It’s getting a little crazy out there. Let’s talk about multiple offers and buyers paying above the appraised value. I want to give some perspective from the lens of an appraiser, and I’d love to hear your take. Any thoughts?
MULTIPLE OFFERS: The other day I heard about a property that had 20 offers and the contract price ended up being 16% above the list price. What the? Clearly the market was willing to pay more than the list price, so maybe the property was priced too low. Yet if the seller accepted the very highest offer, are there really comps and data to support a value that high? That’s always the question. Here are some things to keep in mind.
1) Magic: Appraisers aren’t magicians. They have to support the value they say exists. Sometimes appraisers are told, “There were 20 offers above list price,” and maybe that says something about value, but appraisers still have to use actual comps and adjustments in a report instead of the number of offers.
There are multiple offers above list price.
Are there multiple comps above list price?
2) Getting stuck on the list price: It’s important for appraisers to be cautious not to give too much weight to the list price because sometimes it really doesn’t reflect value at all. It might seem like a red flag for a property to be in contract 16% above the list price, but what if the property was priced 16% too low? Moreover, if the sales and pendings all support a value 16% higher, then it’s a no-brainer to see the appraisal come in at that level. But if nothing is anywhere close to the contract price, then maybe the property got bid up too high.
3) One Buyer vs everyone: There might be one buyer willing to pay more than anyone for whatever reason, but market value is about what the market will pay. If a bank is going to lend on a property, it’s a good bet to lend on market value rather than one individual buyer’s perception of value.
4) Offering high: Let’s remember some buyers make offers based on the amount they are qualified to borrow rather than looking at the comps. This reminds us sometimes high offers don’t always mean value is there.
5) Offers as data for appraisers: The number of offers can be helpful for appraisers. If we know there were 20 offers above list price and it looks like value is going to come in lower, then the number of offers can at least prod appraisers to dig deeper to understand value. In other words, if 20 buyers are willing to pay more, but I’m coming in lower, I better be ready to explain why. Appraisers can also use the number of offers as supplementary data. So an appraiser might write in a report, “I gave Comps 1-2 the most weight because they were most similar, and 10 of the 20 offers were at contract price or above, which also helps support the opinion of value.”
PAYING ABOVE THE APPRAISED VALUE: I’m hearing more from agents about contracts where the buyer says, “We’ll pay $10,000 above the appraised value.” This tends to happen in a market with low inventory and when buyers feel desperate about getting an offer accepted. Anyway, when I read a buyer is willing to pay above the appraised value, my gut reaction is to think the buyer probably believes the contract price is too high. Can you relate? Yet I’m paid to be objective, so I cannot let what a buyer wrote in a contract influence my conclusion of value. Besides, to be fair, contract verbiage like this might be about a buyer trying to get an offer accepted rather than what a buyer believes about value. Ultimately it’s crucial to remember support for value is found in the market with comps and data rather than what a buyer writes in a contract (this is why I recommend agents to communicate well with appraisers).
Radio Interview: By the way, I had a 35-minute conversation last week on a financial radio show. If you need some background noise, check it out here.
I hope that was interesting or helpful.
Questions: Anything else to add to the conversation? Did I miss something? I’d love to hear your take.