Adjustments for buyer motivation?

[CO Native]

In the first scenario, that comparable should be automatically excluded from the analysis because it's purchase price did not meet the requirement (1) buyer and seller are typically motivated of the definition of market value. I would hate to purchase a home and subsequently discover that the appraiser who said grace over my purchase price relied upon a sale like that. "Bidding wars" are more complex scenarios, and I would rely upon long-term analysis of the view amenity to determine what the most probable price paid "should have been" for those comparables before deciding to give them any weight in my analysis of the subject. There is no "rule" for dealing with such a scenario, just make sure you have well supported reasoning behind whatever you decide to do with them. Simply gridding those comparables and indicating that they are good indications of market value would be misleading, and your client is entitled to know your thoughts regarding the scenario precisely as you described them above. You can certainly apply an "atypical motivation adjustment" to the bottom of the grid if you feel you have enough data to support it. If not, discuss those comparables so any reader of your report is aware that you were aware of them, but do not rely upon them as primary support for your opinion of value.

Agreed on the $3.5 million sale and have excluded it from every assignment I've had. I just included this one as an example as it was one of the first ones that popped into my mind. There are numerous others during the two-year timeframe I'm willing to expand to so I was hoping to get opinions from outside sources that have their own experiences and market areas as I always find it helpful.

I appreciate your response and am happy to know that the way I've been handling them to this point appears supported by my peers (so far lol).

 

[CO Native]

Some luxury home markets are so affected by hidden or not disclosed motivations or games involving including personal property, partial trades of other properties, avoiding taxes, etc, that it becomes scary to appraisers. I gave up appraising ( except under certain conditions ) in the ultra-luxury home market here in Palm Beach Island. Too many games are being played, with sellers trying to avoid paying capital gains taxes - the agent would explain that it "really" sold for a million or two more, but the recorded price was lower to avoid taxes, and the buyer rapid it on the side and so on. I could not verify any of it and, after a while, decided it was too risky to appraise there and started declining the assignments 3 years ago, except for the occasional one that looks clean.

Look for cash sales, see those prices. Look at sales that are cleaner and more typical terms that are 2 years old.
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Yeah, I completely get that and kinda wish I could do the same at this point. There's fun to attempting to solve the puzzle but this market is just getting even crazier and the stuff revolving around these closed prices, terms of sale, marketing times, off market deals, etc. makes me skeptical of so many sales at this point.

I'm honestly shocked with how many "trades" of homes I've seen where two neighbors essentially swap homes with no representation or appraisal and just settle on a handshake sales price.

 

[Overimprovement]

If you don't understand why a house sold for what it did, I would argue you can't use that sale. If there are several you can't explain, there are market factors you aren't understanding.

We don't do appraisals on comps to arrive at what they SHOULD have sold for. You either have outliers (for which the truth may never be fully known) or the market speaking due to some new info. If you have to have these sales, talk to the agents. But I would not make adjustments to a comp as you are suggesting unless market supported.

 

[Mike Ault]

If you don't understand why a house sold for what it did, I would argue you can't use that sale. If there are several you can't explain, there are market factors you aren't understanding.

We don't do appraisals on comps to arrive at what they SHOULD have sold for. You either have outliers (for which the truth may never be fully known) or the market speaking due to some new info. If you have to have these sales, talk to the agents. But I would not make adjustments to a comp as you are suggesting unless market supported.

I would respectfully point out that we do so every day to comply with this Definition of Market Value requirement.

You can't figure out "market reaction to concessions" without calculating "what the comparable should've sold for" without the concession. The same would apply to "atypical market motivations".

 

[Terrel L. Shields]

Most likely has to do with the land.

Exactly. Remember we appraise the rights to a tract of land. The land is not going to depreciation and demand for land is high. The contribution of the improvements depends upon the value of the land. If vacant land is more valuable than improved, then the HBU is vacant land. A friend in Denver bought a new house down in Cherry Creek area - and sold his existing house and its large site for over $2 million (this was almost 20 years ago) Months later that house (built in the 1960s) was demolished and a new house built on the site - larger and higher quality. So that 2 million was just what the buyer was willing to pay for the land.

 

[CO Native]

If you don't understand why a house sold for what it did, I would argue you can't use that sale. If there are several you can't explain, there are market factors you aren't understanding.

We don't do appraisals on comps to arrive at what they SHOULD have sold for. You either have outliers (for which the truth may never be fully known) or the market speaking due to some new info. If you have to have these sales, talk to the agents. But I would not make adjustments to a comp as you are suggesting unless market supported.

I'm not saying I can't explain why they sold for what they did. The explanation on the majority of the ones I've been reviewing are that those owners just "had to have" that property. This isn't a market factor that I am missing (again, appreciate the claims on my lack of knowledge lol). This is a luxury market where there's not 200+ properties for sale at a given time. Hell, it's the spring/summer selling season and there are 24 actively listed properties in the entire city and three of them are only listed because a property closed on their block for $15 million so they are trying to fish for similar offers.

I'm fine not using the ridiculous outliers as comps as I've been doing this entire time, but if I'm eliminating sales with surprising sales prices, questionable terms of sale, possible 1031 exchanges, etc., I'll be using 25% of the possible sales available. Luxury homes don't transfer the same way starter/tract homes do.

 

[Mike Ault]

I'm not saying I can't explain why they sold for what they did. The explanation on the majority of the ones I've been reviewing are that those owners just "had to have" that property. This isn't a market factor that I am missing (again, appreciate the claims on my lack of knowledge lol). This is a luxury market where there's not 200+ properties for sale at a given time. Hell, it's the spring/summer selling season and there are 24 actively listed properties in the entire city and three of them are only listed because a property closed on their block for $15 million so they are trying to fish for similar offers.

I'm fine not using the ridiculous outliers as comps as I've been doing this entire time, but if I'm eliminating sales with surprising sales prices, questionable terms of sale, possible 1031 exchanges, etc., I'll be using 25% of the possible sales available. Luxury homes don't transfer the same way starter/tract homes do.

Personally, I believe you have earned a "gold star" for local market knowledge, due diligence, and "congeniality" on your first post to the forum!

 

[John Hassler]

Consider going old school and tracking down and interviewing both the buyer and seller of the sales in question. Both agents, too.
I’m not a fan of adjusting for this economic factor since most likely you would need to back into it, in which case the sale is of no actual value in your analysis. Great assignment. Enjoy!

 

[Mark K]

IMO, those are non-market value sales per the typical definition of MV. Once you leave the realm of the definition of MV, there's no good way to measure the market reaction.

 

[Mike Ault]

Adjusting market value indicatiors per "list to sell ratios" historically exhibited for the market segment is an accepted and quantifiable technique, however. Most secondary market clients expect to see that technique applied when reciting active listings on the grid. So, if I was appraising one of those luxury homes and had to choose between doing that, or using manufactured homes as comparables, I would choose the former.