Forward Comps in Retrospective Appraisal

[Doug DeMars]

The assignment is for an estate. Retrospective market value as of about 2 years ago.

In years past, I would lean heavily upon transactions that led up to the Effective Appraisal Date (EAD). Often, I would also include Comps that are pending as of the EAD and maybe even an active or two. I'd go as far as stating the final sale price of a pending sale with a reasonable assumption that the contract price could be reasonably obtained from the listing agent. On the sales grid, I'd report the pending sales and active listings as pending or active. And yes, I would...explain, explain and explain.

In the recent past, I considered what I was doing a bit silly. The EAD is simply the "date of value" and has no magical powers. The opinion that is most credible is based upon the best evidence available. So what if that evidence became known after the EAD? It may be a stretch, but one could argue that not using post EAD comps would be a USPAP "violation" because doing so could be considered "an error of omission" and be considered negligent by not using relevant data. Going forward, I started to use comps that become "known to the market" (i.e. active listings) well past the EAD. And why not? If I can prove a stable market from the EAD to a point in the future (near or far) what better evidence than an ideal comparable with little or no adjustments required? Even if market conditions have changed, a proper trend adjustment (aka Date of Sale/Time adjustment) could be applied to bring the evidence "back in time" in a retrospective manner. We do this all day long with "dated" evidence and bring it forward to the current EAD.

So far so good?

Not long ago, I completed a slightly challenging retrospective appraisal. Some of the best comps were listed and had their COE several months post EAD. No problem...the market was found during a modest up-swing and I adjusted these post EAD comps down for their Date of Sale/Time to adjust for the market trend. I also included some prior EAD comps plus I had a pending as of the EAD. My new commercial mentor had copies of my comparables and inquired as to my post EAD comps. He brought it to my attention that there could be potential problems with the IRS should my appraisal be called into question during an audit. He agreed that my methodology was sound but argued that a less-than-knowledgeable IRS auditor could red-flag the appraisal report. He recommended to at least only use comps that were no less than active as of the EAD...if only to avoid issue with the IRS.

I understand his reasoning but thought it was unlikely a "honest" audit of an appraisal with post EAD comp methodology would have dire consequences. FTR, I agree that it would be reckless to not also include prior EAD comps. I'm curious as to the opinion of forum members out there.

What is your stand on post EAD comps? Do you give them equal weight with prior EAD comps (all other factors being similar)? Have you ever had issue with using post EAD comps...from the IRS, review appraiser, lawyer, etc...?

 

[Doug Wegener]

Post Ead Comps

The assignment is for an estate. Retrospective market value as of about 2 years ago.

In years past, I would lean heavily upon transactions that led up to the Effective Appraisal Date (EAD). Often, I would also include Comps that are pending as of the EAD and maybe even an active or two. I'd go as far as stating the final sale price of a pending sale with a reasonable assumption that the contract price could be reasonably obtained from the listing agent. On the sales grid, I'd report the pending sales and active listings as pending or active. And yes, I would...explain, explain and explain.

In the recent past, I considered what I was doing a bit silly. The EAD is simply the "date of value" and has no magical powers. The opinion that is most credible is based upon the best evidence available. So what if that evidence became known after the EAD? It may be a stretch, but one could argue that not using post EAD comps would be a USPAP "violation" because doing so could be considered "an error of omission" and be considered negligent by not using relevant data. Going forward, I started to use comps that become "known to the market" (i.e. active listings) well past the EAD. And why not? If I can prove a stable market from the EAD to a point in the future (near or far) what better evidence than an ideal comparable with little or no adjustments required? Even if market conditions have changed, a proper trend adjustment (aka Date of Sale/Time adjustment) could be applied to bring the evidence "back in time" in a retrospective manner. We do this all day long with "dated" evidence and bring it forward to the current EAD.

So far so good?

Not long ago, I completed a slightly challenging retrospective appraisal. Some of the best comps were listed and had their COE several months post EAD. No problem...the market was found during a modest up-swing and I adjusted these post EAD comps down for their Date of Sale/Time to adjust for the market trend. I also included some prior EAD comps plus I had a pending as of the EAD. My new commercial mentor had copies of my comparables and inquired as to my post EAD comps. He brought it to my attention that there could be potential problems with the IRS should my appraisal be called into question during an audit. He agreed that my methodology was sound but argued that a less-than-knowledgeable IRS auditor could red-flag the appraisal report. He recommended to at least only use comps that were no less than active as of the EAD...if only to avoid issue with the IRS.

I understand his reasoning but thought it was unlikely a "honest" audit of an appraisal with post EAD comp methodology would have dire consequences. FTR, I agree that it would be reckless to not also include prior EAD comps. I'm curious as to the opinion of forum members out there.

What is your stand on post EAD comps? Do you give them equal weight with prior EAD comps (all other factors being similar)? Have you ever had issue with using post EAD comps...from the IRS, review appraiser, lawyer, etc...?

I agree with your position on post EAD comps. USPAP allows it so why not use them and make appropriate adjustments for market conditions if necessary.

One thing you could do is included a citation in the appraisal that USPAP allows the use of post EAD Comps. That might head off any potential problems from a less-than-knowledgeable auditor, a pre-emptive strike so to speak.

 

[Mike Kennedy]

"Statement 4

A retrospective appraisal is complicated by the fact that the appraiser already knows what occurred in the market after the effective date of the appraisal.

Data subsequent to the effective date may be considered in developing a retrospective value as a confirmation of trends that would reasonably be considered by a buyer or seller as of that date.

The appraiser should determine a logical cut-off because at some point distant from the effective date, the subsequent data will not reflect the relevant market. This is a difficult determination to make.

Studying the market conditions as of the date of the appraisal assists the appraiser in judging where he or she should make this cut-off. In the absence of evidence in the market that data subsequent to the effective date were consistent with and confirmed market expectations as of the effective date, the effective date should be used as the cut-off date for data considered by the appraiser."

 

[sputnam]

The use of post effective date comparables is allowed and is addressed in USPAP (might be an AO or FAQ...too lazy to look it up for you right now). The requirement is that the comparables be relevant to market conditions as of the effective date of the appraisal. Time adjustments would be made, if appropriate, in the same way as with pre effective date comps.

If the appraisal is for lending purposes, then you need to consult with your client. A few are okay with using slightly, post effective date sales. Most aren't.

 

[Digger88]

wouldnt using post ead comps lead to a less reliable opinion of value? if comps were higher post ead and you used negative time adjustments then using the most recent ead comps would be most accurate imo and less confusing.

 

[hastalavista]

Mike K posted the relevant excerpt from SMT-3.

Yes, post EOD data can be used. Sometimes it is the best.
The difficult part is to determine when it is no longer relevant or reasonably reflects the the buyer/seller dynamic as of the EOD. Although a market could be increasing for 2-years, it is doubtful that a buyer 2-years ago was anticipating 2-year growth; therefore (IMO), making market condition adjustments to a current sale to reflect value of 2-years ago would not meet the SMT-3 requirements.
Having said the above, I have used data that is past the "logical cutoff point"; not as a primary valuation tool, but as secondary analysis to support the value opinion.
Here's an example:

EOD is 6/1/2012. And, the property sold in 8/2013.
Comps used were prior to and immediately after the EOD. Value opinion concluded based on that data.
I then analyzed the 8/2013 sale, and applied a downward market condition adjustment to its sale price; it landed in the range indicated by the primary valuation analysis. I clearly stated in the report that I did not rely upon the market-appreciation analysis to form my opinion of value, but did consider it as secondary support for the opinion of value.

Value opined using primary data that is directly relevant.
Value opinion tested and found "reasonable" by using secondary analysis.

 

[Doug DeMars]

I made a cursory review of the USPAP AO Table of Contents and did not find the topic included. The FAQ section has some Q&A with reference to retrospective analysis. (143, 144, 146, 147, 233 and 294)

FAQ 143 only clarifies the reporting of a retrospective value with a current value.
FAQ 146 basically states that USPAP applies to the date of report not as of the EAD.
FAQ 233 is an extension of FAQ 146. It basically states that an appraiser must analyze the prior sale history of the subject and its recent listing history regardless of the EAD. (i.e. USPAP applies to the "date of report")
FAQ 294 is basic common sense. It makes it clear that you can't punish an appraiser for not including information/data that was not available as of the date of report for the appraisal under review.

FAQ 144 and 147 cover "post EAD" information.

FAQ 144 essentially states that events subsequent to an EAD (such as a large employer closing its facility) cannot be a representation of market conditions as of the EAD. The appraiser can (and maybe should) report the post EAD event to the client. This may be appropriate so the intended user is not being misled about the date of value. All the more reason to be clear as to the EAD vs the Date of Report.
FAQ 147 is a slight twist to the use of "post EAD" data. It basically states that using evidence only subsequent to an EAD could be misleading. It sure would be hard to argue contrary to that.

Both FAQ 144 and 147 quote Statement 3:

A retrospective appraisal is complicated by the fact that the appraiser already knows what occurred in the market after the effective date of the appraisal. Data subsequent to the effective date may be considered in developing a retrospective value as a confirmation of trends that would reasonably be considered by a buyer or seller as of that date. The appraiser should determine a logical cut-off because at some point distant from the effective date, the subsequent data will not reflect the relevant market. This is a difficult determination to make. Studying the market conditions as of the date of the appraisal assists the appraiser in judging where he or she should make this cut-off. In the absence of evidence in the market that data subsequent to the effective date were consistent with and confirmed market expectations as of the effective date, the effective date should be used as the cut-off date for data considered by the appraiser.

I have issue with the last sentence of the above paragraph and will comment on my next post.

 

[hastalavista]

I think the deal is this:
If the market participants as-of the EOD had reasonable belief that certain things were going to happen in the future, then the data post EOD is relevant.
If market participants were engaged in transactions that didn't consummate until post EOD, then the data is relevant.

If the market participants could not reasonably know or consider data in the future, then it isn't relevant to the primary valuation analysis (my bold for emphasis). However, IMO, such data can be used on a secondary level to confirm how the value opinion "fits" with all data (pre-, concurrent, and post-).

Market condition adjustments to comparables post EOD, that were not part of the market participants dynamic as-of the EOD, would not qualify as a primary valuation analysis in my opinion. It provides support for the primary valuation, but should not be used as the primary valuation.
It may prove consistency with the overall trends, and shows how the value opinion "fits" within the entire universe of data.


I'm off to meet CAN for an inspection. I'll check back tonight! (Good luck, Doug).

 

[CANative]

Data after the effective date is not allowed. It's just not disallowed.

If there is no compelling reason to go beyond the effective date for the information then don't do it.

 

[Renee Healion]

I went past the Effective Date when there was a property two doors down that was nearly identical to the subject (1910, style, room count, all but condition, same side of street, whereas the other side was being converted to office use). It was on the market for a long time and under deposit as of date of death (eff date) and closed shortly thereafter. Typical buyer would have known about it as of ED. That is it. I get what you are saying, OP, I just would not want to have to explain it.

Comp 4 with comments devoted to why it mattered.