Todd Huttunen began appraising more than 20 years ago with a few years off in between to pursue a career in cabinet making. He relegated that to hobby status and is currently an appraiser in an assessor’s office. His best friend dubbed him The Hall Monitor because of his rigidity and respect for rules. He offers Soapbox readers tongue-in-groove insight on appraisal issues.
This week Todd adds some seasoning to the time adjustment concept.
Here is a comment you will find in many residential appraisals “A lack of more recent sales required the use of sales which are more than six months old”. The apologetic nature of this comment implies that “recent” (meaning sales occurring within six months of the valuation date) are always better indicators of value than those which took place more than six months prior. The “logic” of using the most recent sales available would be sound if market conditions (i.e. price levels) changed on a straight-line basis over time as opposed to on a seasonal basis. But in many, if not most, residential markets that logic is flawed and the six month “guideline” should be thrown out.
The graph below is from the Westchester County Board of Realtors Sales Stats and it clearly demonstrates that for single family houses in Westchester County selling prices in the second and third quarters were significantly and consistently higher than in the first and second quarters over the last five years. Property values did not increase in a straight line with prices every month higher than the month before. Even during this “boom” market, prices went up AND down during the year depending on the season.
The seasonally based serpentine line of one quarter followed by the next straightens out remarkably if you connect the dots from first quarter to first quarter, second quarter to second quarter, etc. Any adjustment for market conditions must be based, first and foremost, on seasonal differences between the valuation date and the dates of the comparable sales. The appraiser must also consider that the “meeting of the minds” between buyer and seller precedes the closing date by sixty days give or take, and comparable sales should, to the extent possible, reflect similar seasonal conditions. If the subject property is being valued as of June 1, 2008, I would argue that in terms of market conditions, the sale which closed August 1, 2007 (ten months old) is a more reliable indicator of value than the one which closed February 1, 2008 (four months old).
So the next time your client insists on your using more “recent” sales, take the opportunity to explain the seasonal fluctuations in selling prices (if indeed they occur in your area) in defense of why your ten month old comparable is more reliable than the four month old sale you didn’t use.