Incomplete purchase contract provided

[J Grant]

If the contract price falls within the adjusted range, I would consider that a very good indicator of market value.

The OP's original first post, shows the weakness of this argument. The appraiser saw a CS price of 725k, and along the lines of the above, figures it's the good indicator of market value, and comes in at 725k. A week later, learns the finalized contract price is 740k. Whoa! What to do now? If only she had known that a week ago, she would have come in at 740k!

So, which was the real indicator of MV? The 725k, the 740k, whatever contract price is given ? Too bad the appraiser did not do what we are supposed to do, opine our own independent value opinion. Maybe the best indicator of MV was 730k. Then she would have been okay the first time, and okay the second time, when they changed the SC price to 740k.

Either we are doing what we sign off on the cert, providing OUR independent opinion of value, or we are not.

It is one thing to consider the SC price, and when it is close to our opinion of value, reconcile to it. But to do 99% of the research, and then at reconciliation, go with the contract price, what happened to our opinion ?

More so if the process used to negotiate the price was consistent with the elements .

This is fine, but the reality is, different parties, on different days, will negotiate a different price on the same property. Are they all MV? The best indicator of MV? Some might be, some might be less so.

Again, I am not saying be unreasonable or to ignore the SC price. If it differs by more than 1 or 2% from your opinion of value, consider if there is evidence for reconcling to it.

But what if our opinion of value is 5% off the SC price, and the SC price is still within the range. What to do then?

Perhaps the answer is in the certification we sign, where it says we developed an independent opinion of MV. Maybe the answer is there.

But, I would make (and expect others to make) a very persuasive argument why, if the contract fits within the analysis, my opinion of value is a better indicator than the data point the contract represents.

Your opinion is presumed to be a better indicator, because that is what you hold yourself out to be, as a market expert, and why your client hired you. If the client wanted someone to conclude the SC price is the better indicator, they might as well hire a realtor . They are hiring a market expert to develop a workfile and a market study and an appraisal, in order to provide a value opinion that is a better indicator, whether that value opinion be above, below, or meets the SC price. The lender is deciding to lend on your opinion of value, not the CS price, so they depend on you develop a better indicator. When your indicator and SC price are equivalent, that's nice, but not the purpose of the assignment.

I respect Denis and he wrote a great post, and the common sense argument sounds plausible...except, that we sign a cert saying we provide an independent opinion of value. Are we doing that, when we reconcie to a CS price because it happens to fall within our value range? Where it falls is a point value, and that point value is supposed to be our opinion.

Remember, if this SC were to fall through, a diff set of parties would negotiate a different price on the subject property within an hour. Would each new SC price instantly become the best indicator of MV?

For the record, providing our independent opinion does not always mean a lower value opinion, it can be higher than the SC price .

 

[hastalavista]

Are there two JGrants? :laugh:

In post #80, you fundamentally agree with all the significant points.
In post #81, you then seem to walk-back much of that agreement.

You continue to argue something that everyone has agreed to (consider it being stipulated to): A credible opinion of market value may not be the contract price, even when the contract price is within the adjusted range.

So, no one is arguing against that.
And, since no one is arguing against that, what exactly are you arguing about? (I really/sincerely don't understand )

I respect Denis and he wrote a great post, and the common sense argument sounds plausible

Thanks, and I mean it. The beauty of a common sense argument is that not only does it sound plausible, it typically is the right answer. Its truth is self-evident.

...except, that we sign a cert saying we provide an independent opinion of value. Are we doing that, when we reconcile to a CS price because it happens to fall within our value range? Where it falls is a point value, and that point value is supposed to be our opinion.

Are we reconciling to the contract price just because it is the contract price? No.
Are we (or, at least some of us) reconciling to the contract price because it is the final data point we consider, and it is consistent with all the other analysis? Yes (or, at least I am).
The SCA analysis of the comparables is independent; it has nothing to do with the contract price; a range of value is concluded. The opinion of market value is (presumably) in that range.
Then and only then is the sales contract price-point considered. It is considered in the context of all the prior analysis. It is a data point, nothing more, nothing less. A data point just like all the data considered.
The reconciliation is independent. Whether the appraiser concludes at the contract price or some other point, it is the appraiser's analysis which supports that point-value placement.

If we do not agree to the above, let's stop this discussion. We will never agree (and I'm fine with that).


Let me propose something to you:
One of the things I do in some of my reports (not all... maybe close to half) is I put in a grid (completed in excel) which is intended to convey the confidence/reliability of my adjustment scheme. I use the closed sales applied in the grid, and ideally (if it exists), another comp that I could have used but was more or less redundant, and therefore did not use in the SCA grid.
I then select the comparable I believe is most similar to the subject and use it as the "base" (the subject), and I grid out the other sales against that subject. I make the same adjustments that I used in the grid. In the ideal world, if I knew all the information and could account for all differences, the comparables would all adjust to the sale price of the property I've used as my "base" (the subject).
I have never been able to account for all value differences and I've done this analysis 100s of times.

Usually, the analysis will have an average difference (the average of all the adjusted sale prices) of within 2-3% of the base-sale, but some individual comparables may vary up to 7-8%. I use an average variance of 5% as my confidence-check. If I'm within 5%, I consider that reliable; in essence, it tells me that the adjustment scheme, as applied, explains up to 95% of the value differences between the comps. The remaining 5% I ascribe to the to the imperfections of the real estate market and the inability to quantify all factors.
If I'm over 5%, I go back and double-check my adjustment scheme. If, after re-analyzing the data, that's as good as it gets, I'll add additional comments, but leave the adjustments where they are at if that's as good as I can get them.

You are talking about a value difference of 1-2% in order to feel comfortable that the contract price is consistent with what you otherwise think is "credible" (and, by the way, the difference between $725k and $740 is 2%; within your comfort range).

In my experience, I'm typically within 3% of the average (based on what I described above) and believe the adjustment scheme is very reliable if it is within 5%. That's as good as I can get (if you get better, my hat is off to you... and I mean it). Because of this, I don't have a problem of considering the contract price as a final data point after all the rest of my analysis is complete, and I don't have a problem concluding it is my opinion of value, assuming it fits within the adjustment parameters and there is no compelling reason not consider it as the point-placement. If I can explain 95-97% of the value differences (a 3-5% variance) with my adjusted range, I don't have a hesitancy to consider the contract price as the final data point to narrow my opinion of value to a single point.

You might want to try the same exercise with your comps. You may find that your adjustment scheme can explain to a higher degree the value differences; if your analysis shows you are within 1-2% on average, then I'd say you have good reason to go with your analysis and ignore the contract price or only consider it when it is within that 1-2% variance.
If you are like me, and see a variance among the individual comps of up to +/- 7-8%, and an average difference of up to 5%, maybe your thought-process will shift to giving the sales contract price more consideration in the final point-placement; because, like me, you will find that it is extremely difficult to account for more than 95-97% of the value differences with known sales, and the truth is, within the remaining 3-5% range, the contract price can be the logical and best data point to use in arriving independently at the final opinion of market value.

 

[J Grant]

Denis, I appreciate your post and answer some of your suggestions after I absorb it. I did and still do agree with part of what you say...(but not all , from a philosphical and also practical view ), so will post after I read it more carefully, JG

 

[J Grant]

I wanted to clarify the difference, and I suppose that was why I could not fully agree with all the post, though there are elements I do agree with . Perhaps I am not fully understanding the difference between how you and I reconcile the point value ( and I know your view represents that of a number of appraisers as well)

You do your research independent of the contract, choose your comps, make the adjustments, and arrive at a range of adjusted value. At that point, you consider the SC price. As long as the SC price falls within the range of adjusted values, you reconcile to the SC price.

I do my research independent of the contract, choose my comps, make the adjustments, and arrive at a range of adjusted value. At that point, I reconcile my value to the most credible point value per the research.

Then, I consider the SC price, for purposes of this post, the SC price is within the range of adjusted value. If my MVO is very close % of SC price, I will reconcile a point value to SC price because it is a data point that was supported by all previous research and my indpendent value.

But, if my value is more than a percent off from the SC price, I will then do additional research , to see if there is evidence that my value should be different, why it was different than the SC price.

IF, after additiona research, I still feel my value can be reconciled with the SC price, I will do so. But, if additinal research shows my MVO is still the best indicator and but it and the SC price differn, I opine the point value of my MVO, which may be below the SC price, or above it.

Please feel free to correct me if I was wrong or left something out in summarizing how you reconcilie to SC price when it is within the adjusted range.

 

[hastalavista]

You do your research independent of the contract, choose your comps, make the adjustments, and arrive at a range of adjusted value. At that point, you consider the SC price. As long as the SC price falls within the range of adjusted values, you reconcile to the SC price.

(my bold)

No, that is not what I do.
As I said, the SC may fall within the adjusted range, and may not be my opinion of value.
But if it does fall within my range, I then consider it as a data point to use in the final value reconciliation. I'll re-emphasize this point: Outside of the range, its consideration is little if any. Inside the range, it is considered; sometimes with significant emphasis, but never just as a matter of "its in, that's it".
In the absence of any compelling reason not to consider it as the logical and best indicator of the point-value given everything else, I give it significant consideration.

I do my research independent of the contract, choose my comps, make the adjustments, and arrive at a range of adjusted value. At that point, I reconcile my value to the most credible point value per the research.

The difference between what you describe and what I apply is this:
You arrive at a value opinion and then consider the sales contract.
I don't. I consider it during my value reconciliation as a data point; as part of the process... not as a potential modifier after I'm done.

To me that is a significant difference, although to some it may appear cutting the baloney pretty thin. I'll restate:
You've concluded a value opinion, and then consider the contract price; you will use it as a modifier to your value conclusion if it falls within the 1-2% variance.
I don't use the sales contract as a modifier. I use it as a data point within the reconciliation itself. I'm not modifying my value opinion based on the sales contract, I'm concluding my value opinion with the sales contract considered; the impact of its consideration in my reconciliation process is dependent on all the analysis I've done prior to concluding my point-value.

For you, the sales contract is considered after-the-reconciliation.
For me, it is considered during the reconciliation.

It also explains (to me) why you are reticent in concluding a value that is the same as the sales contract: You've already formed that opinion without consideration of the contract as a data point. Therefore, it may or may not be contrary to what you've determined the value of the subject to be.

I have no reticence since the contract is a data point I use during the reconciliation. :new_smile-l: It becomes contrary only after I've considered it; not before.

 

[J Grant]

I understand the difference...will comment more later after I absorb it better, because, as you say, we are slicing the baloney pretty thin!

I describe what I do, but please note there is always a bit of consideration of the SC price going on, because on a purchase appraisal, normally I get a SC at start of asignment, and I read it. I then put it away, but am aware of it of course, as I do my independent research.

I disagree that the SC is not part of my reconciliation. We do the steps a bit differntly...we both do research and arrive at a value range. If the SC price is outside the range, both of us likely will not consider it a MV indicator at that point.

The discussion is, when the SC price is within the range. I'll post separately on it below ... to make it easier (for me at least )

 

[J Grant]

(my bold)

No, that is not what I do.
As I said, the SC may fall within the adjusted range, and may not be my opinion of value.
But if it does fall within my range, I then consider it as a data point to use in the final value reconciliation. I'll re-emphasize this point: Outside of the range, its consideration is little if any. Inside the range, it is considered; sometimes with significant emphasis, but never just as a matter of "its in, that's it".
In the absence of any compelling reason not to consider it as the logical and best indicator of the point-value given everything else, I give it significant consideration.



The difference between what you describe and what I apply is this:
You arrive at a value opinion and then consider the sales contract.

Isn't the way I do it closer to our intended purpose, to arrive at an independent value opinion? (indpendent of a direction of value).

I understand the SC price is a meeting of the minds, and represents what a buyer and seller agrees to, so in that sense is evidence of a MV indicator. Yet, at the same time, it also points to a direction of value, even though it is within our own developed range of value.

A value range of 710k to 760 k is pretty broad, with $50,000 at stake. The sc price indicates a direction of value within the adjusted range.

Though I arrive at my MVO and then consider the SC price, my final decision on point value is not made, till I consider the SC price . Since I revist my own MVO, and the research after considering the SC price, and I do this before opining my final MVO, the condsideration of the SC price is very much a part of the reconciliation.

I don't. I consider it during my value reconciliation as a data point; as part of the process... not as a potential modifier after I'm done.

To me that is a significant difference, although to some it may appear cutting the baloney pretty thin. I'll restate:
You've concluded a value opinion, and then consider the contract price; you will use it as a modifier to your value conclusion if it falls within the 1-2% variance.
I don't use the sales contract as a modifier. I use it as a data point within the reconciliation itself. I'm not modifying my value opinion based on the sales contract, I'm concluding my value opinion with the sales contract considered; the impact of its consideration in my reconciliation process is dependent on all the analysis I've done prior to concluding my point-value.

For you, the sales contract is considered after-the-reconciliation.
For me, it is considered during the reconciliation.

It also explains (to me) why you are reticent in concluding a value that is the same as the sales contract: You've already formed that opinion without consideration of the contract as a data point. Therefore, it may or may not be contrary to what you've determined the value of the subject to be.

I have no reticence since the contract is a data point I use during the reconciliation. :new_smile-l: It becomes contrary only after I've considered it; not before.

See above insert, I tried to keep it short (shortish)

 

[hastalavista]

I disagree that the SC is not part of my reconciliation. We do the steps a bit differntly...we both do research and arrive at a value range. If the SC price is outside the range, both of us likely will not consider it a MV indicator at that point.

The discussion is, when the SC price is within the range. I'll post separately on it below ... to make it easier (for me at least )

Well, if I read your prior post correctly, your steps are to:
A. Analyze the data

I do my research independent of the contract, choose my comps, make the adjustments, and arrive at a range of adjusted value...

B. Reconcile the data and form an opinion of value (my bold for emphasis)

At that point, I reconcile my value to the most credible point value per the research.

C. Then consider the sales contract; the consideration is done after you've already reconciled a value (bold for emphasis)?

Then, I consider the SC price, for purposes of this post, the SC price is within the range of adjusted value. If my MVO is very close % of SC price, I will reconcile a point value to SC price because it is a data point that was supported by all previous research and my independent value.

I'm not trying to play "gotcha" with the process you outlined. We are typing rather quickly, and you, I, and others can mistype. So, feel free to restate your process.

But what I get out of your descriptions (here and elsewhere) of your process is this: You form an opinion of value and then compare that opinion to the contract price. If it is close, you'll modify your opinion to match the contract price. The sales contract is not really a data point in your reconciliation. It really is a modifier that may be applied after you've concluded your opinion of value. Its ability to modify your reconciled value is dependent on how close it is to your opinion of value. 1-2%, it will modify. More than 2%, maybe not.

I simply consider the sales contract for what I think it is; a data point, when I am reconciling my opinion of value. I am not comparing it afterward, I'm considering it as part of my reconciliation.


Post when you are are able, but I think I've made my arguments/position clear and probably have nothing much to add; we will probably agree on many points and keep our differences on the finer points.

 

[J Grant]

That's pretty much a good synopsis, if we were having a real live talk we could explore the nuances more, but we are limited to typing and point by point repsonse so have to conserve our energy at some point...I would explain that yes, I reconcile a point value before consideration of contact price, but since it is not the "final" reconciliation, I consider it a step in the process of an ongoing reconciliation. I then consider the SC price, may or may not modify my point value after an additional round of checking my research and data conclusions, after which I will reconcile my final point value . (I don't know about you, but I'll sometimes reconcile a value, then let it "sit" a few hours, or overnight, and then revisit it with fresh eyes. ) The reconciliation is a process that is only complete when I sign.the report on the point value.

I appreciate the replies and thought provoking posts!

 

[hastalavista]

Isn't the way I do it closer to our intended purpose, to arrive at an independent value opinion? (indpendent of a direction of value).

Only if one believes that the sales contract is not a valid data point to consider.

I understand the SC price is a meeting of the minds, and represents what a buyer and seller agrees to, so in that sense is evidence of a MV indicator. Yet, at the same time, it also points to a direction of value, even though it is within our own developed range of value.

All data point to a direction of value, no? (unless there are all the same and sold for exactly the same price)
The sales contract is just another piece of data; its value direction is considered like any other.

A value range of 710k to 760 k is pretty broad, with $50,000 at stake. The sc price indicates a direction of value within the adjusted range.

Of course it does. But, are you implying that because the best the appraiser could do is reconcile to a $50k spread, the sales contract, as a data point, is less reliable than if the spread was $20k? What's the difference if the sales contract price is within both ranges? In both, the sales contract is a data point within that range. Would the spread in the ranges require that it be given less consideration in the first example, and more consideration in the second?
In a lot of circumstances, I could make the argument that the wider the spread, that more consideration to the sales contract as a data point should be given.

Though I arrive at my MVO and then consider the SC price, my final decision on point value is not made, till I consider the SC price . Since I revist my own MVO, and the research after considering the SC price, and I do this before opining my final MVO, the condsideration of the SC price is very much a part of the reconciliation.

Well, I'll leave your final process to you (naturally! :new_smile-l.
But I would think if you are concluding a point-value opinion without considering the contract price as a data point during that first-conclusion, then unless the contract price matches your preliminary point, it is always going to be contrary to what you first concluded, and you will find yourself in the position of modifying your opinion of market value by 1-2% from what you first thought independently (to use the term in the way I think you imply it to be used), to what the sales contract is.
I don't have that kind of conflict. :new_smile-l: