How much does a previous purchase matter to appraisers?
Originally posted on Sacramento Appraisal Blog on August 28, 2018
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.
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 tweeted about:
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.
I’ve been appraising full-time since 2003 and my clients include home owners, real estate agents, governmental agencies, attorneys, and lenders. I handle appraisals for estate settlement, divorce, pre-listing, loans and other types of private matters. I am able to serve as an expert witness in court also. I speak monthly in real estate offices to share what the real estate market is doing as well as teach appraisal-related classes. I was the chair of the Housing Opportunity Committee in 2016 and I currently sit on the Strategic Planning and Finance Committee through the Sacramento Association of Realtors. I am a board member of the Real Estate Appraisers Association of Sacramento. I was awarded the Affiliate of the Year in 2014 from the Sacramento Association of Realtors, and I was given the Citizen of the Year award by Rancho Cordova Rotary in 2008 (when I used to live there) and the Distinguished Service to Youth award by the Cordova Community Council in 2009.