It must be worth more than it sold for in the past, right? In many cases, YES. But sometimes NO. Let’s talk through some things to consider when pulling comps and noticing a previous sale. I find many of these points coming up lately in conversation, so I hope this is helpful.
Here’s some things I keep in mind about previous sales:
1) Context: Previous sales can be powerful sometimes because they help us see how a property has historically fit into the market. In other words, we get to see context. What were the comps at the time of the sale? Here’s an example where a home sold three times at a very similar price position in the market. When I see something like this I can get clues into comps and where this one might fit into the market today. Click thumbnail to see larger image.
2) Unique property: Sometimes when a property is unique though a buyer might have been willing to pay more than what current buyers will pay. Thus a prior sale doesn’t always paint the perfect picture for value. For example, a home in Granite Bay sold for $4.7M in 2013 and then $4.2M in 2018 despite the market showing hefty increases over the years. Thus we have to be careful not to give too much weight to a previous sale while ignoring current comps.
3) Unicorn buyer overpaid: Buyers overpay sometimes – especially if they’re paying cash. I can think of a property that sold at a lofty level a few years back and it’s been re-listed for a while now without any bites. In this case I wouldn’t give any real weight to the previous sale because it looks like it represented a unicorn buyer at the time rather than the market.
4) Appraisal waivers: One thing I’m watching is appraisal waivers. If there was no appraisal on a property and it ended up selling too high, the previous sale likely means very little for value.
5) Inflated & distressed: When a sale took place in an inflated market (like 2005) or a distressed market (like 2007-2009), I tend to give very little weight to these sales. I’m going to look at them and probably even graph them, but I might take them with a major grain of salt.
6) Neighborhood change: One of the things we need to consider is how neighborhoods have changed over time. In other words, it’s possible the market would look at a property differently today than the past. This is especially true with gentrifying neighborhoods, so I better be careful about giving too much weight to older sales.
7) Slower market: Previous sales sometimes remind us the market is slower. I find owners today often expect massive value increases from two years ago, but comps might not be astronomically higher since price appreciation has been slowing. We just haven’t had recent 20% increases like we did in 2013.
8) Not penalizing because it sold too low: If a property sold too low in the past, it shouldn’t penalize the value for today. This is why appraisers have to take a previous sale with a grain of salt and not give too much weight to it. Let’s remember value is found in the comps – not in a previous sale.
CLOSING ADVICE: I recommend paying close attention to previous sales to get clues to understand how a property fits into the market. But don’t get so stuck that you don’t see the most important thing – current comps.
VIDEOS: If you need some background noise, here’s two videos. The first is a presentation to Realtors and the second is a Q&A after a talk I gave to investors.
10 things to tell your clients about the market (or not) – 30 min
Q&A after a presentation I did to investors – 20 min
Questions: What point stands out to you the most? Anything to add?
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Ryan, good comments, observations.
Lets not forget that abnormal Motivations my drive Sales Prices up or down. I have seen 25% over market value paid by a buyer that had 1-week to find a house.
I have been involved when an owner wanted to acquire the adjacent property forsome personal reason, and paid twice the market value supported by the appraisal they hired me to do. Well informed, Yes. Motaivations, Abnormal.
What about Sales where the players greed to raise the Price 25%, and then give cash back to the buyer after escrow.
Then, there is the illegal property Flip at twice the normal market value.
Real Estate Frauds can take mamy forms, usually resulting in inflated sales prices. These make their way into the databases, and are relied upon at face value by {unaware, unsuspecting, naive} real estate practitioners, from listing and selling agent, loan agents and appraisers.
Not to be forgotten, are prior sales made during a booming market where the buyer knowingly bid over the Sales Price. The amount of overbid can be breathtaking. Hundreds of thousands in some instances, and I have seen as much as $1,000,000 overbid on a $2,000,000 Listing.
The out of town buyer from higher priced area may pay more than any local. This can be seen in many areas, as you move out from the high priced metro market areas. Or in resort or 2nd home areas where buyers come from higher priced areas. Or, the foreign buyer whose currency exchange rate is favorable to the US Dollar, ie $1.25 to $1.00. In some markets, foreign buyers have controlled pricing.
Until and unless the appraiser Verifies the Motivations, Terms, Concessions, Personal Prperty, Cash Back or other factors that were packed into the current, or prior sale of the Subject or the Comparables relied upon, if performing the MarketnData Approach by Direct Sales Comparison, as opposed to Statistical Analysis.
Until the appraiser Verifies the above factors in prior or current sales of theirnSubject or Coparables relied upon; they are simply uninformed and may make inferences or assumptions that are off base without knowing it.
Steve, what a golden comment. Thank you. I welcome your take any time as I have a high respect for your opinion. As a practical note, now that you have an approved comment, you can post freely here.
It’s easy to look at a previous sale and automatically accept it and assume its a reasonable picture of value, but that’s not always the case for the reasons you mentioned. I know you are aware of foreign buyers in your market in SoCal. We don’t have as many Chinese buyers in NorCal. But we have had Blackstone and we certainly have Bay Area buyers. I just finished an appraisal where an extremely wealthy buyer clearly overpaid for a property a few years ago. Despite the market increasing by 15% since this time, the property isn’t worth what the buyer paid. It happens. And that’s really what inspired my post today.
Anyway, thanks Steve. See you tonight at REAA.
Great points to think about, Ryan. It goes back to the most used phrase in appraising which is “it depends”. Can the previous sale be a good indicator of the value today? It depends. Can you ignore that last low sale? It depends. The points you highlight in your post just goes to show you that each sales traction is a unique situation that needs to be put into context and while historical sales can give us insight into what a property might appraise for today it depends on the situations surrounding the prior sale as well as what is happening now. I think the most important thing to keep in mind is what the current sales comps and active listings are showing because that is a direct reflection of what is happening in the market right now.
Thanks Tom. Exactly. I find it’s easy to subjectively get tied to a previous purchase price and to automatically think that’s where value is at. But we have to understand the nature of a previous transaction and then analyze today’s market. I recall a property I appraised sold for an absurd amount in 2005 because that’s what the market was like back then. Buyers were simply paying ridiculous prices that were totally disconnected from where they should be. Thus if I were to look at comps at the time it would look like I should compare this home to other higher-end areas that sold on par with the purchase price in 2005. But in today’s market we haven’t been seeing that sort of frenzied purchasing. It’s like buyers are more in tune with this location and not willing to pay crazy prices that are really reflected elsewhere. Anyway, I’m rambling maybe. For me I just remember that a previous sale may have also reflected different dynamics in a market…
Great points Ryan! I do consider prior sales of a property I am appraising as well as the sales and listing history of the comparable sales. It really helps to give some context to the property being appraised, as you mentioned. Great reminders!
Thanks Jamie. I’d say in most cases the sales tell a helpful story of the market. For me I probably find myself relying on them in many cases. But there are times when I have to throw out the sale completely because it was simply too high, too low, or something funky was going on. 🙂
I find the same thing. Every case is different.
Thanks. I think in the back of my mind one of the reasons why I wrote this post is because the market is slowing down. We don’t know what this means exactly yet for the future, but we do know markets go up and down, and at some point we can anticipate prices will decline (thanks Captain Obvious). Thus this conversation will become paramount in the future at some point in light of market dynamics. “Hey man, I bought my house last year for X amount. How can you say it’s worth less now?” Yep, this is where the conversation becomes quite relevant, and I’d recommend for any onlookers in real estate to anticipate conversations like this in a slower market or down market.
Exactamundo!?
Good information for consumers Ryan. I think this will help many understand that just because they paid X, doesn’t mean it is worth X times %
Thank you so much Rachel. I appreciate it.
So Ry Guy, here we are sir, into March and the beginning of spring selling season. This is the moment we’ve all been waiting for and discussing so that we are armed with the information necessary to call the direction of this marketplace…and…what is the verdict?? haha. Or if you’d like to take a halloas unit the end of March I guess I can concede that. I expect a post on this! We can’t kick the can down the road forever! Time to make hard calls!
Take a ‘hiatus.’ Don’t know how it ended up as ‘halloas.’ I promise I’m sober. No Sake for Miyagi. Thanks.
Hey Mr. Miyagi. Great to hear from you. I’ll have my big market update out in a few days. As I’ve been saying, we might have enough information to see what the market is doing, but we might not. As of now pendings have been fairly normal so far this year, so I’m not sure there is anything completely definitive we can say right now. But at the same time we’ll see what happens with sales volume in March and April. That’s the big deal in my mind. Will the fairly normal level of pendings from January & February actually close? That’s the key and it will be most telling. It seems interest rates have been like a steroid for the market lately, so the market has felt a little more normal so far this year compared to the incredibly dull slump these past two quarters. Technically sales volume slumped again this past month, but I expected to see that since February sales reflect December and early January more than anything. So I think you’re right that we need a little more time. As frustrating as it is we may need to see what happens after rates presumably increase as we’ll see the real market after the spring season cools. But these next few months are critical in terms of sales volume and the word on the street. I say all this without my stats. I’ll be pulling those later today most likely. I usually wait until the 10th of the month so mostly all of the sales are calculated (though preliminary numbers last week show a clearly lower volume as expected).
Glad you’re sober… 🙂