Ask The Appraiser: Can Pending Sales Be Used In An Appraisal?

I was asked a great question yesterday that I thought I would share with you.  Can pending sales be used in an appraisal?  The short answer is “yes”.  Appraisers have three options for comparables.  They include closed sales, active listings, and pending sales.  The appraiser must use a minimum of 3 closed sales in the appraisal report, however if there are more sales that would support the final value estimate then they should also be included.  This might occur when the sales that are available exceed recommended guidelines such as time of sale, distance, or adjustment percentages.Pending sales can be used in appraisals

The use of active listings provides good insight into what other similar homes are priced at.  The best way to look at it is to imagine what other homes a potential buyer might consider if the subject property were not available for sale.  Not all properties that are the subject of an appraisal are “for sale”.  The appraisal may be for a refinance, but the same concept can be used.  The appraiser is estimating the market value of the home if it were to sell on the date of valuation.  In today’s market an active listing will typically set the upper end of the value range, and will most likely be negotiated down from the list price.  Appraisers make sale price to list price ratio adjustments to the list price to reflect this.  The adjustment is estimated based on what other closed homes have sold for compared to what they were  listed at.  There can be some margin of error to this though because many variables go into negotiating a sales price, including buyer/seller motivations.

Pending sales are the last type of comparable that can be used in an appraisal.  If you think about it, this is really the best sale possible.  A closed sale is a record of what happened in the past, an active listing involves a calculated guess at what the list price to sale price ratio is, however the pending sale is one which is current and reflects what is happening in the market at pretty much the same time as the valuation of the subject property.  Not all pending sales are the same however.  A pending sale which has been signed by both parties that agree on the contract amount, that has received a good title policy, and appraises for the contract price or more, is a better pending sale than one that just consists of an offer by an interested buyer.  If you are a Realtor, do you provide the appraiser with current sales information, including pending sales that you are aware of?

If you have any real estate appraisal related questions you can call me at 205.243.9304, email me, or connect with me on facebook.

Comments

  1. Can you use a pending as your listing and as one of your comparable sales, it settled the effective date of the appraisal?

    • I use either an active listing or pending sale as in addition to at least 3 closed sales. If I am understanding you correctly, the pending sale that closes on the effective date of the appraisal would actually be a closed sale, right? If I misunderstood you, please let me know. 🙂

  2. Great article and explanation. While most of my clients request two active listings be included in the appraisal (in addition to 3 or 4 closed sales), most have told me they prefer pending home sales rather than active listings to show what the current market is doing now.

    • Bryan,
      Same here. My clients would rather see the pending sales if they are available. They are definately stronger than regular listings.

  3. Pendings and listings sure are important, especially in a declining market. They help us see what is happening now. I think you made an important distinction about that.

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