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 the 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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