Portland Area Real Estate Appraisal Discussion

Value of Prior Sales in Real Estate Appraisal
February 25th, 2015 10:19 AM

Recently, I performed an appraisal on a very unique property that sold in 2006 after a normal time on the market.  Other than maintenance, the subject did not change noticeably in nine years.  This is an upper end property near Portland, Oregon; an area where such home prices have not recovered as much as lower priced and median priced properties have since the mortgage meltdown.  Consequently, the S&P/Case-Shiller Portland Home Price Index would not be a good way to ballpark the current value or the market appreciation adjustments for this subject, because the index is derived from properties at all price levels and locations across Portland.

The Case-Shiller Portland Index was 181.02 in August of 2006 and the most recent Index (November 2014) is 170.44.  Case-Shiller suggests a price decline of roughly six percent, or that the subject’s current value should be $740,000 rounded.  However, this information can confuse an appraiser, given that all of the adjusted comparable sales are pointing closer to a value of $650,000.  Based on this, some appraisers or real estate agents might think that the prior sale is not relevant at all.  The problem is not with the prior sale being relevant, but that the published market data are not relevant to this property.

The Case-Shiller Index and other published market data, like multiple listing market reports, are great for looking at the overall market, but they do not apply to most individual properties as an adjustment.  Conversely, if the appraiser performs a search of only comparable sales that are similar to the subject over the past nine years, and plots them on an Excel scatter chart with a polynomial trend line, it is easy to see that the prior sale is relevant and consistent with the adjusted comparable sales.

The Nine-Year Trend chart (above) shows that a value for the subject close to $650,000 is reasonable, and that a value at $740,000 (as suggested by the Portland Case-Shiller Index) would not be reasonable.  A value of $740,000 would be above the sales price of anything similar that has sold in the past two years.  The Nine-Year Trend chart shows that when the subject last sold, it was at the upper end of the market for similar properties, but it was not at the top of the market (nor above the market) because there were many properties that sold for more.  The Nine-Year Trend chart, in addition to an appraiser’s comparable sales analysis, shows that this subject’s prior sale is relevant after many more years than the three years that appraisers are required to analyze a prior sale.

Did I leave anything out or do you want to join in the conversation?  Let me know in the comments below.

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Thanks for reading,

Gary F. Kristensen

Nice job, Gary. This is a great method. It's always nice when you can look back in history and note how the market responded at the time to the property. We are asking that same question today as appraisers. What is the market's response to the subject property? I use this method all the time, and a graph like yours sure can help tell the story of the market. I do find sometimes the market changes over time, so it's important to be in tune with the previous sale's market. For instance, duplexes in Sacramento were very much inflated in 2005 because buyers were betting on massive appreciation (and paying way beyond the property's income production). Nowadays duplexes are selling at more reasonable levels, so when looking at a previous sale in 2005, it can look like there is a HUGE value premium for the property type. Yet in today's market, the "premium" doesn't transfer over since it was something that was only real in 2005. I found this recently with a couple of duplex appraisals, but it's not something I usually see in the single family market (like with your example). Again, great stuff. I always enjoy your posts.

Posted by Ryan Lundquist on February 25th, 2015 10:38 AM
Well said Ryan. Thank you for the great comment. I totally agree.

Posted by Gary Kristensen on February 25th, 2015 10:42 AM
I agree with you Gary that appraisers must look more on a local level to provide property specific value estimates while looking at the index as you suggested gives a better macro view of the entire market.

Posted by Tom Horn on February 25th, 2015 11:36 AM
Thank Tom for the comment. You're right, appraisal is about the local level market. We still need the overall context of the larger market, but value is made on the local level.

Posted by Gary Kristensen on February 25th, 2015 11:39 AM
Great example Gary. Like what was said before, the local analysis is very important in concluding a value. Then if necessary, expand from there.

Posted by Lucas on February 27th, 2015 2:19 PM
Thank you Lucas for your comment. Prior sales offer great context for appraisers.

Posted by Gary Kristensen on February 27th, 2015 4:08 PM
Some appraisers don't take the time to look at the sub market in which their subject belongs and lump it in with the rest of the market. I love the way you use statistics and the scatter plot to support or gain insight into values. Again, I continue to learn from you educational blog posts. Keep up the excellent work!

Posted by Paul Rowe on March 1st, 2015 10:31 AM
Thank you Paul for your comment. It is an honor to have you as a follower of my blog.

Posted by Gary Kristensen on March 1st, 2015 11:05 PM


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