Comp Sale appears to be below market value?

[NC Values]

What is the correct approach to take when you believe a Comp Sale is below the actual market value for that property? Is it appropriate to make a positive value adjustment to a Comp that appears to have been sold below fair market value?


I am working on an appraisal assignment in older residential development with only 14 homesites and therefore limited recent market data. There is only 1 closed sale within 12 months and 1 active listing. My problem is that based on the active listing price and prior sales from the preceeding 2-3 years, the most recent sale appears to have been about 10% ($40,000) below the actual market value of the property. This property sold in only 28 days and the MLS listing itself says the hone is "priced low for quick sale". I also spoke to the listing agent and this was not a distressed sale. but the owner had long ago paid off the property and had other financial assets, and was more interested in a quick sale than getting the best price for her property.

There are not good nearby comparable sales from other neighborhoods, so my approach is to use the recent sale & active listings + olders sales within the neighborhood (plus 1-2 recent dales from outside the neighborhood).

 

[J Grant]

How can you believe a comp sale is "below market value" before you finish the appraisal? The appraisal sets out to find MV for subject, so put your comps down, make any time adjustments if they are indicated, and make your physical adjustments, and see where your opinion of MV is. Then decide where this partic comp lies...below, above, within range of adjusted comps, and decide how much weight to give it.

What do you mean that there not "good comparable sales from other neighborhoods"...the neighborhoods are not similar enough to subject neighborhood? The homes are too different from the subject? What makes the outside sales "not good"?

 

[EddieB]

Include this sale, state in addendum that it sold in below normal marketing time, and represents the low end of the market. If the "outside neighborhood" sales are comparable or competing, use them. I am assuming you meant outside the subdivision and not outside the neighborhood. Either way we are responsible for selecting comparable sales and making supportable adjustments including time adjustments if warranted.

 

[CANative]

It didn't sell at a below market value. It sold at a below market price. The explanation by the agent is logical and I've seen these a number of times. I wouldn't make an adjustment because there is nothing to base the adjustment on (although I suppose you could make a transactional adjustment based on seller motivation... but that would probably be more risky than just explaining the situation and reconciling the subject's market value higher based on other data and analysis.)

IMO

 

[NC Values]

It didn't sell at a below market value. It sold at a below market price. The explanation by the agent is logical and I've seen these a number of times. I wouldn't make an adjustment because there is nothing to base the adjustment on (although I suppose you could make a transactional adjustment based on seller motivation... but that would probably be more risky than just explaining the situation and reconciling the subject's market value higher based on other data and analysis.)

IMO

Thank you, I think this answer seems the best approach to take.

 

[JamesRockford]

Is it appropriate to make a positive value adjustment to a Comp that appears to have been sold below fair market value?

I guarantee the first time you do that will be the last time you do that.

That would raise a huge RED FLAG to any underwriter or reviewer of that report and you don't want to have to defend that sort of adjustment.

Use the comp it and explain it, but NEVER make an adjustment like that.

 

[Judy Whitehead (Florida)]

Welcome to our world in Florida. We have so many sales that appear on the surface to be well below market value because someone really, really wants to sell the property. This current market has created a situation where everyone is competing for a limited number of buyers and "how low can you go" is sometimes the only way to compete.

Imagine that you are the family of a deceased retiree and you have to fly in from Omaha or somewhere just to settle the estate. My husband actually buys homes like this - cash - because they are anxious to tie up all the loose ends and go home. It happens. The other thing you have to ask yourself is.....if someone doesn't buy this home, what else might they buy? That would be your competing neighborhood, regardless whether or not it exceeds a mile or whatever.

 

[NC Values]

Welcome to our world in Florida. We have so many sales that appear on the surface to be well below market value because someone really, really wants to sell the property. This current market has created a situation where everyone is competing for a limited number of buyers and "how low can you go" is sometimes the only way to compete.

Imagine that you are the family of a deceased retiree and you have to fly in from Omaha or somewhere just to settle the estate. My husband actually buys homes like this - cash - because they are anxious to tie up all the loose ends and go home. It happens. The other thing you have to ask yourself is.....if someone doesn't buy this home, what else might they buy? That would be your competing neighborhood, regardless whether or not it exceeds a mile or whatever.

Perhaps I am exposing a weakness in my appraisal training, but I thought it was acceptable appraisal practive to make adjustments for "Conditions of Sale" in which the seller is acting under duress and hence sells a property below normal market price. Is this not the case for most REO properties?

 

[JamesRockford]

Perhaps I am exposing a weakness in my appraisal training, but I thought it was acceptable appraisal practive to make adjustments for "Conditions of Sale" in which the seller is acting under duress and hence sells a property below normal market price. Is this not the case for most REO properties?

Your training sounds reasonable BUT in the REAL WORLD any positive adjustments for "Conditions of Sale" or "Time" are not well received at all by lenders. Unless, you can justify the adjustment, don't make it, period.

Just explain why this sale was so much lower than the other comps and put less weight on it if you feel that is appropriate.

 

[Judy Whitehead (Florida)]

I guess my main question would be is how do you arrive at the dollar figure for that adjustment? In this market we have so many REO properties and many sell for drastically different prices. The banks are just like sellers (in my opinion only) since the motivation can differ with them, too. If they have to liquidate inventory due to the FDIC, in the case of banks that went belly up and were repurchased, then you do see very low sales prices.

But.....it would seem to make more sense if you believe that it was a distressed sale for you to do what James suggested.