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.
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, 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.
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.