7 reasons why buyers offer more than a house is worth

Have you noticed how some listings are receiving multiple offers at list price even though they are priced way too high for the neighborhood? I’m talking about the type of listings where agents and others all think, “There’s no way in heck it’s going to appraise that high.” But buyers are still offering at list price and even above. What does this tell us about the market?

Possibilities for why buyers offer full price even when the list price is REALLY high for the neighborhood:

  1. Value: The market has increased in recent months.
  2. Strategy: Since inventory is so tight in the Sacramento area, buyers feel the need to offer at list price or above to get into contract.
  3. Rejection: Buyers have become burned-out from getting their offers rejected, so they’re offering at higher levels to help compete with other buyers.
  4. Cash Competition: There is so much cash in the market, so financed offers need to find a way to be more attractive to sellers (higher offers can help).
  5. Money: It’s really cheap to borrow money right now, so taking out a larger loan is not as big of a deal.
  6. Financing: When buyers finance nearly all of their purchase (FHA), they’re essentially spending someone else’s money. It’s a whole lot easier to offer more when you’re not spending your own money, right?
  7. Good Deals: Many buyers still remember how high prices used to be, so offering more in today’s market still feels like a deal because current values are far lower in the post real estate “bubble” burst.
  8. Other: What do you think?

Housing Inventory in Sacramento County - Graph by Trendgraphix - posted on Sacramento Appraisal Blog

My take as an appraiser: Having multiple offers can be one indicator for how the market sees a property, but it’s not the end-all fool-proof metric for determining value. For example, 10 offers at list price sounds sincerely convincing on paper to establish value, but we also must sift through factors above to try to understand the motivations of buyers – not to mention consider competitive sales and other market metrics. After all, as mentioned above, there are many reasons why a buyer or group of buyers might offer more for a property than it is actually worth.

Listing a property at any price level: I was talking to an investor friend recently about how he could pretty much list his properties at any price level right now (relatively speaking), yet still generate multiple offers due to scarcity of supply. This isn’t true in every case of course, but it’s definitely a realistic dynamic in the Sacramento area real estate market.

All things considered, it’s easy to blame appraisers when appraisals come in “low”, and there are certainly scenarios where appraisers should be blamed. However, in cases like this where offers are unrealistically high for the market, the appraisal probably should come in “low”, right? By the way, check out a previous article if you need help challenging a low appraisal.

Anything you’d add? Any stories to share? Realtors, have you seen listings get into contract far above what you think is realistic? What advice would you give to buyers trying to get an offer accepted these days?

SacBiz Journal Mention: By the way, I was quoted in a Sacramento Business Journal article last week on a related topic of “Homebuyers starting to pay higher prices as investor market dominance wanes.”

If you have any questions or Sacramento home appraisal or property tax appeal needs, let’s connect by phone 916-595-3735, email, Twitter, subscribe to posts by email (or RSS) or “like” my page on Facebook

Comments

  1. Fernando Cigaro says

    Those are seven very interesting reasons you point out there Ryan. But why are people diving head first into a real estate market that has the potential to go back into a decline? Is it 100% accepted as fact, that the bottom has been hit and now the recovery will begin? Maybe the only reason values have been increasing over the past few months is because of the multiple offers, over MV, on almost every listing, due to an extremely low inventory. If that is the case and the rumors of a huge shadow inventory being held back by the banks is true, then a lot of people are going to be regretting being so anxious to buy up more real estate in the Sacramento market area.

    • says

      Fernando, there are good reasons to think the bottom has been reached, yet there are still red flags in my mind – especially since unemployment is still 11.1% in Sacramento County. I actually did a video interview about this topic recently in case it’s of interest (http://sacramentoappraisalblog.com/2012/06/18/have-we-reached-the-bottom-of-the-real-estate-market-in-sacramento/). Is it a 100% fact? Many experts seem to think the bottom has indeed been reached, but anything can happen. There are no absolutes in real estate or any investment.

      You’ll never hear me say “values have reached as low as they will go” or “it’s absolutely the best time to buy right now” because that just might not be true. The low inventory has definitely been the X-factor for this surge in our real estate market, and a change in inventory can definitely change the direction of the market if there was indeed a “wave” of foreclosures that hit. When describing the market in my appraisal reports lately, I’ve been talking about a recent spike in values (in some areas – not everywhere), but how a change in inventory in coming months can change the direction of the market.

      Ultimately, real estate markets have the potential to decline. It’s about assessing risk for the buyer now. Since values are so low in Sacramento and it’s so cheap to borrow money, it makes sense for many to invest in the market because there is room for a bit of loss ahead if values take a little hit in coming months or years. Of course if they absolutely tank…. well, that’s another story. I’m leary of the properties I see on the market that are selling at the very top right now and far above anything else over the past year (because of the “hotness” of the market).

      All things considered, I’ve been saying this whole time that we’ll see how the market unfolds in the next 12-18 months. It’s nice to have a little spike, but what’s going to happen through Fall, Winter and with the next president taking office?

  2. says

    Buyers expect appraisals to cover their potential mistakes. Their goal often is only to get their offer to the top of the pile.

    Appraisers – bring your expertise to the game! Considering the current failure rate of FHA minimum down loans and increasing mortgage insurance costs, its important that those loans have proper colateralization.

  3. says

    AS mortgage services and finance services are so easy no one thinks bout it and take a load to pay the amount as the seller want.

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