Arm's Length vs Non-Arm's Length Sales

[Mark K]

That methodology precludes the use of any sale and leaves the appraiser establishing "market value."

Not really. I didn't say I didn't use the sale, just that I'd use the other bid for the value, as in making a downward adjustment to the 'winning' bid to reflect the point where there's more than one bidder.

 

[TerryRohrer]

By the same logic, residential appraisers could reduce the price of the accepted offer to equate to the next most "acceptable (to the appraiser)" offer. That still leaves the appraiser making the market. They may exist, but I have never seen any valuation methodology that dismisses the price of a transaction by some subjective amount. Why would the next appraiser be wrong in reducing the final price to the third to the last price? Or to the 10th to the last price? Or, to the first bid as the entire buyer pool was in at that point. I see no basis and am not aware of any appraisal methodology which would support the adjustment as valid. There are a number of appraisers operating out there who believe cash sales have to be discounted or dismissed because financed sales are more prevalent and sometimes lower (and their opinion is stated in terms of cash or its equivalent). All unsupported in my view.

 

[Ricky LaFleur]

Take any appraisal course and they explain why auction sales are not sued because they typically do not meet the MV definition. Your insulting me does not change that.

Auctioneers might advertise, but the TERMS of auction sales are usually NOT MV terms - most auction items are sold all cash or bring cash within 3 days, as opposed to open market RE sales that can be financed with a mortgage. The market exposure, even in an advertised auction, can be short, and the type of buyers to attend and buy at auctions are often investors or speculators and are not looking to be owner-occupied. Among other differences.

I Said that auction terms are all cash, which is different than open maker sales which can be cash or financed

Sorry, I was a bit behind in work, although I wanted to respond while you two were going at it lol. We have to remember that RE is local and while you may typically see auctions in your area require 100% cash paid within 2-3 days or some kind of atypical terms, that isn't the case everywhere else. In my area, and I presume in @TerryRohrer 's area, the auctions are advertised well before hand (often for 60 days or however much they can, which btw is more exposure than many MLS listings are getting before going under contract here still) and they often allow a 30-45 day closing period. This sometimes is paid in cash, but very often they include financing. I know this because I do appraisals on these auctions fairly frequently. All it takes is the buyer meeting with the lender and getting prepared to buy before the auction takes place so that if they get the high bid they can get the loan completed within the allowed timeframe. Even after COVID when appraisals were backed up further, the auctioneer's would allow more time for closing because they knew getting financing arranged in 20-30 days just wasn't going to happen, which would ultimately hurt their potential buyer pool.

 

[Mark K]

By the same logic, residential appraisers could reduce the price of the accepted offer to equate to the next most "acceptable (to the appraiser)" offer. That still leaves the appraiser making the market. They may exist, but I have never seen any valuation methodology that dismisses the price of a transaction by some subjective amount. Why would the next appraiser be wrong in reducing the final price to the third to the last price? Or to the 10th to the last price? Or, to the first bid as the entire buyer pool was in at that point. I see no basis and am not aware of any appraisal methodology which would support the adjustment as valid. There are a number of appraisers operating out there who believe cash sales have to be discounted or dismissed because financed sales are more prevalent and sometimes lower (and their opinion is stated in terms of cash or its equivalent). All unsupported in my view.

I've never subscribed to the theory that one highest bidder makes a market.

 

[Ricky LaFleur]

I often used auction sales for comps but also didn't use the 'winning' bid. One buyer doesn't make a market. I'd usually use the next lowest, 'non-winning' bid for the value. At that point you know there's at least two buyers at that price.

From my experience, adjacent landowners will nearly always pay more and the farmer that is currently planting the land, if he's not the adjacent owner, will also pay a premium as to not lose this acreage for planting. I've seen these premiums be 5-10%, sometimes more than other local sales. I think you need to include this sale in the analysis with the comment that the other sales temper the value lower than this sale price.

I suppose that the current tenant farmer bidding could be considered non-AL since he is currently in a business relationship but the adjacent owner is simply more highly motivated than some other buyers.

I heard this kind of thinking coming about during post-covid residential bidding wars, where you pick some other bid than the winning bid to be "market". I understand where it came from, I just think it's a difficult road to go down.

That methodology precludes the use of any sale and leaves the appraiser establishing "market value."

It does seem that way, so it would be difficult to justify where you draw the "market value" line. I saw a property that was listed by realtors but they listed it a little low and wanted the neighborhood of farmers to submit their best offers, which is akin to a "silent auction", I guess. Well, when it was all said and done, one farmer (who had repeatedly shown he would pay unreasonably high rates in other sales in the area) submitted an offer quite a ways above the rest. I see why that doesn't represent what the rest of the market would do, but arguing that one or two or three bids below that represents market is not any more reliable or accurate IMO.

Not really. I didn't say I didn't use the sale, just that I'd use the other bid for the value, as in making a downward adjustment to the 'winning' bid to reflect the point where there's more than one bidder.

I've never subscribed to the theory that one highest bidder makes a market.

Observe and Report, my supervisor always told me. You don't create legal descriptions, give opinions outside of your expertise, or dictate market value, just observe and report. I'd feel more comfortable reporting what it sold for and letting it be known that it was higher than the others for whatever the reasons. There's always a "highest bidder" that "wins" a property that was listed on the market. They were obviously willing to give more than any other party, and yet we don't adjust those down.

 

[Mark K]

There's always a "highest bidder" that "wins" a property that was listed on the market. They were obviously willing to give more than any other party, and yet we don't adjust those down.

Agree, there is a highest bidder, usually, on every property as evidenced by the multiple offers that far exceed the listing price and the prevalent market values. IMO, that 'winning' bidder often exceeds the market value. Again, the concept that just because someone is willing to pay $X for a property automatically means that the property is worth $X would result in a lot more appraisers being out of work.

If one bidder at an auction overbids the local market value, I'm not inclined to accept as fact that its worth it, whether its the subject or a comp.

 

[J Grant]

Agree, there is a highest bidder, usually, on every property as evidenced by the multiple offers that far exceed the listing price and the prevalent market values. IMO, that 'winning' bidder often exceeds the market value. Again, the concept that just because someone is willing to pay $X for a property automatically means that the property is worth $X would result in a lot more appraisers being out of work.

If one bidder at an auction overbids the local market value, I'm not inclined to accept as fact that its worth it, whether its the subject or a comp.

Price is a fact. The terms and motivations and how they affect the price are what we analyze and then possibly adjust for in the appraisal.

I would never report a different price because I did not feel the price wasn't "market value". If I see the pressure to outbid others, or atypical motivation, concession etc inflated a price, I will adjust for it -for the undue stimulus or the concession. Another option is to not use the sale

 

[Mark K]

I would never report a different price because I did not feel the price wasn't "market value".

I don't recall saying that I would report a different price than the sales price.

 

[J Grant]

I don't recall saying that I would report a different price than the sales price.

Okay, per the below italics, you would use the sale price but make a downward adjustment from the winning bid to a lower bid --

I personally would not do that. How can you tell that the second highest bid or third highest bid was "market value?" I do believe we get information from the bids and can use it in our analysis. For example, if the winning bid was 400k and the other five bids were all below 380k, then more bidders thought it was worth 380k or less ( to them ) than the one winner.

But I would compare the price to the prices of other sale comps to decide if the price needed a downward adjustment for any undue stimulus from bidding effect on price -and perhaps the subject is a market value of 400k that the high bidder paid.

Not really. I didn't say I didn't use the sale, just that I'd use the other bid for the value, as in making a downward adjustment to the 'winning' bid to reflect the point where there's more than one bidder.

 

[TerryRohrer]

I've never subscribed to the theory that one highest bidder makes a market.

I have never seen anyone promoting that theory, so assume it is a strawman. Nor do I believe one sale makes a market. Nor do I think appraisers should make a market.