How much does a previous purchase matter? Do appraisers give strong weight to the purchase price? Or do they completely ignore it? This is an important conversation, especially in the midst of so much talk about the market changing.
1) Meaningless: Sometimes a previous purchase is meaningless. That’s not always happy news, but if a property sold for too little or too much, it just might not mean much to us today. As an example, it doesn’t make sense to give any real value weight to a short sale that closed way too low or an inflated purchase that was clearly disconnected from the market and not supported by data.
2) Strong weight: If a property sold recently and it was a reasonable price, appraisers might actually give strong weight to the sale. If you didn’t know, appraisers are actually allowed to use a previous sale of the subject property as a “comp” in an appraisal report too (usually Comp #4). That might seem strange to do, but then again what is more comparable than the subject property itself? Of course let’s be careful about understanding exactly how the market and property have changed since the sale though.
3) Someone overpaid: One thing we have to consider before giving too much weight to a previous sale is whether it was a reasonable representation of value or not at the time. It can be dangerous to blindly accept a sale without understanding the full story of why it sold at the level it did. On that note, my observation is at times cash buyers fall prey to overpaying on the higher end of the market where comps are a little more sparse and it’s not always easy to see value. Here’s an example I just tweeted about this morning:
4) Seeing the context: Sometimes a previous purchase is an incredible way to understand how a property fits into the market. In the graph below I have three previous sales in the Stollwood area of Carmichael, and each time the subject property competed at about the same price position. That’s powerful, right? So in this case I would likely give strong weight to the previous sales because they help me understand value.
FYI: Here is a tutorial if you want to learn how to make a graph like this.
Quick closing thoughts:
1) The temptation: It’s easy to get stuck on a previous purchase price and not see the current market because we think, “It has to be worth at least X amount because it sold for Y amount in the past.” Be careful of that. We have to be objective by giving the most weight to the current market.
BIG POINT: As some wonder if the market will make a big turn at some point, this conversation could be very relevant if that did happen.
2) Ch-ch-ch-change: The market could have changed since the subject sold previously. Values could have increased or softened. The subject could have been in better or worse condition too.
3) Different trends: Sometimes I hear things like, “It sold in 2016 and the market has increased 15% since then, so it must be worth 15% more now.” The problem is market trends aren’t the same at every price level. Maybe the lowest prices in town have seen increases like that, but price changes could be more subtle at higher levels. So let’s be cautious not to project a more aggressive trend from a lower range on a higher one.
4) Distressed: I find looking to older sales from the foreclosure days isn’t all that helpful because the market was not normal then and properties were selling all over the place. I usually recommend researching previous sales, but when they’re from the distressed days we often have to take them with a grain of salt. The same thing is true for stuff that sold in 2005 at inflated prices.
5) Boldness: Appraisers and agents sometimes have to tell clients why value is actually lower than a prior purchase. That’s not always easy to hear, but we have to be bold and let the numbers speak rather than putting weight on a previous sale that might not reflect the market today.
I hope this was interesting or helpful.
Questions: Which point stands out to you the most? Any stories to share or other points? I’d love to hear your take
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Great post Ryan. Something to add, that you alluded to, is that the prior sale of a home can help you figure out the value of some unusual factor. For example, I appraised a home in Central Davis that had two bedrooms below grade in a basement with none above grade. No sales found with similar configuration in Davis going back three years (I get all the fun appraisals). However, the subject had sold 5 years before. I time adjusted it forward and it supported my approach and adjustments for the subject’s unusual design. I’ve used the same technique for unusual locations, too.
Thank you Joe. That’s such a great example. I’m actually familiar with the property you speak of. Very tricky. As an appraiser you definitely want to be on the post-sale side of things. It does make it much easier, and I think your methodology was perfect.
By the way, I referred you to someone in Dunnigan today. I think you serve that area anyway.
Small world. Thanks for the referral. I do cover Dunnigan. Tough place to appraise because of lack of sales.
No problem. Yeah, I can only imagine about the lack of data.
Good afternoon, Ryan
Excellent blog today.
You make excellent points about value and I agree with you that the “market sets the price” of a property and this is what I emphasize to my sellers when they are trying to decide what price to list their home for.
I enjoy reading your blog.
Keep up the good work.
Thank you
Sincerely,
Del Barbray
Broker Associate
HomeSmart I CARE Realty
Cal BRE #01049232
(916) 521-9229
Thank you Del (aka Mr. Encouragement). I appreciate your kind words. Yes, the market has a way of telling us. Agreed.
Excellent points Ryan! Speaking about prior sales, sometimes I will use prior
sales of some of my comparable sales to help better support time adjustments. To your point though, it is so important to know the details about that prior sale including the market conditions at the time of the prior sale. I don’t rely on that solely for time adjustments. But often they add to the support. I realize this post was more related to the prior sale of the property being appraised. 🙂 Great post as always! I look forward to them every week!
Thanks Jamie. That’s a great point and it’s really one of the big things I had in mind when writing the post. If the sale was a legitimate reflection of the market in the past, we really can gauge time adjustments extremely well.
On that note, it’s always golden too when appraising something and we find a couple other sales that sold around the time of the previous subject sale and then happened to sell recently too. I found this just yesterday and the difference was only 5% from 2015. That wouldn’t make any sense at all at some lower price ranges where the price difference is probably easily 15-20% by now, but at this price point it looked pretty solid actually. Anyway, thanks.
Thank you for the discussion. I love prior sales, even if they are far back in time. If the subject has not changed much and the prior sale had reasonable exposure, is arm’s length, etc… then it can tell you a lot about market value today even without adjusting for time and trending forward. In that case one would be looking at how the prior sale compared to the other sales in area at that time, like you showed in your example graph.
Exactly. Excellent comment Gary. We really can better understand context. How does the subject fit into the neighborhood? What has it historically compared to? Those are huge clues for comp selection today. I find sometimes when a property is really tricky, this can be especially helpful to see the context. The tricky part though is a previous sale isn’t always legitimate, and we end up seeing that when a property is re-listed a couple years later and then there are no bites. Thus sometimes the context we perceive in the past isn’t the right context for today. But if we have a few separate sales, that’s more convincing…
When appraising a house that has been recently flipped, how much does the previous sale matter? Especially if the purchase was in the previous year. I’m sure, like all things appraisal, “it depends” but would appreciate hearing your thoughts on that situation.
Excellent question Corey. Well, it does depend…. Kidding.
This is an apples to oranges situation because the previous sale might be an orange, but the new remodeled version is an apple. Thus on one hand we don’t give much weight at all to the previous sale because it was a totally different house that was seen differently by the market. What matters most is what similar remodeled sales are selling for right now. That’s how we see what the home is worth, so there is very little connection to what it sold for previously. Besides, the investor may have gotten a killer deal off-market, and that shouldn’t matter for value at all. Thus if an investor purchased a property for $100,000 less than it should’ve gone for, that doesn’t need to influence an appraisal today because the proof of value is not found in a previous acquisition price, but in the current market among remodeled sales. This would simply be an investor who is savvy and scored a good deal. The same would hold true if I bought a property for $100 from someone. That only means I bought it for a good price and it may not mean anything for value today.
Yet to be fair the previous sale is a data point, so let’s at least be aware of what it sold for. Maybe it can tell us something about how the market looked at the location, layout, or something else about the house (especially something adverse like a high-voltage tower, weird floorplan, busy street, backing to commercial property…).
I will say investors sometimes get trapped into a math game with a previous sale. So they say, “I bought it for $300,000, remodeled it for $100,000, and I want to make $100,,000, so let’s list it between $500,000 to $550,000.” The market doesn’t care about the investor’s profit though. This is exactly why we have to give remodeled comps the most weight. What are they actually selling for? That’s the only thing that matters.
In short, we can maybe extract some data from the previous sale if the sales price was legitimate and really reflected the market, but the biggest issue to consider is what current remodeled properties are going for.
I hope that helps.
I agree, I always look at previous sales of the subject as well as the comparable to gauge the market reaction. On the topic of comparable sales I especially love when I can find a “flip” to help me quantify the market’s reaction to original condition versus updated condition. This helps give me a supportable adjustment for condition…. Who am I kidding I love all paired sales! After all if we didn’t like analysis we wouldn’t be appraising. Thank you Ryan for all your thought provoking posts and an open forum to just talk to other appraisers.
Thank you Corina. I love when that happens too. Thanks for your comment and the kind words. Let’s keep our thinking caps on today. I have a tricky one on my desk right now, and you might too….. 🙂
Good post Ryan. Here in the High Desert, when you are appraising vacant land, it is very important to look at prior sales.
So many times I locate a sale @, let’s say $100,000 & then notice that the parcel sold 2 months ago for $20,000.
Appreciation, low prior sale. No, usually the $100,000 buyer has a Chinese or Indian name. (Indian from India, not Arizona)
What has happened here is an unscrupulous, I find udually a company in the San Fernando Valley, has sold to the Chinese/Indian so that they can qualify for an EB-4 application & get fast-tracked to get a Visa.
I’ve tracked down & interviewed several of the sellers & they don’t like the light of day to shine on them. They hang up the phone REAL fast when you pin them down about the huge profit they made.
You can put the higher sale in the trash as not an arms-length transaction.
Wow, John. This is a whole different layer of thought here. The prior sales in cases like this really might reflect a more realistic value whereas the new prices are just inflated (duh). That’s quite a loophole to get a Visa. Thank you for sharing. Yeah, I can imagine getting quick hang-ups in those situations.
Ryan, #5 stands out to me because it requires professionals to do a gut check. Realtors and appraisers are professionals that consumers rely on to provide a service based on their market knowledge. We should take this seriously and educate and inform sellers when they want to list their home for a pie in the sky price. I could write a lot more on this but I will leave it at that.
Thank you Tom. Well said. I agree. In any profession we can succumb to telling people what they want to hear, but the truth is much better. Let’s aim for that. 🙂