How Do Appraisers Use Active Listings and Pending Sales In An Appraisal?

Can Active Listings and Pending Sales Be Used As Comps?

Most people are familiar with what a “comp” is in real estate and more specifically in an appraisal. A short definition for a comp would be a property that is an acceptable substitute for the property being appraised.

Active Listings and Pending Sales

An acceptable substitute would mean that the comp should have a similar square footage to the subject as well as be in similar condition. It will be in a competitive market area, have similar features, has sold as close to the effective date of the appraisal as possible, and be of similar quality and workmanship.

Minimum Requirements

At a minimum, three closed sales must be included in an appraisal report. Appraisers can use more than three sales if they help to support the final opinion of value.

What many people do not know is that in addition to closed sales, active listings and pending sales can also be used in the report. Closed sales provide a historical record of what similar homes sold for while active listings and pending sales can give additional clarity as to what is currently happening in the real estate market.

Active listings give us a better understanding of what the current competition is for a similar home. Pending sales that are just waiting to close (financing is taken care of, the home has appraised, and the home inspection has passed) are some of the best comps because they give us a current snapshot of the market and the most accurate indication of value.

In the appraisal report, the appraiser attempts to get in the mind of a potential buyer for the subject property. We locate other active listings that would be good substitutes for the subject property.

By doing this we consider other acceptable alternatives to the subject. Any physical differences are adjusted for as well as differences between list prices and closed sales prices.

The difference between the sale price and the list price is the sale price to list price ratio. This is a common statistic for real estate agents and appraisers to study.

In the Birmingham market this ratio, expressed as a percentage, is usually between 96% to 99%. In the current market we are in it is not uncommon for this to be above 100%, meaning that the sale price is higher than the list price.

Either way, this percentage is applied to the list price to adjust the listing to the anticipated closed price. This may not reflect what it eventually sells for, however, it is the best way for appraisers to estimate what the final sale price will be if we don’t know the contract price.

In my humble opinion, pending sales where we know the contract price, are really the best comparables there are. A closed sale provides us with historical information while an active listing involves a calculated guess at what the final sale price will be.

A pending sale that has a contract signed by buyer and seller has a good title policy, passed the home inspection, and appraised for contract price is the best indication of value because it reflects what is going on at the present time. This is much better than one in which an offer was made by an interested buyer but still needs the previously mentioned items to be completed.

Sometimes the appraiser is able to obtain the contract price of the pending sale and if this is the case it can help provide an even better indication of value.

All other aspects of the active and pending sales comparable are treated the same as the closed sales. By this, I mean that adjustments are made for the physical differences between them and the subject to arrive at an indicated sales price.

Increasing Markets

One last item that I would like to mention is the importance of using active listings and pending sales in appraisals during increasing markets like we are currently in. If we do not use these as comparables we cannot get an accurate picture of the nature of the market we are in.

By including these properties in the appraisal report we can help support any time adjustments we are making to the closed sales that reflect increases in home prices. They will help give a snapshot of what the market looks like at the time of the appraisal and by doing this will help the reader of the report understand how the appraiser arrived at their opinion of value.

Questions?

So that is how and why appraisers use active listings and pending sales in an appraisal report. By using these types of listings as well as closed sales we are able to get a more well-rounded look at the market which provides a more accurate indication of value. If you have any questions about this topic or any other please leave a comment below. As always, thanks for reading.

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Comments

  1. Agreed on the power of pendings. Sales tell us what the market used to be like and pendings and listings tell us what the market is like right now. There is a reconciliation needed there by juggling both datasets. In other words, it’s not just about sales. Just yesterday I appraised something and for the firs time in a long time I called the market stable. The pendings and listings were really on par with recent sales and not way beyond as we’ve been seeing in recent months.

    • Great points, Ryan, and thanks for sharing your experience. No every area around Birmingham is increasing so we have to look at each individual market area as well as price range of home. In my opinion the use of active and pending sales is a necessity in the market we are in now.

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