Question Regarding Page 1 Of URAR Contract Section. Please Help!

[residentialguy]

The subject contract is market data that you must consider; and if the sale is one of typical motivations of a knowledgeable buyer/seller and nothing else (such as concessions, financing, distress etc) is affecting the price, then the subject contract is probably a good indicator of market value. Please notice that I did NOT say to target the sale price. That we must take great care in NOT doing. You need to analyse the subject sale and verify with the buyer/seller and/or agents to see what conditions are driving that sale. Same is true with the comps you use. Analyse, contact the agents to verify the conditions that drove that price, and report.

Appraisers violate USPAP by ignoring significant and relevant market data of the subject contract which can be good indicators of value; this can result in a substantial error of commission/omission that significantly affects the appraisal. You need to consider ALL relevant market data that reflects the actions typical buyers in a particular market, that includes the subject. The subject's contract sale price can be a good indicator of a property’s market value, and it may be logical and reasonable for the appraiser to conclude that they are the same....but as I said above, it just can't be the target, as that would be bias, misleading and advocate of a party interest.

 

[Terrel L. Shields]

The price the buyers paid is the actual closed price for later use as a comp, not what the appraiser for the purchase transaction opined.

But if you were "right" you would have predicted the transaction would consummate at the contract price. You opined something less. So if you are true to your own opinion, you cannot use the closed sale price at the true "market value" (sale price) - rather you have to adjust it DOWN to your opinion of value, otherwise, you are proving yourself to be an incompetent appraiser. You can't have it both ways. You cannot opine something isn't worth what the contract was for only to turn around and use that very sale as a comp at the contract price.

 

[Kitarkus]

Again, absolutely false

Please elaborate.

My reports are based upon facts....typically and most commonly in the form of settled sales. Contracts, listings (both active and pending sales) are wonderful indicators which aid in formulation of an opinion of market trends...but no more. Most of my work is utilized for lending purposes. I've yet to meet a lender who would accept my reliance upon a contract sale price as an indicator of market value. Appraisal analyses are based upon historical facts and not speculation...a fact that many real estate agents detest.

 

[residentialguy]

My reports are based upon facts....typically and most commonly in the form of settled sales. Contracts, listings (both active and pending sales) are wonderful indicators which aid in formulation of an opinion of market trends...but no more.

Again this is false. Indicators are facts. Contracts are facts. They are legal agreements to sell, not some hope and dream. It is the market speaking...the meeting of the minds between buyer and seller.

Notice what FNMA requires of lenders
B4-1.1-05, Disclosure of Information to Appraisers
Contract Changes After the Appraisal is Completed Overview Any and all information about the subject property that the lender is aware of must be disclosed to the appraiser. The appraiser must determine if the information could affect either the marketability of the property or the opinion of the market value of the property.
Why would they state that????

Did you ever notice that the sale price of the subject is on the SCA? Never wonder why?

Are we also to "not consider" the subject's asking rents or pending leases in an Income Approach or "not consider" construction estimates from the property owner to address the subject's physical attributes?

USPAP FAQ addressed pending sales saying that they can be a good indicator of value and if the pending sale is of the subject property, the appraiser is required by Standards Rule 1-5(a) of USPAP to consider the pending sale of the subject property in the development of a real property appraisal. Standards Rule 1-1(b ) requires that an appraiser ". . . not commit a substantial error of omission or commission that significantly affects an appraisal . . .".

Not considering a pending sale of a property highly similar to the subject property could constitute an omission that would significantly affect the appraisal. USPAP requires appraisers to be complete in their analysis and convey that analysis in a way that is not misleading.

USPAP FAQ-18
VALUE OPINIONS THAT EQUAL CONTRACT PRICES
Question: I know appraisers who consistently conclude that the market value of any property they appraise is equal to the contract sales price. In doing so, they facilitate sales and financing of sales, which is apparently what keeps their clients happy. Is this a violation of USPAP?

Response: A contract sale price can be a good indicator of a property’s market value, and it may be logical and reasonable for the appraiser to conclude that they are the same. However, this is not always the case. In some situations, a contract price will exceed what is typical in a market. In other situations, a contract price will be less than what is typical. A contract sale price, while a significant piece of market data, must not become a target in an appraisal assignment. Rather, competent analysis of relevant and credible market data must be the appraiser’s basis for a market value conclusion.

It's saying that we must stay the course of competent analysis of relevant and credible market data rather then serving as a target.. They've stated that the subject is relevant and credible market data...the subject's contract sale price "can be a good indicator of a property’s market value", and it may be logical and reasonable for the appraiser to conclude that they are the same"...it's "a significant piece of market data"! You can't get more relevant and credible than that.

 

[Kitarkus]

Again, absolutely false

Please elaborate.

My reports are based upon facts....typically and most commonly in the form of settled sales. Contracts, listings (both active and pending sales) are wonderful indicators which aid in formulation of an opinion of market trends...but no more. Most of my work is utilized for lending purposes. I've yet to meet a lender who would accept my reliance upon a contract sale price as an indicator of market value. Appraisal analyses are based upon historical facts and not speculation...a fact that many real estate agents detest.

I don't know you... If you have something to say...please back it up... I like to learn from others in this industry. Your once sentence inflammatory posts aren't particularly helpful or worthwhile. If I'm wrong sir...please teach me the error of my ways.

The subject contract is market data that you must consider; and if the sale is one of typical motivations of a knowledgeable buyer/seller and nothing else (such as concessions, financing, distress etc) is affecting the price, then the subject contract is probably a good indicator of market value. Please notice that I did NOT say to target the sale price. That we must take great care in NOT doing. You need to analyse the subject sale and verify with the buyer/seller and/or agents to see what conditions are driving that sale. Same is true with the comps you use. Analyse, contact the agents to verify the conditions that drove that price, and report.

Appraisers violate USPAP by ignoring significant and relevant market data of the subject contract which can be good indicators of value; this can result in a substantial error of commission/omission that significantly affects the appraisal. You need to consider ALL relevant market data that reflects the actions typical buyers in a particular market, that includes the subject. The subject's contract sale price can be a good indicator of a property’s market value, and it may be logical and reasonable for the appraiser to conclude that they are the same....but as I said above, it just can't be the target, as that would be bias, misleading and advocate of a party interest.

Again this is false. Indicators are facts. Contracts are facts. They are legal agreements to sell...meeting of the minds between buyer and seller. Notice what FNMA requires of lenders
B4-1.1-05, Disclosure of Information to Appraisers
Contract Changes After the Appraisal is Completed Overview Any and all information about the subject property that the lender is aware of must be disclosed to the appraiser. The appraiser must determine if the information could affect either the marketability of the property or the opinion of the market value of the property.

Did you ever notice that the sale price of the subject is on the SCA? Never wonder why?

Are we also to "not consider" the subject's asking rents or pending leases in an Income Approach or "not consider" construction estimates from the property owner to address the subject's physical attributes?

USPAP FAQ addressed pending sales saying that they can be a good indicator of value and if the pending sale is of the subject property, the appraiser is required by Standards Rule 1-5(a) of USPAP to consider the pending sale of the subject property in the development of a real property appraisal. Standards Rule 1-1(b ) requires that an appraiser ". . . not commit a substantial error of omission or commission that significantly affects an appraisal . . .".

Not considering a pending sale of a property highly similar to the subject property could constitute an omission that would significantly affect the appraisal. USPAP requires appraisers to be complete in their analysis and convey that analysis in a way that is not misleading.

USPAP FAQ-18
VALUE OPINIONS THAT EQUAL CONTRACT PRICES
Question: I know appraisers who consistently conclude that the market value of any property they appraise is equal to the contract sales price. In doing so, they facilitate sales and financing of sales, which is apparently what keeps their clients happy. Is this a violation of USPAP?

Response: A contract sale price can be a good indicator of a property’s market value, and it may be logical and reasonable for the appraiser to conclude that they are the same. However, this is not always the case. In some situations, a contract price will exceed what is typical in a market. In other situations, a contract price will be less than what is typical. A contract sale price, while a significant piece of market data, must not become a target in an appraisal assignment. Rather, competent analysis of relevant and credible market data must be the appraiser’s basis for a market value conclusion.

It's saying that we must stay the course of competent analysis of relevant and credible market data rather then serving as a target.. They've stated that the subject is relevant and credible market data. The said that the subject's contract sale price "can be a good indicator of a property’s market value", and it may be logical and reasonable for the appraiser to conclude that they are the same"...it's "a significant piece of market data"! You can't get more relevant and credible than that.

Good Stuff...and thanks.

Perhaps some of my mindset comes from being slapped by countless UW's for not bracketing both (1) adjusted sales prices and (2) unadjusted sales prices. UW's want a nice, clean, perfect square peg to slide effortlessly into the lubricated square hole. You/I know that this is not always possible.

I posted this the other day on a different thread and would LOVE to hear your response:

Scenario example: Let's say you have a typical Purchase Assignment in a suburban area which exhibits a moderate degree of continuity. In this area you have estimated that you have superb comparable sales when compared to your Subject property...these comps settled in the 3-10 month period...none sooner. Your Subject is selling at $1,000 higher than the highest relevant sale in this market area and you are tasked to appraise for the purchase transaction. Your highest comparable sale price is $1K less than your Subject....and they are virtually identical....except your Subject is a non walkout finished basement and your comparable #1 is a walkout finished basement. The Subject and comparable properties are superior houses in this market area and they are reflective of settled sales at the very top of the range of settled sales in this market area during the prior year.

At face value...it would seem...your Subject will adjust to a few thousand dollars +/- LESS than your #1 comp....and thus a few thousand +/- less than the Purchase Price per the Contract. At face value...an upward time adjustment could be difficult to substantiate given the lack of relevant sales during the 0-3 month period....and if an upward time adjustment could be substantiated....your Subject would be a 'market making' high sale price. Your unadjusted sales prices do not bracket the purchase price. Your adjusted sales bring the value down a few thousand more. There is no inventory...and no sales in the last 90 days.

The appraisal could be a deal killer in this scenario....by a mere few thousand dollars. What would you do?

 

[Terrel L. Shields]

I've yet to meet a lender who would accept my reliance upon a contract sale price as an indicator of market value.

I don't think that is an issue of "relying" solely upon the contract. It is a matter of using it as information just like closed sales. Closed sales are just that and nothing more. That closed sale may not be any precise measure of the true "Market Value" of the property. No one can really determine that "true" value. Otherwise, then the agreed price between buyer and seller is the true value...and we've already crossed that bridge. But when your indicators are coming close to the contract price, then ask yourself. Is this property going to close at that contract price? And if your value is close, it will. So if it does, and you can see that it is likely to do so, isn't the "most probable" price going to be that contract price? Of course it is. JG and others try to put MV in a theoretical deus ex machina to lower down into place divorced from its surroundings. But a sales price is not necessary a "market value" sale. And the contract is not necessarily "wrong" by its very nature, rather it is a meeting of the minds and eventually may prove to be supported by sales, cost, or income factors, and they in turn, are supported by it. It is when the two diverge that we need to explain what happened.

Say that your indicators are 10% above the contract price. You are wrong about the closed price (or contract price either), but perhaps right about the "market value". If so, you need to explain why you think it is worth more than the contract price. Further, you should refrain from using that sale as a "market value" sale in the future just because it closed as some lower price. You must adjust upwards or dismiss as a "below market" sale.

We work with too little data to be statistically meaningful at times, and even when we have plenty of supporting data, that data is not uniform. Real estate is not readily fungible. It is not an efficient market like stocks or gold. It is an inefficient market. There is a an element of behavior economics where prices are influenced by human interaction. We are not mathematicians. So we are beholden to people's interactions, and by necessity need to understand the motivations of buyers and sellers in the market and a contract is a piece of that puzzle. If there is any serious weakness that is almost uniform between all appraisers, it is a lack of true understanding of these motivations and what impact it has on "market value".

 

[Kitarkus]

I don't think that is an issue of "relying" solely upon the contract. It is a matter of using it as information just like closed sales. Closed sales are just that and nothing more. That closed sale may not be any precise measure of the true "Market Value" of the property. No one can really determine that "true" value. Otherwise, then the agreed price between buyer and seller is the true value...and we've already crossed that bridge. But when your indicators are coming close to the contract price, then ask yourself. Is this property going to close at that contract price? And if your value is close, it will. So if it does, and you can see that it is likely to do so, isn't the "most probable" price going to be that contract price? Of course it is. JG and others try to put MV in a theoretical deus ex machina to lower down into place divorced from its surroundings. But a sales price is not necessary a "market value" sale. And the contract is not necessarily "wrong" by its very nature, rather it is a meeting of the minds and eventually may prove to be supported by sales, cost, or income factors, and they in turn, are supported by it. It is when the two diverge that we need to explain what happened.

Say that your indicators are 10% above the contract price. You are wrong about the closed price (or contract price either), but perhaps right about the "market value". If so, you need to explain why you think it is worth more than the contract price. Further, you should refrain from using that sale as a "market value" sale in the future just because it closed as some lower price. You must adjust upwards or dismiss as a "below market" sale.

We work with too little data to be statistically meaningful at times, and even when we have plenty of supporting data, that data is not uniform. Real estate is not readily fungible. It is not an efficient market like stocks or gold. It is an inefficient market. There is a an element of behavior economics where prices are influenced by human interaction. We are not mathematicians. So we are beholden to people's interactions, and by necessity need to understand the motivations of buyers and sellers in the market and a contract is a piece of that puzzle. If there is any serious weakness that is almost uniform between all appraisers, it is a lack of true understanding of these motivations and what impact it has on "market value".

I don't disagree with any of this. Perhaps we are missing each other a bit. I am referring to appraisal scenarios for purchase transactions in an upwardly moving market (seemingly...based solely upon the Subject Contract). A market where there is limited inventory and limited truly recent (0-90 day) sales. A market where your ABSOLUTE BEST and most relevant comps do not substantiate the Contract Purchase Price. Is the Contract price significant? Is it significant in any sense of the word which can assist the Appraiser to appraise the Subject property higher than any prior sales within the market area?

The Contract price is certainly meaningful. Oftentimes the data indicates a likelihood that...based on undersupply of listing inventory....the contract price makes sense. There weren't BETTER options for that buyer at that specific point in time. The property at the price looks GOOD to them because they have no other options. The reported settled sales from the prior year, however, do not substantiate the Contract Purchase Price. We have serious seasonal fluctuations in my market.....just because there are no better options NOW....doesn't mean that a plethora of options will not be available in 2 months. IMO the required use of historical data (settled sales) for the SCA provides a necessary reliance upon relevant, reliable, and verifiable data...and keeps appraisers from tendencies to speculate.

The Contract data (price) must be analyzed to determine why this Buyer is willing to pay something that nobody has paid prior...yes indeed. Does this agreed upon purchase price change the data with which an opinion of value can be estimated? Tell me how?

 

[residentialguy]

The appraisal could be a deal killer in this scenario....by a mere few thousand dollars. What would you do?

If the trends are increasing and you have the subject contract (that you verified all conditions of sale) falling within a reasonable range of that trend, you absolutely have support for a higher value. I realize that reviewers like round pegs in round holes, but life isn't always that cut and dry. Lack of sales does not mean lack of value.

 

[Terrel L. Shields]

Lack of sales does not mean lack of value.

Likewise, we have to be careful that we don't mistake random market noise for a "trend". If I have only a few sales to support a time adjustment, or any adjustment for that matter, I have to at least accept that I am walking on thin ice. "Fooled by Randomness" (N. N. Taleb, author of the Black Swan) is a book every appraiser should read...

 

[residentialguy]

Likewise, we have to be careful that we don't mistake random market noise for a "trend". If I have only a few sales to support a time adjustment, or any adjustment for that matter, I have to at least accept that I am walking on thin ice. "Fooled by Randomness" (N. N. Taleb, author of the Black Swan) is a book every appraiser should read...

Agree 100%. This is now complex and you better have all your i's dotted and t's crossed....and of course, your fee raised.