It’s the market: Price, value, offers and appraisers - How to stay ahead - by Bill Pastuszek

How to stay ahead of this “churning market?” For single families, the ratio of sales price to list price in the Mass. MLSPIN is 99%, currently with an average days to offer (DTO) of 53. In Middlesex County, the ratio is 101% with an average DTO of 40. For Suffolk County multi families, the ratio is 100% with a DTO of 33. 

Before dealing with that “hot” topic, let’s consider some definitions taken from USPAP.

• An appraisal is the “act or process of developing an opinion of value; an opinion of value.”

• Value is the “monetary relationship between properties and those who buy, sell, or use those properties.”

• Price is the “amount asked, offered, or paid for a property.” 

USPAP requires us to ANALYZE all current sales and listings of the subject property. Before jumping into the churning currents of the market, let’s understand how this requirement may serve to help. 

A couple more definitions. A listing offers a property to the market at a specified price (usually). USPAP requires that we analyze the listing. What are some of the important factors to look for in a listing? What is the marketing history of the listing? How long has the property been on the market? Have there been price changes, broker changes? 

The purchase and sale agreement  (P&S) is a “legally binding contract between the two parties that outlines the conditions that both buyer and seller agree to, including the purchase price.” 

Beyond being required to analyze (and many appraisers don’t go that far), i.e., make a careful reading of the P&S to establish that the contract is bona fide and that it represents an arms length transaction with reasonable terms and conditions, among other things. Another factor that analysis of the P&S can answer is whether the price is distorted by factors contained in the contract. What does is say about motivation when inspection clauses and other contingencies are waived? What effect does a transferred P&S have on the transaction?

Note that USPAP requires analysis of options as well. But USPAP does not require analysis of offers. 

What role do offers play in understanding the current market? Are multiple offers on the same property generally made available? Should they be? If you believe they are useful, ask for them.

A not uncommon scenario in today’s market: A home gets listed on Tuesday and by the time of the open house on Sunday, there are multiple offers at or above the list price.. The appraiser who gets the assignment starts looking at closed sales. Scratching of the head ensues and the sale seems to “break new ground” in terms of pricing. The question that gets asked: “how do I support a price resulting from the interaction of a number of buyers/bidders that doesn’t appear to have much obvious support via closed comparables?” 

The appraisal process is based on a logical process and appraisers tend to want to rely on closed, historical facts, i.e., sold comparables. Appraisers tend to be level-headed real estate analysts who look at market evidence, market trends, comparable data, and arrive at a supported opinion, as contracted, trained, and required.

When, then, does price, as determined by buyers bidding for a property, become value? And, are “bidding wars” reflective of rational market activity, or are just an auction sale? And, are auctions indicative of market value? There is no easy answer. 

In the end, the appraisal reconciliation will allow the appraiser to communicate to his or her readers how all relevant factors have been considered. Were the limitations (if any) of closed comparable sales discussed, pending transactions, offers, listings considered and the subject’s marketing history analyzed?

Question: Having established the bona fide nature of a transaction, does it mean that appraisers must then use that contract price as a benchmark or target? The marketplace rules, right? Willing buyers, willing seller? Does a bidding war by buyers fixed on getting a slice of the real estate market (and a place to live) constitute a rational market, even if widespread? Good question, and the appraiser needs to support his or her answer to it. 

Leading edges of markets are formed by offers, properties under contracts, and listings. This information is harder to get but that hard work may be necessary for a supportable value opinion.

There is no right answer. The data gathered and the analysis performed by the appraiser will allow the appraiser to arrive at a supported value opinion. There are no shortcuts. As my much more esteemable namesake might say: “Do your Job!” If you don’t, no Super Bowl ring for you!

Bill Pastuszek, MAI, ASA, MRA, heads Shepherd Associates, Newton, Mass.