Using subject as comparable

[Don Jones]

I would appreciate opinions on the following. Say we have a property, in this case farmland, that is under contract for sale. This property is the subject of an appraisal. What is your opinion about using the subject of an appraisal as a comparable sale in an appraisal of the subject that is s under contract for sale?

My personal thinking is that doing this does not make sense. The subject of the appraisal should be compared to suitable comparable sales that reflect market value. It is possible that the subject’s current sale price could be higher, or lower, than a reasonable market valve based on other sales. The appraisal is a test of the property being appraised as it relates to market value based on arm’s length sales of similar properties. Using the sale against itself does not compare it to the historical market data.

One argument for doing this that I have heard is that if the appraiser was doing another appraisal where this sale (used against itself) was in the same area then this sale would be used as a comparable. Well, maybe it would and maybe it would not. It would depend on whether, or not, the sale price represented reasonable market value.

I have also heard it said that, “What better comparable than the subject itself.” This goes against the definition of the meaning of comparison. To compare one item to another requires at least two of the items. One is the subject and the other is used to make comparison. When the subject is used against itself there is no comparison being made. The very definition of “comparison” is negated. This makes absolutely no sense to me. With this kind of logic why even do an appraisal. Just say the current sale price is market value and be done with it.

 

[CGinMN]

With this kind of logic why even do an appraisal. Just say the current sale price is market value and be done with it.

Nailed it.

 

[Russ Kitzberger]

It serves to analyze the current agreement to sale and helps to reconcile sales comparison as well as quantify the terms of the sale to the defined market value.

It also serves, in many jurisdictions, to meet the standard of case law to consider it as an indication of value and explain any difference to MV, FMV, Just Compensation, or other defined issue that is part of the project.

 

[Russ Kitzberger]

Say we have a property, in this case farmland, that is under contract for sale. This property is the subject of an appraisal.

The subject of the appraisal is the fee simple interest?

Is the land leased, if so then the conveyed interest is leased fee, is there an adjustment needed for that?

Has it been planted? Does the purchaser need to wait to utilize the land until after the ag is harvested?

 

[Michael P Jacobs MAI]

I would appreciate opinions on the following. Say we have a property, in this case farmland, that is under contract for sale. This property is the subject of an appraisal. What is your opinion about using the subject of an appraisal as a comparable sale in an appraisal of the subject that is s under contract for sale?

It is already in the report when you analyze the current contract, but I always reference it before concluding - in fact it's in my table of conclusions. I think including it as a comparable sale is admitting that you don't have anything all that good and are just trying to fill your grid.

I could see using a prior sale in the grid, however, especially if the conditions of sale were relevant. If it was a market sale, and you have nothing better, it's a good idea to illustrate the current value by making a market conditions adjustment and, if relevant, conditions of sale as well.

 

[TerryRohrer]

Your client knows what the contract price is. They want your opinion of the market value of the subject, and an explanation of why that might be different from the contract price. Your exactly right...there is no point in hiring an appraiser to tell you what the contract price is, and using it as a "comparable" to essentially appraise itself simply lacks any credibility. I have seen it done, and frankly, that was the best aspect of the report...the rest really sucked! Now, if it had sold, say, a year ago, then you could argue it could be included. But, there, to, you have to analyze and report it and explain it in comparison to your opinion of current value so why waste the space? For some, this is a simple means of filling up pages to make it look like they did something, and, look, no adjustments required. But it can still be just one sale and that is not sufficient to conclude value.

 

[TerryRohrer]

It serves to analyze the current agreement to sale and helps to reconcile sales comparison as well as quantify the terms of the sale to the defined market value.

It also serves, in many jurisdictions, to meet the standard of case law to consider it as an indication of value and explain any difference to MV, FMV, Just Compensation, or other defined issue that is part of the project.

Can you cite an instance where case law requires an appraiser to consider the pending sale of a property as an indication of its market value?

 

[George Hatch]

Appraisers are required to analyze the subject's sales history. When there's a contract, I've included a paragraph at the end of the SC analyses commenting on the contract price and stating that I did include consideration of that contract price in my analysis just the same as any of the other sales data. If/when the comps support that contract price I say it that way, and if/when the comps don't support the contract price I say it that way instead.

 

[Don Jones]

Appraisers are required to analyze the subject's sales history. When there's a contract, I've included a paragraph at the end of the SC analyses commenting on the contract price and stating that I did include consideration of that contract price in my analysis just the same as any of the other sales data. If/when the comps support that contract price I say it that way, and if/when the comps don't support the contract price I say it that way instead.

Right. I always analyze the contract for sale and explain the contract sale price and its relationship to the opinion of value developed in the appraisal. This is a separate issue from actually using the subject property against itself in the adjustment grid. I think Roher above missed the point of my question.

 

[Russ Kitzberger]

Can you cite an instance where case law requires an appraiser to consider the pending sale of a property as an indication of its market value?

Sorry, I don't have one handy, If the subject is under contract or recently transferred, that is going to be strong evidence of value unless it is shown to be not an indication by an expert.

If an expert didn't reconcile and explain the relationship to real estate interest that is the subject and how that relates to the market value of the assignment, it would cast doubt on the findings. There are other ways to do this without using it in the sales comparison grid, however, that is the easiest for many intended users to follow.