Non-Arm's Length Transaction Adjustment

[dawnmccay]

I am reviewing an appraisal wherein the appraiser included as the fifth comparable what I would consider a non-arm's length transaction in that the property was exchanged between related parties and was a privately negoiated transaction (no agent involved). The appraiser made an adjustment of $25,000 on a $440,00 sale for "for the private transaction and the 5+ percent below fair market value." My supervisor says this is ok appraisal practise. I have a real problem. Any comments or suggestions?

 

[Smokey Bear]

Sounds like circular reasoning to me.

 

[Pamela Crowley (Florida)]

I would not consider that a qualified sale to use as a comp for anything.

Would love to see the justification of that adjustment.

 

[stefan olafson]

Question #1: How was the sale verified, by whom? Buyer, Seller, Broker???

I would think in a situation like this it would be beneficial to verify it with both participants to find out the truth to the transaction.

Question #2: Where in the market did the appraiser come up with a $25,000 adjustment "for the private transaction and the 5+ percent below fair market value." ?

It sounds like the appraiser was manufacturing an adjustment from thin air.


I may include it, if verified and not place much weight on it. I've seen this type of sale happen where the actual price paid was higher than market?

 

[Lawrence R.]

Comps 3,4,5, etc... can be almost anything you want,(according to Fannie, at least) if you as the appraiser feel that it is indicative of market value.(listings, pending sales, heck, land home packages...)

I personally do not think this type of transaction to be indicative of market value.

I also agree with Pam that it would be difficult to provide a rationale for a reasonable adjustment.

I would think that whatever the adjustment was, was given to make that "sale" conform to his/her already formed opinion, and hence, would mean very little to me if I were reviewing it.

Just to restate, I don't consider it a good idea to place that in the report. But off hand, I can't come up with anything prohibiting it directly.

 

[dawnmccay]

Thanks a lot for your help. I am just including a statement in the review comments that the comparable is not relavent.

 

[Metamorphic]

As a 5th comp, it doesn't seem any more flaky than using a listing like Rels is requiring. At least this is a transaction where a meeting of the minds has occurred and value exchanged. With a listing the only meeting of the minds that has occurred was between the listing agent and the property owner and nothing of value has been exchanged.

 

[timd354]

Just how can one justify an adjustment (which should be a market based adjustment) for a non-market based transaction....In any case what does a non-market based transaction have to do with the market value of the subject? Using such a transaction as justification for anything is a complete and utter joke.

 

[Caterina Platt]

In a pinch, maybe it was the only example to bracket some particular feature?

My method, if I had to illustrate that sale for whatever reason (rural market with minimal transfer activity???), would be to leave it without a PFA adjustment and merely state that it represents the lower range of value, wasn't arm's length because (place whatever the reason was here) and that it really doesn't meet Fannie's definition for a proper comparable. It's additional information, and it's the best I had. I didn't weight it in the final reconciliation, blah blah blah. Paraphrased for brevity here, of course, but you get the idea.

In the sales grid, were the adjusted values in a tight range with your other comparable falling $25,000 lower, you really have a paired sales analysis there in the grid. BUT- it only applies to that particular sale. Non-arm's length transactions take place all the time, but the difference above and below typical market value are completely unrelated from one transaction to one another. It's not like there is a typical 'she's my sister' discount in your market of $25,000. It all depends on the circumstances surrounding the deal and the level of generousity, desperation, or greed as it may be of the selling party.

I suppose you could loosely call it a concession, but standard appraisal practice, ie. what your peers would normally do, is avoid the comparable if at all possible.

 

[Joyce Potts]

Drop back and kick.