Why does the appraiser ask for the contract?

Why does the appraiser need the sales contract?

 

This is a question we hear over and over again.  It seems counter-intuitive, that if an appraiser is hired to come to an independent opinion of market value in a sales situation, that they would require a copy of the contract.  There are a couple reasons that the appraiser will request the contract.

 

One is that it is a requirement of the Uniform Standards of Professional Appraisal Practice (USPAP) to which appraisers must comply. Specifically, the appraiser needs to comply with Standards Rule 1-5 (a), which is:

 

When the value opinion to be developed is market value, an appraiser must, if such information is available to the appraiser in the normal course of business: analyze all agreements of sale, options, and listings of the subject property current as of the effective date of the appraisal; and (b) analyze all sales of the subject property that occurred within three (3) years prior to the effective date of the appraisal.

 

This is the development standard, meaning when the appraiser is doing the analysis portion of the assignment.  The reporting standard, the meat of what the public sees, applies to Standards Rule 2-2(a)(viii). In it, the comment section, third paragraph is:

 

When reporting an opinion of market value, a summary of the results of analyzing the subject sales, agreements of sale, options, and listings in accordance with Standards Rule 1-5 is required. If such information is unobtainable, a statement on the efforts undertaken by the appraiser to obtain the information is required. If such information is irrelevant, a statement acknowledging the existing of the information and citing its lack of relevance is required.

 

As noted above, analyzing and reporting on the contract is a requirement of USPAP. This is the primary reason you will be asked for a copy of the sales contract.

 

Another reason that you will be asked for a copy of the contract is to analyze what the meeting of the minds was, as the negotiation process can be meaningful. If the house was listed for $250,000 and there were five offers from $250,000 to $260,000 and it sold for $260,000, then the seller was in a very strong position and it is evidence of a seller’s market. If it was listed for $250,000 and sat on the market for six months, before getting an accepted offer at $200,000, then the buyer was in the best position. What if this house sold for $240,000 and the appraisers’ sales were from $220,000 to $245,000, and the value indication was $238,000?  What if the adjusted range of the sales was from $235,000 to $240,000, but the most similar of the sales was $240,000 and adjusted at the same?  Even if the indication from other sales was $238,000, that $240,000 was also supported, and it was the most relevant sale. If the appraiser opted for that $238,000 value instead of considering the negotiated contract between willing buyer and willing seller, they may be remiss. It is one data point in a series of other data points, and should be considered. Now of course, if the best indicator was $235,000 and there was only one odd sale supporting $240,000, we would expect the opinion to be at $235,000. There is normally some swing in range, in which one sale will stand out as better than the others. This is one of the reasons that the appraiser asks for a copy of the contract. It is also one reason that appraisers do not average adjusted sales prices, as there is often one or two sales that are more similar to the subject property than the others.

 

If the lender underwriters could make a decision based on the adjusted and unadjusted range of values, it would make this contract analysis less important. Unfortunately, a range of values has not been accepted by the government sponsored entities as a viable position, in spite of it being most relevant from the appraisal standpoint. As long as a point value  is required in the reporting of the value opinion (and required by USPAP), appraisers will need to keep analyzing the contract.  It bears repeating however, that an appraisal should never be a “bulls-eye” and if the value falls lower than the sales price, then it is quite simply possible that the property sold over market value. This happens in particular in highly undersupplied markets, or with buyers who are unduly motivated or lack knowledge of the market.  The appraiser’s role as the unbiased third party is critical at that juncture. Reading the tone of the market and completing a true market analysis is vital, as markets are fluid.

 

Regardless of whether the appraiser is able to obtain a copy of the contract, they still need to address what steps they took to obtain it, and they need to analyze the listings of the property. Although USPAP addresses listings current as of the effective date of the report, the Fannie Mae/Freddie Mac forms go further with the specific question “is the subject property currently offered for sale or has it been offered for sale in the twelve months prior to the effective date of this appraisal?”  That means that even if it is not offered for sale today, but was offered for sale six months ago at $200,000 and is now under contract for $250,000, there is going to be a need to discuss what happened in the interim. Did the market change drastically in those six months, such as the city being awarded the second Amazon Headquarters?  Did the house undergo substantial renovation? Was it taken off the market six months ago in order to mitigate the problem points with buyers, such as installing a new roof and a new kitchen after complaints indicated those were huge sticking points?  The appraiser is going to have to address it regardless, if the report is for mortgage financing.

 

Even though it may seem strange that the appraiser is requesting a copy of the contract, or even asking about prior listings, it is part of our due diligence process. It is a requirement of our professional standards.  Please be forthcoming with all information that has been negotiated, including any sales concessions or repairs that may be on a separate addendum. Afterall, it is part of what is required of the appraiser in their analysis of the sale.