Quantifying Buyer Motivation

[margaret nelson-quin]

I've run into an issue where the house next door to the one I'm appraising transferred for between $150,000 and $200,000 more than what the market supports. The sale occurred when a buyer who was moving off acreage had to move into town and wanted to retain the "outdoors" feel. They found this house and asked the owner to sell. The owner didn't really want to sell, and set the price high enough that they thought no one with any sense would pay the price. The Buyer paid cash. I want to be able to include the sale in the appraisal, but know it doesn't really represent market value. I did a survey of brokers in the area and asked them how many times in their careers that type of situation had occurred, and to a person they recounted the one time their buyer client had "more money than sense" and did just that. Is there a way to quantify motivation? Am I looking to hard at the forest and can't see the tree?

 

[gregb]

One sale does not make a market. Grid it or explain it in the narrative if you choose to exclude it in your SCA. Did the buyer have California plates on the Telsa, 'nuff said.

 

[margaret nelson-quin]

Hey Greg, good to hear from you. I hope all is well in the land of Hops. I did look...but it turns out they were locals. Which makes it even more mysterious. Rookie move for an Oregonian.

 

[Michigan CG]

Some sales are outliers where some people have more money than sense. I would not grid the sale but would acknowledge the sale in the addendum.

If everyone else is sane and one buyer is not sane that does not make a market.

 

[margaret nelson-quin]

Second time on this house, once right before the neighbor sale, and now about 9 months later. Have decided to grid the sale and felt like I wanted to give it some weight too because of its location (creek frontage, adjacent property). I'm just looking for a way to derive a condition of sale adjustment.

 

[margaret nelson-quin]

Some sales are outliers where some people have more money than sense. I would not grid the sale but would acknowledge the sale in the addendum.

If everyone else is sane and one buyer is not sane that does not make a market.

Agreed. Can you think of a reference that defines that concept? The market value definition doesn't really encompass this. Both buyer and seller in this instance were knowledgeable. I'd love to be able to call it something like value in use or investment value, but those don't really fit either.

 

[Meandering]

Agreed. Can you think of a reference that defines that concept? The market value definition doesn't really encompass this. Both buyer and seller in this instance were knowledgeable. I'd love to be able to call it something like value in use or investment value, but those don't really fit either.

But neither were typically motivated.

I would mention the sale and the circumstances in the report, but not try and use it as support for market value. ESPECIALLY if, as you noted, price paid was higher than the market support. Such sales should not be used to press a value higher when "the market" is not paying similar prices without the enhanced motivations you stated occurred in this transaction.

.

 

[margaret nelson-quin]

Thank you both for your feedback. As always your comments and questions caused me to open my mind. I just pulled out the dictionary of RE appraisal and re-read the definition of market value, again. Even though I was hearing in my head "market exposure" when I read "...should sell after reasonable exposure in a competitive market under all conditions requisite to a fair sale" it shone a light on the issue. Then I found an article in the Summer issue of The Appraisal Journal all about market value in which I read "...many buyers and sellers (no one can unduly influence the market)." That's what I was looking for!

 

[margaret nelson-quin]

But neither were typically motivated.

I would mention the sale and the circumstances in the report, but not try and use it as support for market value. ESPECIALLY if, as you noted, price paid was higher than the market support. Such sales should not be used to press a value higher when "the market" is not paying similar prices without the enhanced motivations you stated occurred in this transaction.

.

Excellent! I think I was getting hung up on if I grid it I've got to somehow find a way to morph it so I can use it to develop market value...very seductive. May I used "enhanced motivations"? It has such a nice ring to it I'll probably be using it in every sentence I can fit it into for a while.

 

[J Grant]

Part of the appraiser's job is to exclude sales, not just include sales. The excluded sales are those with atypical terms or motivations, to the point where it affected price either far below or far above what we refer to as "market value" ..and market value only happens at the terms defined in the market value definition used in the appraisal. The MV def describes what the TYPICALLY motivated buyer would pay, for a property reasonably exposed to open market. This property was not listed or offered to anyone else thus had no exposure to the open market Buyer had atypical motivations who vastly overpaid, result is the buyer did not act prudently. Acting prudently is in the MV definition, but it's not sexy so appraisers tend to overlook it. Even if this buyer was smart or well informed/ well advised, they chose to overpay for personal reasons, thus did not act prudently.

Though an appraiser can adjust for non MV terms or motivations, when the adjustment itself becomes outlandish that is the break point to exclude the sale.

You can comment on the sale in narrative and explain why you did not include it on the grid.

DEFINITION OF MARKET VALUE: The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (1) buyer and seller are typically motivated; (2) both parties are well informed or well advised, and each acting in what he or she considers his or her own best interest; (3) a reasonable time is allowed for exposure in the open market; (4) payment is made in terms of cash in U. S. dollars or in terms of financial arrangements comparable thereto; and (5) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions* granted by anyone associated with the sale.