Theoretical Question

[Gen Lawson]

Say that subject property sold two years ago for X and last year for X minus 12 percent. Subject is now being appraised for a refi, there have been no changes to the subject in the last two years, and the market trend for the subject area is for moderate increases in value.

What effect, if any, would those two prior sales have on your valuation process?

On one hand, it sold fairly recently for X. But on the other hand, it also sold recently for significantly less than X.

I'm a newbie, your thoughts and comments will help me be a better appraiser and are much appreciated.

 

[David S. Roberson]

Prior sales prices, just like a current sales price, should not be considered in the valuation process. Put the prior sales out of your mind, and appraise the property. After you have developed a value opinion, you can then analyze what the prior sales prices tell you about your market. Prior sales can indicate trends in your market and provide additional support for your value conclusion, but should not effect that conclusion.

 

[Non Sequitur]

I agree with David. I would only add one thing. If possible try to interview the parties to the last sale. You may find out that x-12%=a forced sale. Either way you have to comment on the subjects 3yr sale history.

 

[Mike Garrett RAA]

Was going to make the same point...what was the reason for the second sale? Sounds fishy to me if your market is experiencing moderate value increases why would it have sold for less?

 

[Blue1]

Find out why the prior sale sold for less than the current market trend the explain in the body of your report. Some examples may be a distressed sale, foreclosure, special financing, etc.

 

[Austin]

Sales and re-sales within two years is always fishy. I always pay attention to past and pending sales of any kind for good reasons, those reasons are that the prior sales raise and answer a lot of questions. It might tell you something going on in the neighborhood. It might answer a question about some perceived factor about the property like functional obsolescence or location that is difficult or impossible to measure. It might reveal some hidden feature in the property. If I hired some one to do an appraisal for me and I saw that it was sold and re-sold within a two year period I would want to know why just on general principles. I certainly would consider two prior sales within a two-year period because that is a wealth of information. How long was it on the market, how did the sale price compare with the sale prices of comparable sales sold during the same period, etc.
The last run in I had with a client had to with the sale history of the property. This woman is one of those people that took the course on how to get rich in real estate by coning the appraiser. You know the routine, buy a property for $50,000, get it appraised for $100,000, get a 95% loan and use the equity to buy more properties under the same scenario. Happens all the time, right? Here is the sale history of this house approximately: 1988 sold $72,000; 1991 sold $82,000; 1995 sold $89,000; 1998 sold $99,500; 2001 sold $72,000. The woman I was appraising it for was the purchaser at $72,000. I know this area and I know what happened. This is what eventually happens when appraisers play the make the number game. Prices ratchet up, market drops, bottom falls out. Naturally this idiot woman reminded me that the house sold for $99,500 three years ago. I then reminded her that it had been on the market for six months and she was the high bidder at $72,000. During the property inspection her husband, who is a property inspector, happened to mention that if his kids left their bicycle on the porch over night that there was a 100% probability it would not be there in the morning. That explained the prior sale history. Principle of change at work.

 

[Serge Paquette]

All arm's length sales are market activity. It could be perilous to ignore your subject sale. Do not just gloss over subject sales. Analyze them and at least briefly summarize your analysis in the report.

This is in USPAP. Three year sales history is required. Many have been disciplined by leaving out listing, contract or sales history. You MUST analyze them. What USPAP means when they say analyze, I don't know.

A recent arm's length sale of your subject property may be the best value indicator you can find, especially if it's a unique property for which there are few comps.

 

[Phil Rice]

Dave says:

Prior sales prices, just like a current sales price, should not be considered in the valuation process.

I disagree. You should consider prior sales price and current sales price.

Your post says that the property has not changed. Are you sure? If so, then why did the property go down in value? Do some research, and either explain why, or explain what research you did in an effort to find out.

 

[David S. Roberson]

Yes, a three year sales history analysis is required to make the report USPAP compliant. But the question is, "what effect should the subject's prior sales have on the VALUATION PROCESS?"

In a market with good comparable sales data, what consideration are you giving to the Subject's prior sales? Are you using this as an indicator of where you should be with the value?

If the property has gone up or down in value, the market will tell you that, not the Subject's sales history.

 

[Phil Rice]

Dave says

the market will tell you that, not the Subject's sales history

I disagree. The subject's sales history is a very important part of the market. Pay close attention, and be guided by the subject's sales history in the valuation process. I am not suggesting that you ignore the rest of the market.