I’ve been getting this question quite a bit lately. Are appraisers allowed to use non-MLS sales as “comps” in appraisal reports? My answer? Yes and no. Let’s unpack the “no” first.
NO: If an appraiser cannot verify the nature of a sale and understand the transaction, then it’s not good appraisal practice to use the sale as a comp. If an appraiser has no clue about condition, quality of upgrades, or any sales concessions, for instance, using a private “comp” would essentially be a blind comparison. Simply knowing a sales price and date of sale is really not enough to understand a transaction to make a proper comparison. This is why it’s a huge liability for an appraiser to use an unverified private sale because it could’ve sold high or low for a number of reasons.
YES: Appraisers can use non-MLS sales as “comps” in an appraisal report if the sales can be verified with someone principle to the transaction. In other words, the appraiser needs to be able to understand the nature of the transaction from someone like an agent, attorney, title company, buyer or seller. This happens with new construction all the time where an appraiser relies on a sales office for information on sales that were not listed in MLS. In the new construction scenario, Fannie Mae’s 2013 Seller’s Guide states on p. 584 that the appraiser can use a HUD-1 to verify the sale, but the appraiser also needs to provide sales from other developments too.
One important issue though is if there are ample public sales, why would an appraiser instead opt to use a private sale? There better be a compelling reason. Is the one private sale a “lone ranger” that supports a higher value, whereas all other sales exposed to the open market in MLS have sold at lower levels? If so, this lone sale might not really represent the market.
For further reference on verifying comparable sales, take a look at Fannie Mae and HUD standards.
Straight from the Fannie Mae 2013 Seller’s Guide (PDF) on p. 583:
Information used to verify the data is obtained from a “verification source.” Verification sources include, but are not limited to, the buyer, seller, listing agent, selling agent, and closing documents in certain situations. Regardless of the source(s) used, there must be sufficient data to understand the conditions of sale, existence of financing concessions, physical characteristics of the subject property, and whether it was an arms-length transaction. When comparable sales data is provided by parties that have a financial interest in either the sale or financing of the subject property, the appraiser must verify the data with a party that does not have a financial interest in the subject transaction.
Straight from HUD Handbook 4105.2:
The appraiser must verify all market and comparable information used in the appraisal process and is accountable for any information presented as “fact” used to develop the subject property’s value estimate. Verification ensures that the information is accurate and meaningful and provides the appraiser with a firm understanding of market motivations and trends. The goal of the verification process is to ensure that only information that accurately reflects current market conditions and trends is presented and that meaningful conclusions can be reached from this information.
The appraiser must verify sale information with the buyer, the seller or one of their representatives (broker, lender, lawyer, etc.) . If the sale cannot be verified with someone who has first-hand knowledge of the transaction, use public records. However, the appraiser must clearly state how the sale was verified and to what extent. Do not use or rely heavily on any sale that was not verified with an involved party or one of their representatives because concessions have become more common in the market.
Any questions or insight to add? Feel free to comment below.
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