Comp Sale appears to be below market value?

[Metamorphic]

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.

Sounds like the SP represents a liquidation value. If you want to use the comp add $40k as a transactional condition.

 

[stefan olafson]

I'd consider the sale at market! There was no duress on the part of the seller, the buyer was probably knowledgeable, etc... Take a look at the definition of Market Value, it's what you described.

Conditions of sale have more to do with non cash equivalency, like selling on a Contract for Deed at 3% when the going rate in the market for home loans is 7%. Conditions of sale don't typically go toward seller motivation.

 

[stefan olafson]

Meta....

Transactional Condition? Never heard of that, and don't know where you pulled $40k from????

I hope you were just kidding.

 

[Terrel L. Shields]

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

sure, motivated seller...

How can you believe a comp sale is "below market value" before you finish the appraisal?

easy...i vet my sales before I use them. Don't you?

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.

exactly. There is a huge downside to holding property after it needs to go whether estate or an older person moving back to be with children or need to move for whatever personal reason.

NEVER make an adjustment like that.

...happens all the time and to not make an adjustment for fear of the underwriters is wrong wrong wrong...on many levels. Are you tailoring the report for the UWs or are you appraising the property? ...

 

[CANative]

Conditions of sale don't typically go toward seller motivation.

From the 13th Edition, Page 309...

Elements of Comparison include

3. Conditions of sale (i.e. motivation)

Page 329

Conditions of Sale... The definition of MV in most assignments requires "typical motivations of buyers and sellers" <snip> An adjustment for conditions of sale usually reflects the motivation of either a buyer or a seller...

 

[TJSum]

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

Market Price is what it actually sold for. Market Value is what we think it should have sold for. How can it sell below Market Price? The price is the price is the price.

 

[Michigan CG]

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

I do it regularly. A well researched comparable sometimes needs an adjustment. I could probably give 10 examples of rational, supported adjustments.

.....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......

I don't write reports for underwriters, I am a professional appraiser, they aren't.

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

I completely disagree with this statement. If an appraiser performs due diligence and can support the adjustment then make the adjustment.

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 is correct.

When there is not support for a numerical (quantitative) adjustment then one should use their qualitative skills in the narrative of the report.

 

[Metamorphic]

Meta....

Transactional Condition? Never heard of that, and don't know where you pulled $40k from????

I hope you were just kidding.

Sorry... "Transaction Adjustment", one if which is "Conditions of Sale" (The Appraisal of Real Estate, 13th Edition, Page 322). Transaction Condition.

The OP said he thought the property sold $40k cheeper than it should. If a person wanted to characterize the Transactional Adjustment as a result of Conditions of Sale, they would compare the sales price of that property to other comparable properties....which in this case is a byproduct of the SCA if you're paying attention.

I do this all the time. I'm looking at 4 comps and one of them is not playing nicely in the adjustment process with the other 3. You call the realtor and say "This property looks like it sold for more/less than it should have. Can you think of any reason why? " Then you shut up. The mull it over and will generally tell you something about the property that was not obvious from the street and not recorded in the MLS.
"Oh, yeah, the husband died and the wife wanted to move closer to the grandkids so she took the first offer than came in." "There was some squishy sub floor in the bath so they discounted the price." "That property had some modifications for handicapped access and we found a handicapped buyer." As a comp they're generally not the most reliable for obvious reasons, but they still can support the OMV with property explaination.

In the OPs case, if the realtor is telling you that it sold for less because the buyer didn't want to take the time or care to grind the last dollar out of the transaction, that is a valid basis for and adjustment. Its a departure from the structure of buyer and seller interaction defined in the definition of market value.

 

[J Grant]

Is 28 days a quick sale in the area, or not? Trust your research,not a realtor's opinion. What is the range of sale marketing times in the area for similar comp sales?

If marketing times range 30 -90 days, 28 days is in predominant range and not a distress or high motivation sale. Just weight it less if you feel that is the case, does not sound like a distres or out of typical motivation range sale.

 

[J Grant]

Market Price is what it actually sold for. Market Value is what we think it should have sold for. How can it sell below Market Price? The price is the price is the price.

I agree. :new_multi: