If something does not meet the definition of (fair) market value, aka does not meet the definition you are appraising to, then what steps do you need to take before using it in the report?
It is not the case os "something" meeting the definition of market value or fair market value ( not sure why fair market value is being said?) In any case, re for comps, perhaps what you meant to say, is they do not meet the standard of arms length transactions, so I won't use them, or I will adjust for a conditions of sale in the comps.
You keep saying an appraiser has to use comps that meet the definition of market value, and for a while I even went along with it as its sounds correct.
But (as a few others as well have reminded me) WE ARE SUPPOSED TO FIND MARKET VALUE FOR THE SUBJECT (per it'd definiition, an arms length transaction, not subjec to undue stimulus, not subject to special financing etc, the defintion applies to the SOW for the subject)
The definiiont of MV is a condition for the subject, not a criteria by which to select, or reject comps.
Re, our duty is to estabish an opinon of value of the most probable price on the effective date of the appraisal for the subject, as if the subject were for sale on effective date, (with the sale of subject subject to the terms/definition of market value )
Re, once we establish the terms of sale as defined by definition of market value for the subject, then we choose our comps, per the guidelines for choosing comps. At that point, the appraiser might exclude some comps for not meeting the standard of being arms length transactions, or not being similar enough to the subject in physical characertistics, for example.
When the appraiser has their three comps, THEN, if terms of sale of a comp differs from the theoretical market value terms of sale of subject, then the appraiser can make adjustments. For example, sale one had special financing, seller paid closing costs of $5000. The subject, under the SOW of market value, is not assumed to have special financing.
Re, appraiser finds a good comp, same sf and condition that sold a month ago, but on research finds it had some seller paid closing costs of $5000. This might meet the defintion of special financing. The appraiser is not supposed to reject the comp because since it has special financing, it does not meet the defintion of market value! The appraiser is supposed to consider the comp, and if they want to use it, then adjust the special financing, the 5 k in seller paid costs, up to the theoretical MV sale condition of subject, which does specifiy not subject to special financing.
In this way, the appraiser then can adjust the closing costs of $5000 for the comp to the subject, the subject MV terms assuming no special financing.
For example, suppose an appraiser, on the very same day, is asked to appraise three neighboring homes ( for this purpose, assume same size and condition). 7 Cherry Lane, 9 Cherry Lane, and 10 Cherry Lane. The appraiser goes on the same day and inspects one after the other.
RE, 7 Cherry Lane is owned by a lender as an REO asset. Cherry Lane is owned by a private party. Both owners are in fact under undue stimulus, 7 Cherry Lane because the bank needs to sell, 9 Cherry Lane because owner is behind on mortage and about to lose the house. 7 Cherry Lane, nobody is there on inspection date but appraiser knows it is an REO owned house. 9 Cherry Lane, the nervous owner follows appraiser around talking about how he has to sell or else he is out on the street.
10 Cherry Lane, the owner doesn't care if they ever sell it, and tells appraiser that if she doest' get an inflated high price, she will never sell it. She might not represent atyical owner motivation. BUT IT DOESN'T MATTER WHAT ANY OF THESE THREE SELLERS WANT OR WHAT PRESSURE THEY ARE UNDER.
Because the SOW "erases," for assignment purposes, any individual owner motivation, and imposes the same assignment conditton for all three homes, find most the probable price, the probable price developed per a definition of market value that applies to theoretical terms of sale FOR THE SBUJECT..
Thus, the appraiser approaches each assignment with same SOW, and the comps might even be the same in this example on all three reports ( only difference is the addition of listings on the REO addendum for 7 Cherry Lane).
Because, whether the owner is a bank or a guy losing his house under dureess or a spoiled owner thinking her house is worth double of everyone elses', the appraiser is appraising according to teh SOW, not the individual or lender's particular reasons for selling.
We have to keep in mind that the SOW, find the most probable price according to definition of market value, refers to the SUBJECT, the house or condo being appraised.
Next, the guidelines for comps are similar physical characterisitcs, market area, arms length transactions etc.
If you want to say, I don't want to use this REO or estate sale or builder sale because in my opinion it does not meet the defintion of arms length transaction, for example, that would be correct, but to say you do not want to use an REO or estate sale or builder sale because it does not represent market value, or fair market value would be contrary to the puropose of the apprasial ( which is to find market value for the subject, not to pick comps according to what the appraiser believes are market value sales, even if the sales meet the criteria of market value, that is not why they are supposed to be selected, or eliminated)
The terms can be confusing for sure though!
