Sales Ratio & Adjustments
Three sales, if you chose wisely, bracketed your subject neatly.
There was a time when appraisers popped three sales onto a grid, made adjustments, concluded an opinion of value then moved on to the next assignment. Today, appraisers routinely include five or six closed sales, plus a couple of listings or more.
There was something to be said for the old Goldilocks approach. Three sales, if you chose wisely, bracketed your subject neatly.
Even if you had six closed sales, you could still bracket pretty cleanly.
But listings. What to do with them?
Some appraisers will actually toss them on to a grid and make no adjustments to the list price…no matter what.
This would be fine if we were in an over-heated market with plenty of full-price offers. But we’re not and we haven’t been in many years.
At the complaint level the Board typically sees token adjustments to reflect the spread between what an active listing’s offer price is and what its actual sale price might be.
What, exactly, is the appraiser adjusting for? Time? Market conditions?
Let’s examine an actual listing history:
The table shows an actual listing history for a Chicago rowhouse near a university medical center.
At the end of 2006, the market was starting to show signs of cracking. The property was initially listed for $619,000 and languished on the market for 524 days until June 2008 when there was a $20,000 reduction to $599,000. A lousy 3.23% drop.
An abbreviated listing period of 46 days lowered the price to $529,000. A $70,000 plunge (11.69%). Still no takers.
Finally, its pulled from the market for over 4 1/2 years (1,708 days) then offered at $429,000 for a couple of weeks and finally sold for $410,000 on May 31, 2013.
What should an appraiser learn from this?
Unless the appraiser is uniquely familiar with the transaction history, there’s no way to know, within a reasonable time, what went down with this property from December 2006 through May 2013.
Brokers can be too eager to list the property at any price. Sellers can be stubborn. Reality fails to set in for the broker and/or the seller. The property may have become lost in all of the noise of the real estate collapse.
If an appraiser used this listing from January 2007 through May of 2008, they might have applied some arbitrary 5% adjustment and conclude that it should eventually sell for $570,000 to $590,000.
But that’s not what happened. It never sold with that broker. A different broker, almost 5 years later, successfully listed it for the sale.
Maybe the last broker offered it far below what it should’ve been sold at. Maybe.
Whatever the motivations were on this specific transaction isn’t the point.
Appraisers should be looking at the overall local market in order to develop a reasonable and supportable list price to sales price ratio.
You’ll never learn anything by staring at one deal…or three.
By Lee Lansford – Illinois Appraiser Newsletters – Volume 7, Issue 2