S;LP Ratio

[CANative]

We don't need to make things so complicated or wring our hands over "getting it wrong." It's an opinion and every know it's an elusive moving target.

Know your market, keep track of things, consider differences for individual property types and differences from market to sub-market. Look for cumulative days on market and don't get fooled by Realtors who list and re-list properties in such a manner that the DOM clock keeps resetting. Make a habit of putting the days on market in the actual sales grid on every report you do. Be thoughtful of the active, contingent and pending sales you select for presentation. By that I don't mean tweek it so it looks good but don't grid listings that have been on the market for a year because the seller/agent decided to list it for double what it's worth (if it's real similar to the subject and nearby, I'll describe it in a short paragraph under my sales comparison comments under the heading "Other market activity not presented."). Don't try to force consistent adjustments. If there is an active listing which is advertised as a short sale, has been on the market for a couple of days or so and the list price "seems low" and you have found other short sales which got pounced on immediately and sold for the list price or more, then maybe an adjustment should not be made.

Etc, etc, etc.

5% to 10% is probably a reasonable adjustment that would be hard for anyone to argue with and almost certainly could not be proven incorrect enough to be considered a development error.

 

[ZZGAMAZZ]

IMO an active listing (or two depending on the facts) with extraordinary number of days-on-market can support the SCA because, e.g., "comparable 9 with more than 8 months exposure reflects a list price above market."

IMo a quantitative market analysis, e.g., l/s price ratio, with any credibility would need to account for differences in the ratio relative to the length of market exposure, and ditto for the typical %age of concessions.

 

[EVAUSA]

Why would someone ever make a LP/SP adjustment? All this ratio tells you is how competitively the listings analyzed were priced. Just because "On Average" properties close escrow x% below the list price, doesn't mean all listings are all overpriced by x%. Some of the listings may be priced competitively, maybe only overpriced by 1%, while another listing is overpriced by 20%. Adjustments against the listings for buyer negotiation should be supported by other listings and closed sales, hopefully supported on the sales grid and defined in the Sales Comparison comments. I almost never apply the same % against each listing. "Listings may have varying applied adjustments for buyer negotiations..."

 

[ZZGAMAZZ]

After totally debunking the application of this ratio, I just encountered the following scenario:

The subject is a residential duplex with much lower than avg rental income because of rent control and long term tenants.

Rental income for the sold comparables is speculative either because income data isn't available, or because most units were partially owner-occupied or vacant.

Current rental income data for all of the active listing comps included in the rental income approach is readily available.

It appears possible that the following forumula might result in the most accurate GRM: (curent list prices of the active listings X a factor reflecting list-sales price ratio of multi's / actual current rents).

Comments please.

 

[EVAUSA]

After totally debunking the application of this ratio, I just encountered the following scenario:

The subject is a residential duplex with much lower than avg rental income because of rent control and long term tenants.

Rental income for the sold comparables is speculative either because income data isn't available, or because most units were partially owner-occupied or vacant.

Current rental income data for all of the active listing comps included in the rental income approach is readily available.

It appears possible that the following formula might result in the most accurate GRM: (current list prices of the active listings X a factor reflecting list-sales price ratio of multi's / actual current rents).

Comments please.

When there is a lack of rental data, I use almost the same formula, except I dont use LP/SP ratio. After I've made all my adjustments, I make an adjustment for Buyer Negotiation. Lets say it's listed at $425,000 and it appears to be overpriced by about $25,000, I use $400,000 for the ratio. But, WHAT IF the other listing is priced at $475,000, and it's identical to the first listing, then I adjust it down $75,000, still using $400,000. That is why the same factor cant be applied to all listings, unless they all just happen to be overpriced by the same %.

 

[CURT VAN HOOSER]

Never mind!

 

[CURT VAN HOOSER]

OK you have closed sales with no rental data and you have listings with plenty of rental data. I would think you would just use the listing rental data to establish market rent and apply that to the closed sales to determine GRM.

 

[CANative]

Eva... I don't think it's a good idea to make an adjustment of $xx,zzz based on the "appearance" that it's overpriced by that much. It's just not supportable. If you track SP/LP ratios regularly you can see patterns and trends and then a percentage adjustment could be made. It's supportable because the data analyzed is factual (it's in MLS and will always be archived there in case you have to defend it years later... however remote that possibility is).

 

[EVAUSA]

Eva... I don't think it's a good idea to make an adjustment of $xx,zzz based on the "appearance" that it's overpriced by that much. It's just not supportable. If you track SP/LP ratios regularly you can see patterns and trends and then a percentage adjustment could be made. It's supportable because the data analyzed is factual (it's in MLS and will always be archived there in case you have to defend it years later... however remote that possibility is).

Greg,
Using a listing to derive the GRM is highly subjective no matter how you look at it, but sometimes we do what we have to when there is a lack of data. I dont use the lp/sp ratio because the same can't be applied to all listings, listings are not all overpriced by the same %. I do agree with you about using factual data. I could expand my commentary to include the ratio in the following manner, "The LP/SP ratio varies in the market area from 2% - 20%, depending on how competitively the listing was price. Predominantly, listings have sold 5% below their list price. listings utilized in this report have varying applied adjustments against the list price for Buyer Negotiation. Listing #4 was adjusted downward 2% from it's list price, appearing to be priced competitively. Listings #5 and #6 were adjusted downward 15%, both appearing to be priced above what the market will bear." What do you think?

 

[Mike Garrett RAA]

Sp/Lp ratio is a useful tool when including listings. Divide a sold price by the list price and you can determine the amount a buyer would typically discount a listing. Example Listed for $200,000 sold for $190,000 the Sp/Lp ratio would be 95%. An appraiser should then adjust the list price by 5% in the grid to reflect the present market. It is just another tool we use as appraisers.

You can determine this several ways. Do a manual adjustment on all of the sales in your marketing area or use MLS general stats and divide the average sales price by the average list price which is what I prefer to do. IN MY MARKET is has been from 92% to 97% on average. Quite often, new construction sells for more than the list price because of added on options.

The Department of Veterans Affairs requires an appraiser to include Sp/Lp ratio, Average days on market (DOM) and number of properties used in the analysis on each appraisal. We must include a statement that we considered relevant listings in the performance of the appraisal and if a trend is indicated we need to include listings and grid them so that we can make an appropriate time adjustment.

Ever wonder why so many appraisers are reluctant to use other than "Stable" for market condition?