Why agents should include bad sales as well as the good sales

Are you giving bad sales to the appraiser?

bad sales

I’ve written in the past about how it is helpful for agents to provide a home sellers packet to the appraiser. This packet can include numerous items but the thing I want to discuss today is the sales (good and bad sales) that they used during their CMA to arrive at their list price. After reading I’d like to hear your take on the matter so please leave a comment below.

In order to come up with a realistic list price, it’s important to collect data on recent sales and active listings in the area. For those that are not familiar with the process (in case there are some non-agents reading this) this is known as a Comparative Market Analysis, or CMA.

A CMA is kind of like a stripped down appraisal, and more specifically only the sales comparison part of the appraisal. I say stripped down because the agent typically does not go into as much analysis with the sales, such as making dollar adjustments for physical differences between the subject property and comps.

The best method for choosing comps is to bracket the physical characteristics of the subject property. To do this you would choose sales that are similar in square footage, age, and features to the home being priced. The sales used in the CMA should never be chosen based on the price that you think the subject property should sell for as this will give you a skewed estimate.

When sales are chosen using this methodology they will provide a more accurate indication of what the subject property is worth and this will help it sell within a reasonable amount of time and for the most money.

Good sales and bad sales, what’s the deal?

What I have found in the past is that the sales an agent provides to me are typically the highest priced homes in the neighborhood or area and support either what they or the owner feel the home should sell for. Again, this usually provides a skewed value estimate, especially if the sales are not physically similar to the subject property.

What I would also like to suggest to agents is that in addition to the good sales they should also provide information on the bad sales in the neighborhood that occurred recently but were not used. You may think it’s crazy to include lower priced homes but let me explain myself.

If you are familiar with why these homes sold for a lower price then this would give you an opportunity to explain why you did not consider them and the reason for the low price. Maybe the home sold low because it was a foreclosure or some other distress type situation.

You may have walked through this home during an open house or when showing it to potential buyers. It may have needed some updating or other repairs and this was reflected in the final sales price. This information is sometimes not included in the MLS listing sheet but if you know it this can help the appraiser understand why it was not used, and if you provide this information to them they don’t have to search for it.

Most appraisers will probably uncover this information in the research phase of the appraisal. The good thing about including it in the information you provide to them is that they will know you are aware of it and they’ll have a better understanding of what occurred with the transaction. It will help provide context for your pricing strategy when they see that you priced it higher than a sale that had inferior quality and condition.

Remember that anything you can provide to the appraiser that will support or explain why you priced the home where you did will be helpful. Of course, keep in mind that a real estate agent’s pricing strategy should mirror the methodologies that an appraiser uses.

This includes using the most recent and similar sold properties as well as any pending sales and active listings. If your comps were chosen based on these criteria the chances of an appraisal coming in lower than the contract are reduced.

Question

What are your thoughts on providing the bad sales along with the good sales? If you have a question about anything mentioned here or would like to discuss something else about appraising, leave a comment below and we’ll keep the conversation going. As always, thanks for reading and commenting.

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Comments

  1. Great advice Tom. I always tell agents that sometimes the best information that an appraiser can have is why that home down the street sold for so much less. The agent might know the story, but the appraiser might not find out. That could result in the appraiser giving weight to a sale that maybe should not have been considered.

  2. Thanks for this. I have always said the more information we have the better the appraisal. There have been times where there is a comparable you can’t ignore because of its similarity but if agents know there is a reason it sold lower, that is not listed on the MLS, it will help in our analysis.

  3. This is just another example of those performing CMAs either create the analysis in compliance of the secondary markets , or get an Appraisers license – Or just stay in their own lane of expertise and accept the appraisal process.

    • Tom, I think appraisers can educate agents on how we do what we do. I know in my area that I have been doing this at agent meetings and they are very receptive to learning. They can never do the level of work we do but there are some things we can help them understand better.

      • If agents want to pay to learn the appraisal process on their own merit to make them better at their craft, then that’s certainly a plus. Otherwise, I Inform clients of the professional differences and purpose of of both for the client to decide.

        • Yes, there is a difference between agents and appraisers. Learning the basics of appraisals can indeed help them become better at pricing their listings.

  4. This is why I always take the provided comps with a grain of salt. In my experience, like you said, agents always include only the highest sales that support their list price. Furthermore, it seems like agents always go off of price per square foot and nothing else. I agree that including the bad sales would be helpful, but ultimately it is our decision to pick which comps we want to use in the appraisal.

    • That’s right Austin. I always tell the agents that I will look at the sales they provide by I will have to qualify them as true comps or just sales. It is our job to see how comparable the sales are by looking at the physical characteristics rather than just the price range. I am on a one-man crusade in the Birmingham market to educate agents on the weakness of just looking at price per square foot. It can be a good metric in certain situations but not always.

  5. Great advice for agents to tell the story of the bad sales. Why did it sell low? If it’s an outlier, let the appraiser know why. I find agents often walk through all the neighborhood sales too, so they may know much more than MLS photos show too.

    • Yeah, agents have a lot of information that can be helpful to the appraiser, especially first-hand knowledge of the sales they have been in. MLS photos tend to paint a prettier picture than the house may actually have been.

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