What can the sales history of the subject property tell us?
In a recent post about red flags that agents should be aware of in an appraisal I noted that big increases in asking and/or contract price for a home within a short period of time can create a red flag to appraisers and lenders.
Appraisers are required to include a 3 year sales history of the subject property in order to provide context to the current transaction. Today I want to go into a little more detail about why this is.
Appraisal Standards requirement
Appraisers must follow the Uniform Standards of Professional Appraisal Practice, USPAP for short, when developing and reporting an appraisal. Standards Rule 1-5 states:
When the value opinion to be developed is market value, an appraiser must, if such information is available to the appraiser in the normal course of business:
(a) analyze all agreements of sale, options, and listings of the subject property current as of the effective date of the appraisal; and
(b) analyze all sales of the subject property that occurred within the three (3) years prior to the effective date of the appraisal.
The focus of our discussion today is Part (b). In addition to this being a requirement within the appraisal report it is also important for the agent to know because it can help them in telling the story of value for the property they are selling. It can help them determine what information they should provide to the appraiser if they choose to provide them with an information packet. By being proactive this can prevent delays in the appraisal and closing process.
Things to include in the sales history of the subject property
When providing information about the sales history of the subject property the agent should always include information that would explain why there are significant variations between what a home recently sold for and what it is listed or under contract for now. Appraisers need to know this so they can provide a logical explanation for their opinion of value. Here are some examples of the type of information for real estate agents to consider:
Terms of previous sale- If the previous sale was what we call a motivated sale, you should include details to explain. Examples of a motivated sale includes a divorce, foreclosure, short sale, relocation, estate sale, or other a sale between relatives.
A motivated sale means that the seller was motivated to sell the home quickly, which typically means that the price was lowered to accomplish this. These types of situations don’t necessarily have to result in a lower price but they can.
A good rule of thumb to remember is that if you were personally buying a home and in doing your research you found out that the home sold last year for $50,000 less than what the current listing is for you would want to know why. If there is a good explanation then that will help you feel better about your decision to purchase it for the current price. In a similar way, in an appraisal report, if the appraiser comes in higher that the previous sale they can include the details of the prior sale to explain to loan underwriters why the price difference exists. This can help the underwriting process go quicker.
Recent renovations or additions- If there have been significant renovations or additions made to the home since it was last purchased this would be very important information to provide to the appraiser. The perfect examples of this are flip houses.
I’m currently working on an appraisal of a home that sold less than 6 months ago for $60,000 less than the current contract. Don’t you think that a lender would want to know what happened in this 6 months period? The explanation may be obvious on some of these but we still have to document it within the report.
This documentation helps us tell the story of value. Just like in a mystery novel the author must provide background information about the characters and situations so that as the story progresses the readers will logically understand what is going on. If significant pieces of information are left out then it creates a gap where we may not know what happened and this can create confusion.
Change in market conditions- A change in market conditions can also result in possible change in supply and demand which can affect the values of the homes in the general area.
Years ago within the Birmingham metro area a Mercedes Benz manufacturing facility was built. This created job opportunities for local residents. It also created an increased demand for homes in the general vicinity of the plant. Employees working there needed nearby housing which resulted in increased demand for housing and which resulted in home prices increasing.
Another recent example that has started to occur in the Birmingham market over the last several years is the revitalization of the downtown Birmingham business district. The relocation of the Birmingham Barons, a local minor league baseball team, to the downtown area, as well as an increase in popular restaurants and neighborhood support services has resulted in an increased demand for downtown living. The demand for condo units in downtown Birmingham has increased as well as the asking prices.
You may think that the information I’ve discussed here is obvious but it should still be included so that the appraiser has the necessary information needed to provide a solid and documented report to the lender. This can reduce the likelihood that the lender will ask for additional information which can delay the loan process.
Question
Do you have any additional questions about why agents should consider the sales history of the subject property? If so leave a comment below or give me a call.
I speak at local real estate offices to help agents understand the appraisal process so if you’re interested in having me speak at your office let’s connect and we’ll schedule a time when I could be a speaker at your sales meetings. Thanks for reading.
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Another well written and relevant article. Thanks!
Thanks Mark!
Nice job, Tom. I firmly agree about agents telling the story of the property. What was the deal with the sales price in the past? Why did it sell for that amount? Why is there a difference now? These are critical questions and there is always a story to tell.
Exactly Ryan. Sometimes it’s easy to get so caught up in the moment of selling a home that you may not think about the last sale. The ironic thing is that these recent sales can tell you a lot about the house and how it fit into the market when it sold. This can give you insight into what it should be listed at now.