LP/SP RATIO

We all know appraisals are being scrutinized more these days than in the past by lenders, underwriters and reviewers. We also know the main reason(s) for this, if we keep up with the news and happenings within the Real Estate Industry. With the declining market so wide spread, there is a reinforcing of expectations on the part of underwriters and reviewers and is being carried over to appraisal standards.

One of the main areas of an appraisal, that AACAZ has noticed, being looked at closely (in a declining market) is the support for the value conclusion. An Appraisers responsibility is to certify that they have performed an objective and complete analysis of quantifiable data supporting their conclusion, with a strong emphasis these days on: property value trends and market trends – supply and demand – concessions – sale dates and proximity of comparables - marketing time and exposure time – days on market.

There have been numerous Blogs, Posts, Comments, recently and in the past about concessions, disclosures, absorption rate, matched pair sales, cost to cure, all of which should be addressed in the reports ( NOTE: I will be adding new posts on these topics in the future). But there is one thing that is probably over-looked, neglected, or unknown that needs to be included. That is: List-To-Sale Price Ratio.

Realtors can, and some do, use this as a marketing tool for clients by telling sellers their sale price ratio is higher than others, which means a higher return at closing, or getting the property sold at or closer to the listing price. But that ratio is calculated on the performance of the individual Realtor and not the market.List-To-Sale Price Ratio, sometimes referred to as Sale Price Ratio or LPSP%, is a simple calculation to determine the ratio percentage between the list price and the sale price. Formula: Sale Price divided by List Price equals Ratio (%).

What this indicates, and what it is being looked at for, is seller’s of previously sold comps, willingness to negotiate and by how much. It is also an indicator of the market trend – increasing, stable, or declining. Adjusting the listings by the LPSP% calculated on the sales, a supporting indication of value is presented because of the Principle of Substitution, applied to the listings. By adjusting the listings and arranging all comps and listings from oldest to newest, will show higher or lower values as you move forward in time, proving a positive or negative time adjustment that can be calculated as a monthly percentage. The analysis results are an upper limit of value and a market trend direction.

Appraisers should have in their work files documented research supporting the market conditions reported (LP/SP ratio, concessions, active/pending listings, absorption rate, etc) along with comments in the report to comply with Standard Rule 1-1 for Credibility and the Competency Rule of USPAP. AACAZ is USPAP compliant.