What’s in a Sales Contract? Insights from a Seasoned Appraiser

Sales contract for sale of real estate property

Why must an appraiser be given a copy of the sales contract? First and foremost, Standards Rule 1-5 in the Uniform Standards of Professional Appraisal Practice (USPAP) states that we are to: “analyze all agreements of sale.” That’s the real reason why—because USPAP says so.

Secondly, the appraiser is likely familiar with the local real estate contract forms, customary terms, and conditions of real estate transactions in the area, and might be able to identify irregularities and comment on them.

Thirdly, and more importantly, there may be provisions in the contract that identify concessions, non-real property items included in the sale, or other unusual conditions that would give the appraiser the opportunity to comment on or explain in the appraisal report as to why there is a difference between the indicated market value of the subject property and the contract price.

Questions we should ask ourselves

When should we analyze the contract?

Looking at the sales contract early on allows the appraiser to identify any “subject to” items or other conditions that could influence the value conclusion.

However, reviewing the contract early might also put the sales price in the back of the appraiser’s mind. And although it shouldn’t, it may unintentionally influence the appraiser’s comparable selection and eventually impact a direction in value.

Maybe looking at the sales contract only after developing the appraiser’s opinion of value would help avoid the above concern?

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What is in the sales contract that an appraiser actually needs to see?

For a typical “as-is” Market Value assignment with a straightforward contract with no contingencies or conditions, there is probably nothing that an appraiser actually needs to see. If a property appraises for $200,000 for a refinance, then it is still a $200,000 property for a sale transaction.

Of course, if the sale transaction has a “subject to” provision such as adding, replacing, or repairing something that would impact value, then the appraiser could properly account for that in the appraisal. However, that information could also have been provided to the appraiser without seeing the contract, by the lender (or client) stating in their engagement letter to “Appraise the property subject to replacing the roof or HVAC, etc.”

Analyzing the contract might also allow the appraiser the opportunity to comment or explain in the report prior to delivery, rather than afterward, whythe value opinion differs from the sales price,such as a condo being sold with non-real property items (expensive furnishings and artwork included in the sales price).

What is an appraiser expected to analyze and give an opinion on?

Attorneys are the professionals who are licensed to analyze and give opinions on the accuracy, appropriateness, adequacy, abnormalities, and legality of contracts. Appraisers should be careful not to perform analysis and/or provide opinions and conclusions that would fall under “practicing law without a license.”

That said, there is no clear guidance in USPAP, Secondary Market Guidelines, HUD or VA handbooks, etc. that states exactly what the appraiser is supposed to be looking for when performing the contract analysis. That lack of guidance creates two questions without answers:

  • Without specific standards or guidelines, how does the appraiser know what to do?
  • How does a state appraisal board or a court determine what was an appropriate analysis given the lack of any authoritative guidance?

Should the contract price have any impact on the value conclusion?

Some students in my appraisal classes have argued that if the contract price falls within the indicated value range of the comparables after adjustment, it is appropriate to reconcile to the contract price. However, extreme care should be taken with that philosophy to be sure the appraiser can still truthfully sign the pre-printed Certification item #18 on the URAR form which states:

My employment and/or compensation for performing this appraisal or any future or anticipated appraisals was not conditioned on any agreement or understanding, written or otherwise, that I would report (or present analysis supporting) a predetermined specific value, a predetermined minimum value, a range or direction in value, a value that favors the cause of any party, or the attainment of a specific result or occurrence of a specific subsequent event (such as approval of a pending mortgage loan application).”

When contract prices and value often differ

Contracts provide a “price” (an agreed number between the buyer and the seller), which may or may not have anything to do with “market value.” McKissock has offered courses on mortgage fraud for decades. A key element in classic fraudulent transactions is getting an appraisal that overvalues the property. Without a gap between actual value and the inflated contract price there are often no illicit proceeds for the perpetrators of the fraud to get. Of course, the number one tool to achieve that is a phony contract showing an inflated price.

These phony contracts typically give no obvious signs of their falsehood. Experienced fraudsters know to select targets where there are some properties in the general area that are sold at the higher prices. The perpetrators are hoping that having seen the contract, the unsuspecting appraiser will search for comparables by price range and find those higher priced sales and use them as comparables to support the stated contract price. Even some of the most experienced appraisers can fall victim to this scam. A reliable way to avoid falling into this trap is to complete a proper market analysis and search for comparable properties based on relevant characteristics for the subject’s market rather than search by sale price.

CE Course: Learn about different types of fraud schemes—and how to avoid them—in our course, Avoiding Mortgage Fraud for Appraisers.

And then to complicate things even more, there’s the investor segment of the market. As an investor, I have paid far more than a property’s market value because I really wanted or needed a specific property. I’ve also paid far less than a property’s market value because a seller was vulnerable or desperate to sell. In fact, contract prices on properties I’ve purchased are seldom anywhere near their true market value.

Here’s one idea to help stay safe

Although it is common to check out the sales contract up front, maybe the safest and smartest way to avoid getting caught in a fraudulent deal (or being misled by an investor’s purchase price in areas where those transactions are common) would be to follow the suggestion above and not look at anything in the contract (especially the sales price) until after an initial opinion of value has been developed. Then if there were a “subject to” or some other conditions that warranted accounting for in the valuation, the appraiser could adjust their opinion to account for the “new” information without the contract sales price having influenced the development process.

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Written by Steven W. Vehmeier. Steve resides in Florida where he is a state-certified general real estate appraiser and a licensed real estate broker. He has taught appraisal qualifying and continuing education courses for multiple colleges, professional appraisal organizations, his own school, and McKissock Learning since the mid-90s, often spending over 100 days a year traveling and teaching. He has authored dozens of appraisal courses and textbooks, including several for McKissock, and has been a member or affiliate of eight national appraisal organizations, and national director of two.

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