Agents, Are You Using Tainted Sales In Your CMA’s?

Avoid Tainted Sales and Price More Accurately

It’s a proven fact that if a house is priced correctly it will sell. If it’s not, then it could take longer to sell and the final sale price may be lower than it normally would be. Using legitimate sales is key in pricing a home correctly in order to sell quickly and for the highest market-supported price.

Agents, Are Your Sales Tainted

While we are in an abnormal market now with the increased demand and limited inventory, there are some hints in the market that this may be cooling. For the Birmingham, AL real estate market as a whole, sales have slowed down over the past 12 months and inventory levels have increased slightly. See the below chart:

Birmingham Alabama home sales stats

Is this seasonality or actual signs of the market cooling?

Market forces have resulted in an increase in the months of supply of homes. Over the past 21 months, it seems that all the rules have been thrown out and people have been buying no matter what a house was priced at but what we’ve seen hasn’t been normal and what goes up must come down.

I’m not predicting a collapse in the market, after all, I’m not a fortune teller. What I do know is that the market can only go so high before it returns to normal.

Everything goes in cycles with highs and lows. If you’ve ever seen a sine wave you can see that most things occur in cycles over time.

These cycles can also be seen in the seasonality of sales over a twelve-month period. Because of the cyclical nature of the market, we will most likely see a return to a more normal market where supply and demand are in balance.

When this occurs, it will be more important than ever to make sure the data we use to price homes is as accurate as possible. This is the reason for the topic I’ve decided to write about here.

I recently wrote about how important it is for agents to verify the sales they use in their CMA’s. It’s important because it is possible for the sales that are used to be tainted.

Two things that I would like to discuss that relate to this topic are the recent increase in iBuyer sales and appraisal waivers.

iBuyer Sales

These types of sales have increased significantly over the past several years. They are occurring at varying frequencies depending on the area of the country you live in with some areas seeing more activity than others.

There are various players in the iBuyer field including Zillow, Offerpad, Opendoor, and Redfin to name a few. They work by offering to buy a home quickly and for cash, which eliminates the need to get your home in “showing condition” and also eliminates the need to have open houses and have strangers walk through your house.

Spoiler alert; while I have listed Zillow as a major player in the iBuyer market, as of the writing of this article they recently exited the playing field, however, their exit is an important part of this story.

As you may know, Zillow has their proprietary Zestimate feature which they claim will provide you with the value of your home. Zillow used Zestimate algorithms to make offers on houses to sellers who used their iBuyer services.

Zillow discovered last year that their iBuyer program was not profitable and decided to end it. The offers they were making were based on the Zestimate which leads you to the conclusion that the Zestimate was flawed and the iBuyer sales transactions do not line up with the true market value of the home.

While the Zillow story has been the most written about and familiar to the general public the other iBuyers also use technology and proprietary valuation algorithms to arrive at offers that may also be flawed. If you are using these sales in your CMA’s your data may be tainted and you may be pricing your listings inaccurately.

As I noted in my prior article about verifying sales information, you should proceed with caution when using iBuyer sales. Both the transaction where they bought the home and then sold it should be avoided if they do not appear to line up with what other similar homes are selling for.

Appraisal Waivers

As an appraiser and one who strives to obtain the most accurate information available it would be a good idea to be able to note within the MLS if a sale is an iBuyer transaction or if it had an appraisal waiver. I’m not saying that these sales cannot be used but they should be analyzed more closely to determine if they do meet the definition of market value.

It’s important to keep in mind that homes that sell with appraisal waivers may not be true market value sales. By that, I mean that the sale price may not be a true market value.

You may think that if you have a willing seller and a willing buyer then you have market value but this is not always the case. If you have a property that has a true market value of $300,000 but the owner wants to sell it for $400,000 and the buyer likes it so much that they’ll pay $400,000 the price is not a true reflection of what it is worth.

It is a reflection of what one motivated buyer is willing to pay but 9 out of 10 other buyers may not pay that much.
So what is the true market value?

We have to remember what market value is. Here is the official definition:

The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:

buyer and seller are typically motivated;

both parties are well informed or well advised, and each acting in what he or she considers his or her own best interest;

a reasonable time is allowed for exposure in the open market;

payment is made in terms of cash in U. S. dollars or in terms of financial arrangements comparable thereto; and

the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

When we look at this definition we can see that the aforementioned sale is most likely not market value because the price paid is not the most probable price because 9 out of 10 buyers would not overpay that much. In addition, the buyer is not acting prudently because they are paying way over the true market value.

I write all of this to emphasize the fact that homes that sell with appraisal waivers may sell over market value and they may not be truely reflective of what other similar homes may sell for.

If you use these tainted sales as comps in your CMAs it may cause you to overprice your listing. It will take longer to sell and may even sell for less than what it would have if it would have been priced lower but more realistically.

When sales that are overpriced are not verified with an appraisal they can add dirty data to your CMA. If this happens enough it can cause a snowball effect and may influence the market in a negative way.

You may think that there is no problem with this, however, if these overpriced sales hit the market again and go through the traditional appraisal process they may not end up appraising because their “price” is not market supported.

What Can You Do?

The best thing to do is to verify the sales that you use to see if they are iBuyer sales or if they sold with an appraisal waiver. If the home sold for more than all other sales there may be a legitimate reason for this and an iBuyer sale or appraisal waiver may have been the cause.

I am not saying that these types of sales can never be used but they should be verified and compared to other arms-length transactions before relying on them to price your listings.

Question

I  hope that being aware of these two situations will help you to sift through bad data so you can focus on true arms-length transactions. If you have any questions about these two types of transactions feel free to contact me and as always thanks for reading.

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Comments

  1. Hey Tom. Do you know how many properties Zillow targeted in your market? I know in my area they had just north of 500 homes owned as the height of their activity. That is, 500 owned at any given time (not 500 for the entire year).

    • It’s difficult to know the exact number. I have seen more Offerpad and Redfin signs than Zillow and it looks like between the two there were between 300-400.

  2. Very great points. Good stuff. Really enjoy your articles

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