Quantifying Buyer Motivation

[margaret nelson-quin]

Part of the appraiser's job is to exclude sales, not just include sales. The excluded sales are those with atypical terms or motivations, to the point where it affected price either far below or far above what we refer to as "market value" ..and market value only happens at the terms defined in the market value definition used in the appraisal. The MV def describes what the TYPICALLY motivated buyer would pay, for a property reasonably exposed to open market. This property was not listed or offered to anyone else thus had no exposure to the open market Buyer had atypical motivations who vastly overpaid, result is the buyer did not act prudently. Acting prudently is in the MV definition, but it's not sexy so appraisers tend to overlook it. Even if this buyer was smart or well informed/ well advised, they chose to overpay for personal reasons, thus did not act prudently.

J - Thank you for your thorough response. "act prudently" is the phrase I was looking for. I've just about finished writing this puppy and "act prudently" is going to be the cherry on top of the sundae! Happy Tuesday.

 

[RCA]

I've run into an issue where the house next door to the one I'm appraising transferred for between $150,000 and $200,000 more than what the market supports. The sale occurred when a buyer who was moving off acreage had to move into town and wanted to retain the "outdoors" feel. They found this house and asked the owner to sell. The owner didn't really want to sell, and set the price high enough that they thought no one with any sense would pay the price. The Buyer paid cash. I want to be able to include the sale in the appraisal, but know it doesn't really represent market value. I did a survey of brokers in the area and asked them how many times in their careers that type of situation had occurred, and to a person, they recounted the one time their buyer client had "more money than sense" and did just that. Is there a way to quantify motivation? Am I looking to hard at the forest and can't see the tree?

There is the so-called "in-use value" which is the value of a specific use. It's conceivable that one in a million users has some specific use for a property that no one else has and is willing to pay far more than anyone else. For example, the certain wealthy owner of a golf course hates the fact that a neighboring property has ugly buildings and a trashy yard and he can't or doesn't want to hide the view of it for sundry reasons, e.g. maybe it would just be really great just to expand his property a bit further and take care of things in an optimal way.

So, he offers to buy the property for more than it's worth. Game on. The owner sits back and waits for the price to go up and up. Maybe the certain wealthy golf course owner is famous, so the owner of the trashy yard hopes the media will come out and pay for interviews. Maybe he thinks he will be able to write a book about the evil golf course developer. But then, sadly, the said wealthy golf course owner faces reality and gets a bunch of bulldozers and dump trucks to pile up mounds of dirt to block the view and then plants a couple of rows of trees to boot. Well problem solved, if not optimally.

Moral of the story: In-use value can be transitory and short-lived.

Of course, there are sometimes also, more simply, people with more money than common sense.

 

[Raven59]

$150,000 and $200,000 more than what the market supports

Curious...relative to what? Percentage wise, selling $150-$200k more on a $500,000 property is not the same as $150-$200k more on a $5,000,000 property. I agree with the posters suggestions, but a dollar figure "more than the market supports" needs a reference point. Percentagewise, what are we talking about?

 

[Meandering]

Margaret,

What is the purpose of your report?
Market Value for Lending is a different definition than Market Value for the IRS which does not require open exposure to the market.

Please state the value you are seeking, which satisfies the intended use of the report you are trying to create.

.

 

[J Grant]

When I choose not to use a sale, I keep the reasons succinct. You've explored diligently why you are not going to use it, but the explanation does not have delve into the psyche of the buyer (imo). I might write along lines of , "A sale occurred at ( address ) 4 months ago, on same street as subject with an equivalent view. It sold for 100k over the other similar home sales due to a cash offer from an atypically motivated buyer and was not exposed to the open market. Therefore this sale is not included in the grid. "

I avoid statements like " The sale does not represent market value", or " it sold for over market value"...

 

[Meandering]

When I choose not to use a sale, I keep the reasons succinct. You've explored diligently why you are not going to use it, but the explanation does not have delve into the psyche of the buyer (imo). I might write along lines of , "A sale occurred at ( address ) 4 months ago, on same street as subject with an equivalent view. It sold for 100k over the other similar home sales due to a cash offer from an atypically motivated buyer and was not exposed to the open market. Therefore this sale is not included in the grid. "

I avoid statements like " The sale does not represent market value", or " it sold for over market value"...

Hopefully you have the necessary backup documentation for that benchmark valuation, from which you can create an appraisal report, in compliance with USPAP.

Go with the value definition you are asked to value,
qualify the sales in meeting the value definition.
either they pass, and can be used as comps,
or they don't pass and are market noise,
not representative of the value definition of the appraisal.
Discuss and provide the facts that preclude them from the value definition.

.

 

[J Grant]

Hopefully you have the necessary backup documentation for that benchmark valuation, from which you can create an appraisal report, in compliance with USPAP.

Go with the value definition you are asked to value,
qualify the sales in meeting the value definition.
either they pass, and can be used as comps,
or they don't pass and are market noise,
not representative of the value definition of the appraisal.
Discuss and provide the facts that preclude them from the value definition.

.

Exactly...note my statement avoids the word "value" and only refers to sales and sale prices. Saying a property sold for 100k more than similar homes is a fact. Saying it sold for 100k more than market value is an opinion and offers a MV benchmark ( and thus can be construed as an appraisal of that property )

 

[margaret nelson-quin]

Curious...relative to what? Percentage wise, selling $150-$200k more on a $500,000 property is not the same as $150-$200k more on a $5,000,000 property. I agree with the posters suggestions, but a dollar figure "more than the market supports" needs a reference point. Percentagewise, what are we talking about?

The neighbor property sold for 24 to 28 percent more than the market supports.

 

[margaret nelson-quin]

Hopefully you have the necessary backup documentation for that benchmark valuation, from which you can create an appraisal report, in compliance with USPAP.

Go with the value definition you are asked to value,
qualify the sales in meeting the value definition.
either they pass, and can be used as comps,
or they don't pass and are market noise,
not representative of the value definition of the appraisal.
Discuss and provide the facts that preclude them from the value definition.

.

Thank you for your suggestions. I'm afraid I wrote both, but see the wisdom of avoiding the later.

 

[Mr Rex]

But neither were typically motivated.

I would mention the sale and the circumstances in the report, but not try and use it as support for market value. ESPECIALLY if, as you noted, price paid was higher than the market support. Such sales should not be used to press a value higher when "the market" is not paying similar prices without the enhanced motivations you stated occurred in this transaction.

.

And the buyer is not acting in their own best interest, but the seller is going wee-wee-wee all the way to the bank.