Appraised Value Below Contract Price

[J Grant]

"QUESTION: I understand that Standards Rule 1-5(a) requires the appraiser to analyze an agreement of sale (if available in the normal course of business). What constitutes proper 'analysis'?

RESPONSE: The term 'analyze' is not defined in USPAP because it does not have a special meaning within the document or in Standards Rule 1-5. The term is used based on its English language meaining as found in common dictionaries.
The extent of the analysis performed to comply with the requirements of Standards Rule 1-5(a) is part of the scope of work decision. The acceptability of the appraiser's analysis is judged in the same way that any scope of work decision is judged. For more information, please see the SCOPE OF WORK RULE, Advisory Opinion 28, 'Scope of Work Decision, Performance, and Disclosure', and Advisory Opinion 29, 'An Acceptable Scope of Work'."

Found this FAQ while doing research on the topic...

Despite disagreements and differing perspective, there have been some very informative and interesting posts and I always learn something from those whose views differ from mine.

 

[JSmith43]

Apparently, Saturday Night Live has developed a character called ‘the girl you wish you hadn’t started a conversation with at a party."

I didn't get it at first, but I should have. A long time ago I tried to post using the persona of "Al Bundy" of Married With Children fame. I stopped because it was starting to affect my thinking (for real)

That is what you are doing,JG, right?

 

[J Grant]

lol, maybe! ):

 

[J Grant]

Subject contract price:
Subject contract price is a full price offer. The appraiser researched a large number of area sales that were considered but not included in report. Although there are higher price sales , they were found to be typically larger, or more extensively upgraded or newer contstruction. A number of lower price recent sales were also considered, typically REO sales or short sales with inferior conditions or terms such as longer marketing time of the short sales . The sales on the report bracket subject size, condition, amenities and offer similar location.

The exact amount of the sales contract price was not found to be supported, the market value opinion represents the most probable price in market definition terms, and as indicated from both the unadjusted prices and the adjusted value range of the comps used in report.

Above is the explanation I provided on a recent report. (note: The explanation was provided after MVO was derived, and is in addition to the sales contract analysis in first part of report)

 

[Mike Kennedy]

"QUESTION: I understand that Standards Rule 1-5(a) requires the appraiser to analyze an agreement of sale (if available in the normal course of business). What constitutes proper 'analysis'?

RESPONSE: The term 'analyze' is not defined in USPAP because it does not have a special meaning within the document or in Standards Rule 1-5. The term is used based on its English language meaining as found in common dictionaries.
The extent of the analysis performed to comply with the requirements of Standards Rule 1-5(a) is part of the scope of work decision. The acceptability of the appraiser's analysis is judged in the same way that any scope of work decision is judged. For more information, please see the SCOPE OF WORK RULE, Advisory Opinion 28, 'Scope of Work Decision, Performance, and Disclosure', and Advisory Opinion 29, 'An Acceptable Scope of Work'."

Found this FAQ while doing research on the topic...

Despite disagreements and differing perspective, there have been some very informative and interesting posts and I always learn something from those whose views differ from mine.

USPAP 2012 SR 1-5(a)
"See the Comments to Standards Rules 2-2(a)(viii) for corresponding reporting requirements relating to the availability and relevance of information." (last sentence)

 

[Meandering]

Here you go J,

Sales Contract Analysis Results:
The subject has been marketed at the current list price for the number of days that represent:

market typical, less than market typical, more than market typical

The current list price of the subject is considered to be
Above, Below, Similar
To other competitive listings of similar properties in the neighborhood.

The opinion of market value relates to the sales contract as:
above, below, approximates

CMA/BPO was performed by the sales persons involved in determining a listing price and the offering price:
Yes, No, Listing Agent

Yes, No, Selling Agent

If provided, I have read the CMAs/BPOs and agreed or disagreed with the comparables chosen by the:
Agree, Disagree, Listing Agent

Agree, Disagree, Selling Agent

If CMA/BPO was or was not performed, and the opinion of market value approximates the price on the sales contract, this is by coincidence and may be attributable to knowledgeable buyers and sellers and diligence of the sales people involved.

If CMA/BPO was not performed, and the opinion of market value does not approximate the price on the sales contract, there is no way for the appraiser to verify how the parties involved in the listing and sale of the subject property determined a list price and sale price because the market analysis and appraisal indicate a market supported value of $X.

If one or more CMA/BPOs were performed, I have agreed/disagreed with the comparables chosen, adjustments made and analysis performed and find the differences between the CMA/BPO(s), are X and this is why there is a difference between the opinion of market value and the sales contract price.

It aint rocket science. Just ask the agents for the BPOs. It's better to address it up front then get tons of BS later. If you ask for the BPOs upfront and don't get them, then notify the client you have performed your due diligence by asking for and not receiving them and that you will not address sales person "comps" after the fact, because they obviously did not do their job first.

 

[J Grant]

More and more I am asked by the lender to comment as to why the appraised value is below the contract price

This was the question the lender asked the OP. It asks why the MVO is below the SC PRICE. It does not ask about the sales contract itself, or to analyze the sales contract in relation to the MVO. The lender is now asking only about the SC price, as a comparison to the MVO.

Note that separating the SC price from the sales contract is something the lender/client is doing, in order to ask the appariser to comment on a difference.

Note that the SC price is part of the contract and influenced by the clauses and terms therein, among other factors. The SC price was NOT influenced by the MVO, because the MVO was unknown on signed contract date. BUT, the MVO can be influenced by the SC price, since it is known to the appraiser. Something to be aware of when explaining any correlation/difference between the two.

Read a contract, 14 pages (on average) of verbiage, clauses, and contingencies. ALL of these affect the price. (Some more than others, such as a concession , for example). The very fact that the buyer is applying for financing affects the price. If they were paying cash, it is likely the price would be different. IF the buyer is putting down 3% FHA or 20% conventional or 50%, that impacts the price. IF the seller asked for a long closing date to accomdate them, that impacted the price.

The interest rate affects the price. Most contracts have a clause "obtain financing at prevailing rates", with sometimes a rate cap filled in. And on and on it goes.

THAT is why a contract analysis should not contain the explanation about any correlation to MVO. The purpose of the contract analysis is to explore and explain how the contract terms might impact the price, or if contract terms were typical for area, etc. A comparison of A SC price in the contract analysis is inappropriate, since the MVO did not exist on signed date of conract and thus was unknown to the parties.

If an appraiser wants to address individual sales used in a BPO or CMA that a realtor used to set a listing price, that is their choice. In my view, it approaches being an additional assignment, that of reviewing a CMA or BPO.

.

 

[Meandering]

J,

You might be right, but it is what the client is looking for. And it's just not worth not doing it when you see there is a problem between value and price. Of course it is equally plausible to tell the client that you are not a mind reader and they need to ask the agents involved how they derived the price. But the agents are not the lender's clients, the appraiser is, and they are the ones that write your paycheck if you do this kind of work.

.

 

[J Grant]

J,

You might be right, but it is what the client is looking for. And it's just not worth not doing it when you see there is a problem between value and price. Of course it is equally plausible to tell the client that you are not a mind reader and they need to ask the agents involved how they derived the price. But the agents are not the lender's clients, the appraiser is, and they are the ones that write your paycheck if you do this kind of work.

.

Marion, I agree that providing an explantion of why CS price and MVO differ can be good appraisal practice, since, as you say, it's a client expectation. That is pretty much the reason for it, not a USPAP requirement as some are stating.

However, I feel that analyzing BPO or CMA sales is beyond the SOW of this explanation .

I also feel (see above post, ), that providing an explanation of why SC price and MVO differ is not part of the SC analysis and should be a separate statement, though it can refer to SC terms.

 

[JSmith43]

If you ask for the BPOs upfront and don't get them, then notify the client you have performed your due diligence by asking for and not receiving them and that you will not address sales person "comps" after the fact, because they obviously did not do their job first.

That's a great tip to consider when one of those special agents somehow snags a buyer with an extra special deal that has no credible support.