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
- Hybrid Assignments, the Consequences - February 7, 2019
- Bankers Concerned About Appraisals - October 18, 2017
- Third Party Blues - July 19, 2017
Why not just direct your client to Zillow for the listing info….. would be just as accurate +/- (+/- that is…) — or maybe the indication would be “approximate” (+/- that is…)… or whatever. By the way that’ll be an extra $75 for the approximate plus or minus estimate of Opinion or whatever……
The example is extreme; and frankly disingenuous in that infers ANY trained appraiser would have used the exposure time on that one property as an indicator of a specific market trend.
Coldwell Banker once did a study covering twenty five years. I learned of it when I was last licensed as an agent in 1984. It was consistent with my own observations as an agent from 1970-1974 and again from 1984-88.
That study showed that 90% of all listings that are considered by the market to be within 5% of their market value, will sell within 30 to 90 days. Further that those considered to be within 10% of MV would sell within 6 months. Those more than 10% over MV would never sell; or would not sell until the market actually caught up to them. Even then, negative exposure could be a factor. I’d like to see them publish that study again. Though old, its long lived.
The ONLY way to judge listing to sale price ratios is to review closed sales of listed properties. The expired listing period prior to the price at which the property finally sold is simply a period when it was over priced and NO percentage adjustment could be applied that would be supported or supportable for that prior period.
Each MLS publishes sold statistics. The 1004MC (as bad a form as it is) also enables one to draw partial trend conclusions-sometimes.
I rarely provide more than three closed sales for non complex properties. The ONLY time I also provide a listing, is if I feel one is needed due to a characteristic needed for comparison that could not be found in the closed sales available. Pending sales are ALWAYS better potential comparables than active listings.
Mandatory requirements from AMCs or idiot lenders, dictating four closed sales; a pending sale and an active listing is reckless micro management that usually yields LESS analysis, rather than more. The appraiser is in too much of a hurry then due to the added (unnecessary) work, rather than having the time to explain their reasoning on three or possibly four legitimate comps.
In an increasing market, where the closed sales are either weak, or the concluded value is at the extreme upper end of the range; a listing comparable can have validity when it is the lowest or near lowest listing available and it’s asking price is at or above the sale price / appraised value.
Anything else is gratuitous and meaningless data to make a report look like it is more reliable than it actually is.
When I have identified and used the three most relevant sales there are; the inclusion of a 4th or 5th LESS relevant comparable does not add to the credibility of my conclusions. It detracts from them.
I am a highly trained, general certified appraiser professional. LET ME DO MY JOB, as I have been trained to do it by other appraisal professionals!