Incomplete purchase contract provided

[J Grant]

I'll end my part of this discussion (didn't I say that before? :laugh.

Yes, lol.
Take my observations for what they are worth (probably not much)-

Your concern regarding "hitting the sales contract" is not misplaced; that happens with some appraisers, and client-pressure does exist and it can coerce the outcome of an appraisal to be equal to the sales contract.
I don't think any appraiser would argue with you on this.

I think that your concern/passion/focus on the above has given you a bit of a jaundiced eye on evaluating the appraisal process.

This entire discussion of where the sales contract price-point is, is based upon the assumption that it falls within the adjusted range. We are (you, me, and everyone else) in agreement that up to this part of the valuation analysis, the process has worked.

Okay till this point.

What we are left with is this: A range of values and a contract price. If we assume that the contract price has been properly analyzed, and no unusual term/conditions exist, and it falls within the adjusted range, and there is no compelling reason not to give it consideration, then a valid choice is:

A. Give it significant consideration for all the reasons cited above,
and the opinion of market value will probably be consistent with the sales contract (in my case, substitute "probably" for "highly likely").

This is the crux of our differnce...you jump from giving SC price consideration, which I agree with, to suddenly giving it significant consideration. Why is the SC now more signifcant than the other comps/pendings/research?

My reasoning and comments for a reconciliation might look like this: Most weight was placed on comp 1, a recent sale of a home equivalent to subject in upgrades, size, and lake view, and needing minimal adjustments. The remaining comps are considered and support the value opinion, listing comp 5 has a pending contract that is higher than the last sold price, and represents trend of increasing values. Because comp 1 was one of the highest priced sale and is most similar to subject , and the listing activity and market conditions support an upward trend, the market value opinion is X. (on the high side, same or above SC price, just to make u happy!)

In other words, the MVO has to be developed and supported from the comps and research and market conditions, and yes, includes SC price consideration, but it is not based mainly on giving significant consideration to the SC price itself, and less consideration to the rest of the research.

If there is a compelling reason not to give it consideration, then the choice is:
B. Do not give it significant consideration, and conclude an opinion at some other price-point.

If "B" is the action the appraiser takes, the only thing I think most users and other appraisers will want to see is a persuasive argument of why the appraiser's OMV is a better indication of the market value than the sales contract.

Imo, there does not need to be a persuasive argument why the OMV is a better indication of MV...the whole report should indicate why. One can write an explanation, why the SC price is above or below the MVO. But I don't see why we have to "persuade" anyone why our OMV is better, the report development and research and support makes our OMV "better". (and our training and experience and third party disinterested status)


Throughout this entire discussion, everyone has acknowledged that such situations exist, and when they do, the OMV should be based on the best evidence which, in the case of "B", is something different from the contract price.

We agree here. ( I think)

So, when "B" is not the case, wouldn't it seem reasonable, logical, and natural that the probable result of the "A" scenario is that the contract price is the final data point considered and the OMV is reconciled accordingly?*


That's where I'm in significant disagreement with you; the case of "A". In the case of "A", where "B" doesn't exist, why wouldn't the OMV and the contract price be similar/the same?

*(Some appraisers may be concerned about their OMV being consistent with the contract price because they will be thought of as a "number hitter"; intentionally avoiding the most probable price is as bad as intentionally opining a value that is not the most probable price.)

Truly, I don't intentionally avoid coming in at the SC price just not to be a number hitter. I agree that is as bad as the other. I develop a MVO, vet it against SC price, (the consideration of SC price), if they are close, and no other reason is present, will reconcile to SC price or above. If there are reasons the SC price is below the MVO, I will double check research and adjustments, and look to see if I missed any relevant comps or listings ( a second consideration of the SC price). IF no more relevant information or data is found, and the SC price is still above MVO, then that is that, I will offer an explanation, but there comes a point where there is no further legit and credible support for a MVO, sales contract or no sales contract.


I think your concern of number-hitting and pre-determination of values makes you conclude that "A" is a rare event, and since it happens so often (OMV = Contract Price), then there must be something faulty with the appraiser or the appraisal-process the appraiser is using; so it is either a bad-apple appraiser or a misapplication of the appraisal process.

I don't think "A" is such a rare event, and especially in stable markets, buyers and sellers are often apt to meet at a MV point. But it's hard to tell, because in reality, there is such intense pressure, inlcuding peer pressure, to opine to SC prices.

I think appraisers, including myself to a degree, bend over backwards to find support for SC prices. I hardly think it is a problem or area of concern. Appraisers should be much more concerned with the growing pressure to make SC prices.

While I have a similar concern of number-hitting, I don't see that being a risk when the conditions in "A" are present. And, I would presume when "A" is the situation, it is more likely than not that OMV is consistent with the sales price. I'd find it unusual that not be the case (unless the situation is consistent with "B").

Your concern about number-hitting makes almost all situations where the contract price and the OMV are the same suspect, even when it happens under the conditions presented in "A".
My concern about number-hitting disappears when the contract price and OMV are the same under the conditions presented in "A".
That is the significant difference between our positions.

Some thoughts inserted above...

 

[23Degrees]

With the current state of the "process" there is no use in criticizing how many proceed with regard to giving consideration to the purchase contract. At that point in the process to ignore the purchase contract or deny that it exists would be an exercise in futility and beyond silly so I'm glad the thread has not headed in that direction. But to deny that its presence does not potentially install bias into the process to a small or even large degree in some cases is to be denying the obvious. Ideas for how to remedy this in a logical and reasonable manner are a subject for another thread that will probably never be started as many within the field, if not most, do not see this topic as a problem.

Considering that in some states a complaint, no matter how trivial, will trigger an exhaustive review of the entire report it should not surprise anyone that many appraisers might give at least some thought to the consequences of not signing off on the contract amount, if only to avoid the PITA factor. While we can hope that the bulk of practitioners put in a level of thought that at least approaches what has been written in this thread, it is probably more common than any of us would care to admit that the process consists of handing bozo a number and having him figure out a way to repeat it.

 

[J Grant]

A lost of wisdom packed into your brief post, 23 D!

 

[Michigan CG]

I have completed a total of 163 assignments this year. That includes commercial, ag, some 2075's and residential assignments. Not sure how many were for purchase. I do know that I have come in at the exact contract price exactly once this year. It was a small commercial property.

 

[J Grant]

Good for you mich! Sounds like an interesting stat and probably atypical of most appraisers...maybe someone could start a poll how often appraisers tend to come in at purchase price?

 

[hastalavista]

You are doing exactly what I have been advocating. My bold-

This is the crux of our differnce...you jump from giving SC price consideration, which I agree with, to suddenly giving it significant consideration. Why is the SC now more significant than the other comps/pendings/research?
My reasoning and comments for a reconciliation might look like this: Most weight was placed on comp 1, a recent sale of a home equivalent to subject in upgrades, size, and lake view, and needing minimal adjustments. The remaining comps are considered and support the value opinion, listing comp 5 has a pending contract that is higher than the last sold price, and represents trend of increasing values. Because comp 1 was one of the highest priced sale and is most similar to subject , and the listing activity and market conditions support an upward trend, the market value opinion is X. (on the high side, same or above SC price, just to make u happy!)
In other words, the MVO has to be developed and supported from the comps and research and market conditions, and yes, includes SC price consideration, but it is not based mainly on giving significant consideration to the SC price itself, and less consideration to the rest of the research.

Your analysis supports the price-point where the contract is at. Then, at the end, your OMV is at or slightly above the contract price. Without the contract price, it would be coincidence to arrive at the same value. With the contract price, your value is equal to or, intentionally, slightly higher.
If that is not giving the contract price significant consideration, I don't know what is?

And, it makes perfect sense to do so. It is the final data point to be considered, and in your example, it sets your opinion of value. All the rest of your analysis supports your opinion; there is no argument that the opinion is not credible (it is). I cannot see anyone making a plausible argument that your opinion isn't the "most probable price", etc., etc., which reflects market value for the subject. But the value-point you arrived at is dependent on the final data point (you've said this! I'd do the same thing.): Why? Not because you are hitting a "number", but because everything up to that stage tells you that the contract price should be considered and your selection of its price-point as your OMV makes it a significant data point.

Do you not consider the final data point, which you use to establish your point-value, significant?
Up to that stage, the value is still uncertain (or, something else), at the stage when you consider the contract price, the uncertainty disappears (or you change your prior opinion) and the contract price is the final piece that solidifies your value opinion.

Again, if that isn't significant, I don't know what is . If it weren't significant, it wouldn't make a difference and your value would be different more times than not (or, at least many times). It does make a difference: that is significant.


The only difference I see between what you do and I am advocating is this:
A. Nomenclature. You don't consider the final data point that solidifies your opinion of market value to its precise point as "significant". I do.
B. You are comfortable (as a rule, and assuming all the data fits), at using the contract price as your final data point to solidify (establish) your precise-market value point if it is within 1-2% of what you (presumably) would otherwise conclude. And, sometimes, you don't look at the percentage, you look at a dollar amount (I take it $9k on a $300k transaction (3%), exceeds your comfort level, but perhaps $5k would be acceptable?).
I am comfortable with a wider degree of variance because I have a high confidence about my adjustment scheme: If I can explain 95-97% of the value differences, I acknowledge that the remainder of the difference has much to do with the imperfections of the real estate market. I don't feel constrained to restrict consideration of the contract price as the significant data point to 1-2%. I may be comfortable with a higher variance (remember, the data supports it).

You can call it whatever you want, but you are doing exactly what I am advocating. You are not acknowledging that the contract price is significant data point (I think it is, if one uses it to set their OMV), and your willingness to use it as the significant data point is restricted to a 1-2% (as a rule) variance.

I think (and I could be wrong) that your concern of appearing to advocate for hitting the sales contract is making you very reluctant in advocating what you actually do: consider the contract price as the final, significant data point when all the data supports it.
Obviously, someone can corrupt the process by ginning-up the data going into the analysis. Nothing you or I say will stop that from happening. But there are a lot of appraisers out there who honestly believe that the cannot consider the contract price as the significant data point (as you do, and as I do) because it would be a violation of appraiser independence, USPAP, or some other such rule. That isn't the case.

As I said, using a 1-2% variance is your call. I cannot say that is wrong. All I can say is that I don't restrict myself to that limit, and I wouldn't insist others do the same.
Other than that and calling "significant" something else, you and I are doing the same thing.

 

[residentialguy]

Good for you mich! Sounds like an interesting stat and probably atypical of most appraisers...maybe someone could start a poll how often appraisers tend to come in at purchase price?

I typically don't come in right on sale contract, either. I don't understand your accolade "Good for you" because he doesn't come in to the dollar of contract.

I wonder if Mich comes in below contract 30% of the time like you've said you have.

 

[J Grant]

I don't come in 30% less on a reg basis, month in, month out. Some months, yes, other months will come in above contract, other months, right at contract.

Res Guy, since appraisers are supposed to be neutral third parties, why does it bother you when an appraiser comes in below SC price? What difference does it make , esp when it is another appraiser?

You instantly assume this is bad appraisal practice or the like...I can tell you this, every time a SC price is above MV, I spend extra time, just making sure that I did not miss relevant comps or listings etc. Aside from concessions affecting a SC price, there are usually marketability or other issues at play..., and lots of times, the parties, partic the buyer, just gets it wrong. Not my fault, I didn't tell them to pay that! And, if they want to pay the agreed on SC price, go for it, put down more cash. I am not "killing" their deal, their unwillingness to put down more cash is "killing" the deal.

And just so you don't worry, I'd say about 75% of the time when my MVO is below SC price, the parties re negotiate the contract to appraised value and the deal goes ahead anyway. Amazing, but market participants are very willing to do it when the appraisal is fair and clearly supports the MVO so all can understand.

 

[residentialguy]

I am suspect with low appraisals today as I am suspect of high appraisals during the boom. They are both prevalent.

And as far as them re-negotiating the contract to appraised value, you kinda put them between a rock and a hard spot there, kiddo.

 

[J Grant]

I am suspect with low appraisals today as I am suspect of high appraisals during the boom. They are both prevalent.

I don't think that "low" appraisals are anywhere near the volume, or the problem, that high, or inflated values were during the boom. Most "low" appraisals now are the results of price declines in the market. Appraisers of all people should understand that.

And as far as them re-negotiating the contract to appraised value, you kinda put them between a rock and a hard spot there, kiddo.

I didn't put them anywhere. My job was to opine MV for my client. Appraisers have a problem, in that they start having angst about the result of their appraisal. And that's undersandable, as realtors throw tantrums and sellers whine, etc. In a perfect world, we'd be shielded from that. )

All the market participants are grown ups. It was their decision to enter into a contract for X $ for this house. If the realtor or loan officer did not qualify the buyer well enough that the buyer is so marginal they can't put another few grand in, that's not our problem. If the seller is greedy, or the realtor needy, that's not our problem.

It is extremely stressful that people try to make their problems the appraiser's problem. But our job is opine MVO for our client, the one putting up the money. Motivated market particpants will find a way to work with it. And if they don't, and walk away from the deal, that's their decision too.