Why do appraisers need to analyze the sales history of the property they’re appraising?

Why do appraisers need to analyze the sales history of the property they’re appraising?

During an appraisal assignment this week I was speaking with an agent who was re-selling a home they had first sold two years ago.What property history can tell us Whenever I have the opportunity to meet with an agent during my visit to the property I like to collect as much helpful information as possible. Besides it being a requirement, knowing what has recently occurred with the property you’re appraising can be helpful in developing an opinion of value, so today I would like to discuss why appraisers need to analyze the sales history of the property they’re appraising.

USPAP Requirement

USPAP, which is short for Uniform Standards of Professional Appraisal Practice, make it a requirement for the appraiser to analyze and report the previous 36 month sales and listing history for the subject property that is being appraised, if the value opinion being developed is market value. In addition to sales history we must also analyze “all agreements of sale, options, or listings of the subject property current as of the effective date of the appraisal”.

USPAP establishes certain standards for appraisers to follow, so the reporting requirement at the very least satisfies the need to make sure the reader of the report knows what has occurred with the property being appraised over the last 3 years.

Trail of evidence

I like to describe the role of the appraiser as that similar to a detective. We must study a property and use current sales information as well as historical clues as evidence to provide an opinion of value. The historical clues of course includes information about the property that might include what it recently sold for, the terms of sale (foreclosure, divorce, arms-length transaction, etc.), and what improvements have possibly been made since the last sale.

By looking at what a home recently sold for, considering why it sold for what it did, and factoring in repairs or renovations made to it, we can build a case of evidence to support our final opinion of value. Lets look at how these things might affect the value of a house.

Terms of sale

The terms of sale consider the situation surrounding a sale as well as the mindset of the buyer and seller. An arms-length transaction occurs whenever buyer and seller are equally motivated in the sale with neither being pressured to sell or buy for less than the property is worth. This is the type of transaction that is most useful to an appraiser.

A distress sale situation occurs when either the buyer or the seller are motivated to sell or buy for less than a property is worth. Typical instances of this occurring include a foreclosure sale, short sale, divorce sale, or relocations. During a foreclosure sale the bank wants to liquidate an asset to pay a debt and they usually sell the property for the loan balance, which can be less than market value. A short sale occurs whenever a bank agrees to sell a house for less than the loan balance, which can also reflect a below market value situation.

When a home sells during a divorce it can be motivated by the need to move it quickly, which again can result in a below market price. Below market sales are not the rule in these situations but the motivations of the buyer and seller must be taken into account when comparing what a property sold for compared to other similar homes.

Recent improvements-or lack of

In addition to the terms of sale, taking into consideration whether updates or renovations have been made to a house can help piece together evidence for support of a certain value opinion.

Significant updates or renovations to a home can result in the home having better market appeal and therefore selling for more. Cosmetic improvements such as a painting and repair of deferred maintenance items typically result in less value increases than major renovations made to popular areas of the house like the kitchen or bathrooms.

Cost does not always equal value so what you paid to have your kitchen remodeled will not always be reflected dollar for dollar when you go to sell or when the house is appraised. The extent of renovation will be compared to what is typical and acceptable in the market, so spending $50,000 to have your kitchen modernized will not result in a similar value increase when lesser kitchen remodels are standard for the area.

The lack of improvements made to a home since it last sold can also provide support for a certain opinion of value. I have had situations where a home was purchased, no improvements were made, yet the seller expected it to be worth more (isn’t this always the case?) in a short period of time when the market is not showing any appreciation. During appraisal assignments where appraisers develop value opinions for homes that had recent sales transactions the evidence must add up and A + B must equal C because loan underwriters will scrutinize the report and look for evidence and support for the final opinion of value.

The analysis of the sales history and recent improvements to a property help the appraiser to understand why a home sold for what it did and it can also provide support for the same or different value conclusion in a current appraisal assignment.

Question

Does comparing appraisers to detectives make sense to you? Can you see why it is important for the appraiser to know the sales history of a house they’re appraising and why we must build a case to support our final opinion of value? I’d like to hear your take on the matter so leave a comment below.

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Comments

  1. Tom, this is a very well written and thought provoking article. Our company JLB http://www.jlb.com.au doesn’t provide property value analysis but we do provide commercial and economic advisory services and the principals are actually fundementally the same. The need for detailed information to provide correct evaluation comes from a very thorough due diligence process like you described. Even though we are based here in Adelaide, South Australia, the principals remain the same. Again, I applaud how you have written this and the depth of your sharing. Dan

  2. Ryan’s comment beat me to the punch. The prior sale is great context. I recently appraised a very large luxury home built on the highway. I could not find any luxury homes built next to the highway to measure the effect on value, but I did have the prior sale of the subject. I was able to pair the prior sale of the subject with other sales from that time (not on highways), graph the prior sale of the subject to see how it compared to the other sales of that time, and make sure that my current value was consistent in context with the prior sale. Sometimes the prior sale of the subject is your best comparable (although I think it is silly to place it in a grid).

    • Thanks for sharing your experience Gary. I think other appraisers have come up against similar appraisal challenges as you describe. It’s nice to see how your peers handle a similar situation.

  3. Erika Cantwell says:

    Great post Tom!

  4. Nice job, Tom. A previous sale sure can help tell the story of value. I appraised a property recently, and the previous sale really helped provide a context for how the market saw this very funky property. After no upgrades through the years, the current listing was priced at the top of the market, yet this property sold toward the very bottom of the neighborhood market when it sold previously (not a distressed sale). Thus sometimes a previous sale (even outside of three years) can be telling for how the market perceives the property. We need to give the most weight to current sales and listings, but a previous sale sure can help paint a context in some cases.

    • Great point Ryan. I am doing a unique property now that I will be seriously studying its sale history to see how it was perceived the last time it sold.

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