I get this question quite a bit. Do appraisers consider the previous purchase price in a current appraisal? Well, appraisers ought to understand the previous sale, but the current value may have very little to do with the previous price level.
Reasons why a former sale might mean little for current value:
- Trustees Sale: These types of sales tend to sell at a discount. The properties are often not in great condition either.
- Major Fixer: If a house needed significant work, it probably sold at a low price.
- Family Discount: Sales between family members often sell at a discount.
- Short Sale: Distressed sales tend to sell at lower levels. This is not always the case because sometimes foreclosures and short sales really do sell at levels closer to market value, though they certainly can be “dumped” on the market at times.
- Private Sale: A private sale may or may not reflect market value.
- Cash seller paid too much: I’ve seen this happen before where a cash buyer paid $100-200K too much for a property. Thus the previous sale recorded in Tax Records really wasn’t a reflection of value at the time.
- Market Shift: If the market has changed since the last sale, the house could sell for more or less even if it is in the same condition.
Why else might a property have sold high or low?
Lenders & Appraisers: Ultimately if your property sold over the past few years, the lender is going to want the appraiser to explain why the current value is so much different than the most recent sale. This means the appraiser needs to be able to understand the nature of the previous transaction in order to offer justification to the lender. Sometimes a previous sale can be a helpful frame of reference for the appraiser, but other times a sale might have been very high or low. Whatever the case, the appraiser will very likely be asking you (or consulting public records) about the previous sale, so be ready to give an answer.
Is this how appraisers think?
Investor: I purchased at $45,000 previously and spent $30,000 in rehab.
Appraiser: And now you think your property is worth $160,000?
Investor: That’s what houses are selling for in the neighborhood.
Appraiser: I’m only giving you $138,000 because you’ve made enough profit.
It really shouldn’t play out like this since it’s not in an appraiser’s job description to gauge how much profit a property owner should make. Appraisers should instead be concerned with establishing and supporting a value. Yet at the same time part of the appraisal process is looking very closely to understand the previous transaction and to uncover how any recent improvements impact value. Appraisers also need to look at property closely too to ensure the “upgrades” are not “lipstick on a pig”.
In short, let th
e appraiser know if you simply got an amazing deal or whatever it was to cause the price to be so much different now. Moreover, if you’ve done substantial improvements to the home since the initial purchase, provide a written list of upgrades (with costs) to the appraiser. Whatever you do, be as specific as possible. Maybe the conversation could sound something like this:
Investor: I purchased at $45,000 at the court steps. They really should’ve sold at $90,000. I couldn’t believe the deal we got since the former owner had already done a partial remodel.
Appraiser: How much did you spend on improvements?
Investor: Here is a list to show we spent $30,000. We saved some money on labor by doing the work ourselves and getting a bulk discount on materials.
Appraiser: Okay. Thanks.
Any questions or stories to share?
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Ryan – nice article for all the investors out there. I’ve seen recommendations from other investors out there to put together a “package” of before/after pictures plus a breakout of all the expenses and work done. I had thought this was a good idea, but it’s nice to have it validated by the other side. Keep up the great content!
Thanks Brandon. I think you’re right that it makes sense to put together a “package”. I usually don’t see before pictures, but I wouldn’t mind. I’m a big fan of as much information as possible. Besides, it seems most prudent to supply information to the appraiser on the front end of the deal instead of giving the same information during an appraisal rebuttal. Take care. Thanks again.
Very good list of reasons for differences in selling price. I still get people that tell me how much they bought the home for or how much it appraised for many years ago, when those values are not really relevant now. I like to use conversations like that to explain why there may be differences in value now.
Thanks Tom. I get that quite a bit too. I had a seller show me an appraisal last week that came in about 10% above the current contract price. It’s always interesting to see what another appraiser does. Sometimes the appraisal looks solid and other times it’s not so solid. 🙂
I recently had a house appraised and I can tell you both appraisers (FHA loan on a flip) did not take the previous purchase price into consideration per their comments. Both appraisers did come to the conclusion of the same appraised price though. It originally sold a few months ago for $130k, then flipped with new tile/paint/carpet and is now $180k appraised. I do feel appraisers work with the sellers as with my second appraisal it originally came in at $175k as that’s what he thought the sale price was then it got amended to reflect $180k once he realized that’s what the purchase price was. Haha
Thanks for the story Derek. I appreciate that. Congrats on the recent flip too. Did the second appraiser offer any rationale for the boost from $175K to $180K?
Just that he thought the sales price was $175k. I’m actually the buyer in this equation but after over 30 offers I’m just happy to finally have an accepted offer and be in contract on my first house.
Thanks. Congrats then on the purchase. What a relief to get into contract and seal the deal. I’m happy for you.
Ryan, I am the process of buying a one-bedroom home in Flagstaff, where average prices are higher than many areas of country due to low inventory (I am told). Does it matter if the appraiser noted in his report that he did research on county website which showed no sale in past 3 years, but when I checked same county website, it shows that the house sold 17 months ago for significantly less than his appraisal? 11/11 sale $185,000 (non-distressed); current asking price of $250,000; appraised value $255,00. 3 comps in appraisal were $143-151/SF; $161/SF for this house. It is in good repair, no work has been done on it by current owners. Market in Flagstaff has just barely started to pick up (per realtor, 2.2% increase in average sale price since 12 months ago.) The appraisal report notes stable market past 6 months for one-bedroom houses. I offered asking price, and lender sent email to my realtor that the “appraisal worked out.” At this point, does the appraiser’s omission of this past sale matter?
Many thanks.
Hi Ellen. Thank you for the comment. Let me ask you this question. Since you now know about the previous sale, would it have changed what you offered for the property now? In other words, does it impact value for you?
For reference, it looks like Trulia shows median prices have increased by 14.4% over the past year in Flagstaff. http://www.trulia.com/real_estate/Flagstaff-Arizona/. I don’t really know your market, so I’m curious.
The appraiser should have reported the previous sale, whether it was a public sale through MLS or a private transfer of some sort. It was hopefully a clerical error to have left that out. The past sale should have been reported based on USPAP and Fannie Mae standards, but ultimately the market right now is what the appraiser is measuring. I would guess the previous sale shouldn’t be an issue for the appraiser if the appraiser really did a good job analyzing the current market. However, sometimes previous sales can be helpful indicators for value, meaning they can provide insight into how the market perceives a property. This is can be especially true in the case of a one-bedroom unit if those are less common. In this regard, hopefully the appraiser did not miss anything. I would think the lender would call this error to the appraiser’s attention and ask the appraiser to report the previous sale and discuss whether the new information impacts the opinion of value.
Let me know if that answers your question. Best wishes.