So, here’s the situation; you are appraising a unique property in a limited area with few sales. You inspect the subject on Wednesday and finally get to the write up on Friday morning. As you are searching the neighborhood for sales, you notice a fairly comparable home that sold on the same street. It happens to be the very best comparable you have. The problem? It sold on Thursday…the day after the inspection date. Bummer! But, can you still use it?
In order to answer this intriguing question, let’s step back for just a minute and look at the bigger picture. What is the purpose of an appraisal? Aren’t we here to establish the most probable price the subject would likely sell for in the current market? How do we best do that? Most often, it is through the sales comparison approach to value which uses the law of substitution to determine value. In other words, we find comparable properties which have sold within the current market conditions (or adjust if market conditions have changed). Which is likely more reflective of the current market; a sale from 9 months ago which exceeds FNMA guidelines for adjustments or one from a day after the inspection date which is nearly identical to the subject?
Unless something dramatic has happened in the marketplace between the effective date (in this case, the inspection date) and the signature date (even if it were a month later), why wouldn’t that sale be a good indicator of the current market?
So, why do so many appraisers and clients disagree with this? Frankly, I do not know other than tradition. I have heard it before; you cannot use a sale that closed after the effective date of the appraisal. Why? Because that is what their trainer taught them. Why did he teach that? Because his trainer taught him the same way. The fact is, USPAP does not disallow it. I know of only a few state guidelines which address it. Clients and the GSEs might have their own rules, but that is an individual company or organizational decision.
In reality, this situation would be quite unusual. My reports are nearly always turned in 48 hours from inspection. Comps are typically chosen early on in the process. The only likely scenario where a sale might be found after the effective date in my office is if it were presented to me by the client after the report was turned in as part of a reconsideration of value request. Frankly, this has happened to me and, when the sale was truly comparable, I have gridded it out as number 5 or 6 as part of a new appraisal assignment. Of course, it came with a big disclaimer.
That brings me to my final point. If you happen to use a sale that closed after the effective date, I would certainly make a special note in the addendum to avoid any confusion or reader misinformation.
If our job is to value real estate, we should be using the most effective tools at our disposal. If the best indicator of value is a sale which occurred after the effective date of the appraisal – and we know about it – it only makes sense that we would consider it in the appraisal process. To not do so would be… well… misleading.
Postscript: I put this blog idea out to a test audience of appraisers before publishing here. It was met with mixed (and interestingly strong) opinions. Some agree and others adamantly disagree with me on this issue. One thing I found interesting is that though those who disagreed on my stance did so with LOTS OF CAPS and exclamation points, yet none of them could point me to a USPAP standard, or opinion, or a FAQ to support their position. There may be individual GSEs or clients or even state boards who feel otherwise, but these are not standard appraisal practices. One respondent put the idea out to a USPAP instructor who said, “As far as I’m concerned, there is nothing to debate. It’s not a closed sale. And I would note it as a pending sale with unknown sale price, not on the grid.” I pointed out that the key words in her response were “As far as I’m concerned…” I also put the same question to two nationally known and respected USPAP instructors. ‘As far as one was concerned,’ this other USPAP instructor is wrong on this one. The other one pointed to Standard 3 which uses the word “contemporaneous” to describe sale dates (of course, that means happening in the same time period). There are also some other things said in reference to retrospective appraisals that tends to indicate a need to use sales prior to the effective date (that makes sense). In the end, we will have to agree to disagree on this one and follow the opinion of one other respondent who said, “…it is up to all of you to make the bed you lay down in.” As for me and my appraisal firm, we will make our bed with the sale(s) that best represents the most accurate opinion of value…regardless of the sales date.