Can we trust the comps?

Wednesday, 28 March 2012
Buyers, sellers, appraisers and real estate brokers all rely on the MLS and property appraiser's records of sold properties to assist in determining fair value of other properties. While usually accurate there are some recorded prices that are inaccurate. Buyers and sellers sometimes deliberately manipulate the recorded price of real estate sales. Other times the details of a sale may unintentionally cloud the reliability of the recorded price. Developers commonly record sales at numbers higher than the actual selling prices, especially in a declining market. For instance, a developer is selling units for $575,000 but the market softens and he must reduce prices to sell the remaining units but doesn't want the public records to show that. Rather than dropping the prices, he begins offering a credit back at closing. Example: He accepts $500,000 for a unit but records it as having sold for $575,000. The buyer received a "decorator" or other randomly named $75,000 credit back at closing. The buyer paid $500,000 but the record reflects that the unit sold for $575,000.

In another scenario a sale may record at a number lower than the actual price paid. A buyer hoping to purchase more than one property in a development would benefit from a low recorded price on his first purchase. By designating an arbitrary portion of the sales price to the contents (or any non-installed items) and paying for them in a separate sale, the sale of the unit records at a lower price. For instance, the seller may want $320,000 for their unit fully furnished. The buyer can agree to purchase the unit for $290,000 and the contents for $30,000. Never mind that the contents were worth $5,000 to $10,000 max. The buyer now has a low comp, $290,000, to aid in his next negotiations and the seller may benefit from a reduced capital gain. It is entirely legal to sell the contents as a separate sale and the amount paid for the contents is entirely subjective but the result is misleading comps. Unless the listing agent went back and changed the MLS listing to unfurnished, which often doesn't happen, appraisers and other agents are left with the impression that the unit sold furnished for $290,000. Even if she did change the MLS listing to unfurnished, the arbitrary high $30,000 distorts the real sold price.

Cash for contents is common in short sales as sellers are walking away with zero proceeds from the sale of their property. It doesn't make sense to just give away the contents with the property if they can legally be separated and sold. Participants in most short sales are required to sign an arm's length agreement stating that there are no "hidden agreements, implied terms or special understandings" between the buyer, seller and agents involved that have not been disclosed concerning "the above mentioned property". Now whether or not the contents concern "the above mentioned property" is unclear. A short seller agrees to sign a contract for $X if the buyer will hand over $Y in cash to the seller at closing for the contents. The result is inaccurate comps especially if those contents include the appliances that are typically included in a sale or if the amount paid for contents is inflated as in my first example. Best strategy if you're trying to figure out the value of a property is to make the acquaintance of someone with daily involvement in your market. Full time real estate agents who are active in your market will know stuff that doesn't get included the public records. Of course, the details of some sales will never be known except to the participants. Key takeaway here is to take all comps with a grain of salt and to greatly mistrust any anomalous comp. Even if accurate, a single crazy low recorded sales price doesn't usually mean that all similar properties should sell for around the same price. Developer sales are always suspect. Skepticism, as always, is healthy.

Dr. Delp - It's part of a science called "phrenology".
Evil Roy Slade - What's science?