy their next place. They put it back on the market, again at $1,175,000 and at the first open house receive three good offers, all fairly close to asking price. They decide to take a $1,100,000 offer because it's all cash, no contingencies. The buyer writes a check and they close a week later. Now what's the value?

Here's a question for you... Did the value of the house change during this process, did the "chips" fall incorrectly, or were the numerous buyers all wrong?

Another question... Should we commend the appraiser for "sticking to his guns" or should we consider him incompetent for not really investigating the market? After all, he blatantly and purposefully ignored an important (maybe his best) piece of data.

I was glad not to be involved in appraising this property because both choices looked horrible. Either "stick to my guns" and state that my opinion is $800,000 (obviously too low unless your head is stuck in the sand) or develop an appraisal report that includes some incredibly large and erratic time adjustments. This complicated market is not going to be explained by a simplistic appraisal.

By the way, this transaction happened without a deceitful, ill-mannered, greedy, or unknowledgeable person in the group. Just intelligent buyers and sellers acting ethically and in their own best interest, the way the market's supposed to work.


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  #4  
Old 07-23-2005, 03:09 AM
Keith Keith is offline
 
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The contract isn't proof or evidence of market value. Who knows where it came from? I work with investors quite often. I know for a fact that a lot is going on under the table. Oh, you need 5K in you pocket, under the table? Fine, raise the price a bit. You want my car, too? Sure, we can add that to the contract. Broker says she needs an extra $10K down? We can change the contract. They work together to make a deal work. It has nothing to do with market value.

Three years ago I was faxed over an appraisal request, with the purchase contract. The contract was 25% higher than any sale in the subdivision. It was a cookie-cutter. I had a lot of sales to choose from. I turned in my report, and was cursed out. Funny thing, I checked the tax card six months later, and sure enough, it sold for the contract price.
  #5  
Old 07-23-2005, 03:37 AM
KD247's Avatar
KD247 KD247 is offline
 
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Hey Keith,

The sales contract is evidence of market value, but it's up to the appraiser to decide whether it's good evidence or not.

You imply that it's naive for an appraiser to assume that every contract represents a true market action, but isn't it equally naive to assume that every contract is significantly affected by underhanded dealings?

Shouldn't every piece of data (including a sales contract) be evaluated for what it is? Over-reacting to imagined situations can be worse than being unaware of the possibility of unscrupulous parties. You know, better than I, how often crooked deals come up in your market, but I can't believe that every time you're confused by a market response to a property you automatically attribute it to under the table collusion.

It usually takes only a little digging to figure out why a piece of data falls outside of the norm, sometimes it's deceitful players, sometimes it's a remodelled kitchen. The convenient answer isn't always the right answer and the lower value isn't always the more accurate value.

Koert
  #6  
Old 07-23-2005, 04:12 AM
Keith Keith is offline
 
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Hi Koert,

I enjoyed reading your previous post. Interesting! I'm not trying to imply anything. I am just putting some scenarios out there that I see every week (my best clients are private investors) they will do anything to make the deal "work." Most of these properties are not listed; the investor (a rehabber) nearly always has someone waiting to buy his properties. These contracts have little to do with the open market.

In most cases, you are right. The contract is another piece of the puzzle, and I weight it appropriately. We have to remember the limitation of appraisals. Appraisers are generally limited to historical data to work with. I have no problem being a bit generous. I can't make time adjustments without being put under a microscope in my market. If the contract is one percent above the market, I don't have a problem with that. It's not an exact science.

Keith
  #7  
Old 07-23-2005, 04:32 AM
Pamela Crowley (Florida)'s Avatar
Pamela Crowley (Florida) Pamela Crowley (Florida) is offline
 
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Quote:
Most of these properties are not "listed"; the investor (a rehabber) nearly always has someone waiting to buy his properties. These contracts have little to do with the open market.
Under these circumstances, please make sure you don't use any of those sales as comps later.

It's difficult right now to determine how much weight to put on a contract price!

Appraising investor flips is a very dangerous business right now, too.
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  #8  
Old 07-23-2005, 07:21 AM
jeff samolinski jeff samolinski is offline
 
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ouple of lines I use when I am unable to "hit the contract price"

Appraiser was unable to find any market data to support the subject's contract price.

Subject's contract price appears to exceed market value.
  #9  
Old 07-23-2005, 07:34 AM
Richard Carlsen's Avatar
Richard Carlsen Richard Carlsen is offline
 
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Jeff, you just got me to thinking as I get ready to head out into the field for an ERC and a couple of other visits this morning.

We as appraisers will say that the "sale price appears to exceed market value" but when the sale closes anyway at the agreed upon sales price, we turn around and use it as a comp, a benchmark against which we judge other sales. Interesting twist isn't it?

My verbiage is similar to yours in that I say something like, "Sales price appears to exceed current market levels." I think maybe I will change my standard statement to something like this: "Subject's sales price cannot be justified based on the indicated sales price of available comps."

The sales price is a fact, pure and simple. But the sales price is, in fact, the market. The problem in the appraisal is that I simply just cannot justify it right now based on what the market is telling me through other past sales.
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  #10  
Old 07-23-2005, 07:47 AM
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Otis Key Otis Key is offline
 
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David, Richard said a whole bunch in his post. I start there but I also narrow it to the neighborhood and then expand out to the "competitive market" area of the subject. I'm not looking to make or break a deal. I just told the broker of a rather large realty company that last week when he said if I'd just change this adjustment to this, I could make his deal. I told him immediately that I'm not here to make or break HIS deal! Conversation ended with "provide me some different sales that prove this sale price and I'll reconsider" of which I only got a list of improvements to the property - not sales.

When the sale price appears to be above the market supported or indicate value range, my statement has been similar to Jeff's. But, as I'm typing this, I see Richard has modified it enough to make me think about changing my phrase.

Richard, I like that:
Quote:
Subject's sales price cannot be justified based on the indicated sales price of available comps
Of course we could also say that "Sales price appears to exceed the current supporting market indicators and/or levels." or "The sale price shown on the purchase agreement cannot be supported by the adjusted comparable sales from the competitive market area of the subject."



Back to the point David. Sale price can be a starting point, but like Richard posted first, geographic competence is a significant factor in any assignment. In my case, if I wasn't sure, I probably would have caved to the agent. In fact, he demanded the mortgage broker to use a different appraiser because "his" appraiser could get the value to come in. The MB said okay, got the name and phone number, and contacted that appraiser. She asked for the two pages of my report. He faxed it. She called back and bailed on the assignment stating she couldn't do any better than me. I now see that they cancelled that listing (the purchase feel off) and that there is a new listing for $2,000 less and it's now pending a contract offer, AGAIN. If the scenario continues, then this contract should be about $5,000 about the market support value.

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