Adjustments for buyer motivation?

[CO Native]

Good morning all,

I hope this is the right forum to post this in as I've been a big reader of the discussions on this website but have never posted a question before. This is something that has been on my mind and I've flip-flopped so I was hoping to see what others in the profession think.

Is there ever a time it makes sense to make a line-item adjustment for extreme buyer motivation?

Without getting too specific, the market I am studying is a high-end luxury market near the greater Denver area. The properties within this market area vary substantially in lot size, home size, quality, desirability, locational influences, etc. so comps can be sparce. For example, there is a portion of the city under review that is relatively unique so it would be preferred to have at least a couple of comps from this area but the sales are limited. In one case, a property was listed for $1,850,000 and based on the property and comps around there, that seemed reasonable but it eventually closed at $2,500,000. Another home was listed at $2,375,000 (again reasonable) but closed at $3,500,000. Further research on these sales has shown the buyers were extremely motivated and just doing a quick comparison of these homes/properties in relation to other sales nearby, they don't fall in line with the immediate area or the surrounding areas.

In most markets, I would focus on other sales but due to the limited amount of sales and the desirability of this specific market, it's hard to look at other comps that can be vastly different than my subject properties. I have done a quick analysis of close to original list price ratios and using the $2.5 million sale for example, the average close to original list price for the same timeframe was from 100-104%, whereas this closed 35% over the original list price.

Any thoughts on an adjustment on buyer motivation?

 

[Mike Ault]

Good morning all,

I hope this is the right forum to post this in as I've been a big reader of the discussions on this website but have never posted a question before. This is something that has been on my mind and I've flip-flopped so I was hoping to see what others in the profession think.

Is there ever a time it makes sense to make a line-item adjustment for extreme buyer motivation?

Without getting too specific, the market I am studying is a high-end luxury market near the greater Denver area. The properties within this market area vary substantially in lot size, home size, quality, desirability, locational influences, etc. so comps can be sparce. For example, there is a portion of the city under review that is relatively unique so it would be preferred to have at least a couple of comps from this area but the sales are limited. In one case, a property was listed for $1,850,000 and based on the property and comps around there, that seemed reasonable but it eventually closed at $2,500,000. Another home was listed at $2,375,000 (again reasonable) but closed at $3,500,000. Further research on these sales has shown the buyers were extremely motivated and just doing a quick comparison of these homes/properties in relation to other sales nearby, they don't fall in line with the immediate area or the surrounding areas.

In most markets, I would focus on other sales but due to the limited amount of sales and the desirability of this specific market, it's hard to look at other comps that can be vastly different than my subject properties. I have done a quick analysis of close to original list price ratios and using the $2.5 million sale for example, the average close to original list price for the same timeframe was from 100-104%, whereas this closed 35% over the original list price.

Any thoughts on an adjustment on buyer motivation?

Those don't sound like "typically motivated transactions" to me. The most probable price those properties should have sold for is one that would exhibit a "list to sale ratio" similar to what the majority of those property types sold for. We can talk about "outliers", even grid them, however, they should be clearly identified as such, and not relied upon when forming our opinion of "the most probable price" which the subject property should bring in a competitive and open market under all conditions requisite to a fair sale.

 

[TerryRohrer]

In my view, if you don't have sufficient data to appraise your subject without the inclusion of sales you believe are affected by undue stimulus, you don't have sufficient data to reliably measure the impact attributable to undue stimulus. That would relegate the use of those sales as filler, at best. There are no details in your question, so we are left to speculate what "extreme buyer motivation" means. An obvious question is why would anyone pay more than list price? They would be truly fools if they were the only buyer in the picture, but if other buyers were in the picture pushing that higher price, maybe everyone one is a fool, or all were acting in their own best interests. You won't get useful information by requiring that all respondents speculate on the facts that might lead to some insight.

 

[Joe Flacco]

They don't seem to fall in line because there is something you don't know or understand about this specific market. Most likely has to do with the land. Keep digging.

 

[CO Native]

In my view, if you don't have sufficient data to appraise your subject without the inclusion of sales you believe are affected by undue stimulus, you don't have sufficient data to reliably measure the impact attributable to undue stimulus. That would relegate the use of those sales as filler, at best. There are no details in your question, so we are left to speculate what "extreme buyer motivation" means. An obvious question is why would anyone pay more than list price? They would be truly fools if they were the only buyer in the picture, but if other buyers were in the picture pushing that higher price, maybe everyone one is a fool, or all were acting in their own best interests. You won't get useful information by requiring that all respondents speculate on the facts that might lead to some insight.

In one case, the buyer was moving from out of state and wanted to live nearby to their family in that neighborhood so they bid substantially over to ensure the purchase of the property. Things like this are not necessarily uncommon for this market but the excessive close price over list is on the uncommon side.

In speaking to the listing agent on another property that sat on market for about 90 days at $1.65 million, right before the property went under contract, three separate offers came in. All three offers were for over the list price but the winning offer was 20%+ over list price and $150k higher than the next highest offer as the agent said those particular people "had to have" that location backing to a "canal." There are other sales that point to that canal as being a value driver but this particular buyer's motivation could clearly alter any adjustment determination for the locational influence, especially with there being only seven sales along the canal over a four-year period and the homes vary substantially (sales prices range from $1.55 million to $4.05 million). There was market evidence that people were willing to pay over list (substantiated by the close to original list price ratio at the time) but almost 10% over the next highest offer and 20%+ overall seems individually driven.

 

[J Grant]

In one case, the buyer was moving from out of state and wanted to live nearby to their family in that neighborhood so they bid substantially over to ensure the purchase of the property. Things like this are not necessarily uncommon for this market but the excessive close price over list is on the uncommon side.

In speaking to the listing agent on another property that sat on market for about 90 days at $1.65 million, right before the property went under contract, three separate offers came in. All three offers were for over the list price but the winning offer was 20%+ over list price and $150k higher than the next highest offer as the agent said those particular people "had to have" that location backing to a "canal." There are other sales that point to that canal as being a value driver but this particular buyer's motivation could clearly alter any adjustment determination for the locational influence, especially with there being only seven sales along the canal over a four-year period and the homes vary substantially (sales prices range from $1.55 million to $4.05 million). There was market evidence that people were willing to pay over list (substantiated by the close to original list price ratio at the time) but almost 10% over the next highest offer and 20%+ overall seems individually driven.

You could explain how atypical motivation/pressure to outbid others resulted in a price that, compared to other sales, is, in your opinion, above the prevailing range.

However, idk if these circumstances merit it or not....there can be big swings in prices in luxury/unique homes. You can use these as comps 4 and 5 and weight them less, or use one and not the other and mention it in the narrative - you can go back further in time for a sale not as affected -or adjust these, it is your call. I would search for other comps, put them all on the grid, see what shakes out and then decide.

 

[TerryRohrer]

In my view, your on the right track to question the use of those sales. If so, then the problem becomes, if you use them, how much you should adjust. To answer that question, you first have to determine what the market value is without those motivations. If you can complete that mission, I question the need to use those sales in the first place. I would first ensure there were no other relevant sales regardless of time or distance. My first preference is to avoid use of sales like you are contemplating, primarily because I think you have to do far more work and still question whether or not they add to your valuation.

 

[CO Native]

They don't seem to fall in line because there is something you don't know or understand about this specific market. Most likely has to do with the land. Keep digging.

Haha, okay, thanks for the helpful response.

I have studied this market extensively and am pretty comfortable with my knowledge of the market overall. The sale for $3.5 million was within 8 months of another sale that is less than 1,000 feet away as the crow flies and closed for $2.836 million. This $2.836 million sale was of a similar quality home of similar age but the one with lower sales price was extensively renovated within the last 5 years (superior), has almost 1/2 acre more land, and has vastly superior views of the Colorado front range. Also, the higher close price home is accessed via an easement shared between four other owners and is technically land locked, which is in no way desirable in this market (not an opinion, verified with both improved property sales and vacant land sales).

But, again, thank you for your opinion.

 

[Mike Ault]

In one case, the buyer was moving from out of state and wanted to live nearby to their family in that neighborhood so they bid substantially over to ensure the purchase of the property. Things like this are not necessarily uncommon for this market but the excessive close price over list is on the uncommon side.

In speaking to the listing agent on another property that sat on market for about 90 days at $1.65 million, right before the property went under contract, three separate offers came in. All three offers were for over the list price but the winning offer was 20%+ over list price and $150k higher than the next highest offer as the agent said those particular people "had to have" that location backing to a "canal." There are other sales that point to that canal as being a value driver but this particular buyer's motivation could clearly alter any adjustment determination for the locational influence, especially with there being only seven sales along the canal over a four-year period and the homes vary substantially (sales prices range from $1.55 million to $4.05 million). There was market evidence that people were willing to pay over list (substantiated by the close to original list price ratio at the time) but almost 10% over the next highest offer and 20%+ overall seems individually driven.

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.

 

[J Grant]

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.
.