On the FannieMae/FreddieMac Market Conditions (MC) Form there is an entry for the ‘Median Sale Price as % of List Price’ at the bottom line of the top grid section. In other parts of a report, clients and lenders often ask appraisers to use this SP/LP percentage to ‘adjust’ listings to predict the eventual sale price.
So what is that percentage anyway?
The SP/LP percentage is a sales and marketing scheme designed to show how close a Sale Price comes to the List Price of a property. The math is simple: Sale Price divided by List Price, converted to a percentage. On the surface, acceptable. However, it’s not really useful for market statistics if it’s not done correctly.
If inaccurate, what good is it?
If it’s not accurate, or is calculated improperly, and an appraiser uses the inaccurate percentage to
justify market evidence or make an adjustment, then you have potentially violated USPAP by producing a report (or at least part of one) that is not credible.
The rub comes in the methodology used by the various MLS systems around the country to calculate the SP/LP%. Some of the private ‘MC Form’ generating spreadsheets that are based on MLS info automatically downloaded to the spreadsheet worksheet are based on the ‘most recent’ List Price, not the Original List Price.
The first dirty little secret is most MLS systems base the SP/LP% on the ‘most recent’ List Price verses the eventual sale price. The % is fine if there has been no List Price change during the listing period, or no re-listing after its Original List Date with a different List Price.
The second dirty little secret is that most often MLS systems track the Days on Market from the ‘most
recent price change date’, not the Original List Date. (Thankfully the Northwest MLS serving my area is a bit more honest. Any re-list using a new listing number within 90 days has the original listing added to the new listing – to show the Original List Price, and the Original List Date in the listing to compute the CDOM. However, they calculate the LP/SP% from the ‘most recent’ List Price.)
The third dirty little secret is the fact many agents are in on the ruse. Some will re-list a property within a short time of original expiration using a slightly different street address to try to fool the MLS tracking system. This helps them ‘puff the numbers’ to their benefit.
If a MLS system does not track and report the Original List Price based on ENTIRE days on market
(typically named CDOM – Combined Days on Market) as of the Original List Date, but only tracks the ‘most recent’ List Price, you will probably find that the SP/LP% will show a higher percentage figure based on the most recent List Price change. Similarly, the Days on Market will be shorter.
This SP/LP% percentage figure should be calculated from the Original List Date and Original List Price
instead of the most recent List Price change date.
Unfortunately, if CDOM and Original List Price are not shown on the current MLS listing you may have to
examine the listing history to make the calculation. But if the info is shown on the listing sheet you use (on screen or printed), then you should use the Original List Price, and also the total (or combined) days on market (CDOM).
Here’s an example of three properties from a large MLS system:
The inaccurate methodology used by the MLS systems is designed to ‘puff’ the percentage figure and shorten marketing times so that the results look more appealing to consumers and give bragging rights to the RE Agents. But that does not mean we should use them when doing appraisal reports. You can see by the examples above that the correct SP/LP% is lower by 3.1% to 11.5%.
When including Listings in reports, this appraiser REFUSES to adjust those for the SP/LP% - because we don’t really know for what price the listed property will sell. As the example above shows, the percentage is somewhere between 86.8% and 100% - but more accurately 86.8% to 94.4%. But it could be above 100%. So what figure should the appraiser use? I have a statement on the report Listings page that states why I don’t use this percentage figure. Only one underwriter has ever challenged this procedure – ‘because everyone does it.’ However, when the U/W read my explanation the U/W realized why using the fictional SP/LP% is improper.
Some people will claim that the methods MLS systems use to calculate the SP/LP% using the ‘most recent’ info is more accurate because that demonstrates the “realistic” market at play. I say boloney.
RE Agents are sales people and advocates for their clients. They list properties for the price they are told to, or for a price they figure will generate interest. They try to sell for the highest price possible in order to generate the maximum commission. In some cases the list price is too high for the current market. If that’s the case, the Original List Price and Date still become the statistics we appraisers should use. Again, the examples above prove my point.