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.
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All great points Ryan. When I’m appraising a property and there are multiple offers over the contract price, but I’m coming in lower, I will certainly be looking very closely at my analysis of the market conditions and comparable sales selected to see if I might be missing something that buyers do not seem to be missing. Sometimes, particularly in the spring, the market will jump up quickly rather than on a strait trend line and it can be hard for the appraiser to make adjustments to keep up.
Thank you Gary. I totally agree with you about the market. It’s easy to fall into the trap of giving a modest upward adjustment for the market, but sometimes the adjustment simply needs to be higher. When I came into the industry I was taught to give an upward 1% adjustment per month, but that may or may not cut it in many cases (it’s just a bogus made-up adjustment anyway). Last night I heard from an agent on Facebook about a property that was listed for $359,000 and is in contract above $390,000. If I was appraising that one I would be paying very close attention to the pendings in the neighborhood when giving my market conditions adjustment.
Ryan, this is a great post – a reality check that is welcomed! For those of you that DO NOT use Ryan’s “Information Sheet for Appraiser”, you are really missing out! I have been using it for the past 4+ years. I cannot begin to tell you the positive comments and diaglog I’ve received from the appraisers. You must also attach data with notes to support your list price. Ryan’s class “How to Think Like An Appraiser” is a must in order to learn how to interpret and convery relevant data. Ryan, again, thank you for all you do to help the real estate community be a better place to work and live!
Thank you Cheryl. I really appreciate your kinds words. I’m so glad we are in touch. It’s a real pleasure.
I’m elated to hear you are using the information sheet. That makes my day. 🙂
For any onlookers, you can check out the appraiser info sheet at the following link. The sheet is designed to help agents beat appraisers to answering the questions they tend to ask. It helps agents focus on data and tell the story of the marketing of the property (without pressuring an appraiser to “hit the number”). Many times agents hand appraisers a stack of sales, and I get that, but this is a way to focus the conversation and get way more specific than just a stack of potential comps. Anyway, have a look and please feel free to make it better. If you do make it better though, please share what you do. http://sacramentoappraisalblog.com/2014/10/09/a-cheat-sheet-for-agents-of-information-to-provide-to-the-appraiser/
Ryan,
Great post as always. A couple of things to add:
1) The recent Fannie Mae webinars made it very clear Fannie Mae wants the appraised value to be supported by closed sales. So, if you go above all closed sales you better have airtight data.
That being said. In some markets, I am very comfortable pulling closed sales up to 2 years ago. Trendsheet makes this very easy with useful tables to append to the report.
2) My appraisal reports have verbiage that specifically state that the report is not meant to be used in negotiations or as a contingency tool. My client is the lender. Not the buyer, the seller, or their agents.
Thank you Abdur. Did Fannie Mae say the value needs to basically be bracketed? I did not see that webinar. I can dig the concept of bracketing in many cases, though obviously if the market is appreciating (or declining) then that won’t always be possible. Seems like there is good reason in some cases to go beyond closed sales and do exactly what you said – provide support.
Essentially. There was a Q & A for both webinars I watched and one of them she was asked about coming in above closed sales and she stated that Fannie Mae will expect the closed sales to support the value conclusion.
A timely article (per usual) because we just had 25 offers on a house in Citrus Heights. We expected the price to be bid up somewhat, but not as much as it did!
Right on. Thanks Marcy. Wow, 25 offers is no joke. Congrats. It’s good to hear things did not get too out of control either. On a side note I think some sellers struggle to accept a reasonable offer (that is more in line with real value) when there are so many offers on the table. Sellers would be wise to consider which offers are the strongest rather than just the highest.
I always look forward to your articles. Always so timely! There is definetly a lack of understanding out there regarding what market value really means and how we as appraisers estimate it. It certainly can be tricky! I do appreciate the need for good communication with the real estate agents, to the extent possible. I find good communication is so important.
Thank you Jamie. I appreciate it. Yes, it can be tricky. Will the real market stand up? That’s the question we ask in the midst of such a wide variety of offers. Interestingly enough a few emails this morning have echoed what Marcy said above in that the offers aren’t always a crazy amount over asking price despite getting so many. By the way, I read your post this morning. It’s always a good thing when you bring in a pizza analogy… We need more of that in life. 🙂
I always find it interesting to see how markets react to different situations. Real estate is never dull. That’s one reason why I love being an appraiser. Thanks so much for reading my post today also! I really appreciate it! I hope you enjoyed it and that it was not over the top. Have a great weekend!!!
Good evening, Ryan
I enjoyed reading your post on multiple offers and paying above the appraised value.
It is right on point. I agree with you when you state “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.”
Your post is excellent and it gives me a better understanding of the appraisal process which will allow me to help my buyers and sellers understand the appraisal process also.
Thank you
You do a GREAT job.
Sincerely,
Thank you Del. You are the most encouraging person I know, and I’m so grateful to have your voice in my life. Thanks for the kind words. I’m glad the post was useful too.
Don’t know if anyone else caught the most recent Sacramento-area House Hunters, or if my wife and I are the only ones who watch that drivel, but the house the couple ended up buying was listed for $529k (IIRC) yet they ended up paying $639k. Oh and their “budget” was $600k lol. The episode was titled “Downtown Bound in Sacramento” and didn’t say exactly what part of town the house was in.
Chris, that is great. I only wish I caught it, and I hope I can find that somewhere. Looks like they went a little over budget… I’d actually love to look up the sale to see if it was listed at $529,00-ish before closing at $639,000. My understanding is those shows stretch the truth at times and film houses that have actually already been bought too. A show like that in a tight market would be really challenging though to film because they might be able to show three houses the buyer is interested in, but that doesn’t mean the buyer is actually going to get an offer accepted.
On a side note, I was contacted once from a reality show doing a before and after flip. They asked me if I would do an appraisal before and after for them so they could broadcast the number on the show. I was surprised because I didn’t think they used an actual appraisal for their numbers. Yet in this case they needed something in three days and they were fishing for the lowest fee possible I think, so we couldn’t work out a deal. Sigh. My career in reality TV is a wash.
Hey Ryan, if it helps you to look it up, I caught the end of the show again—they said it was listed for $539,900, and they bought it for $645,000. And sorry about your reality TV career, ha!
Thanks. I will definitely check that out. That does seem odd to see such a disparity in price unless this was severely underpriced. We just don’t have the sort of market where stuff happens that extreme. Now San Jose is a different story though… And thanks for your condolences. I’m trying to move from the denial / anger phase to acceptance…. 🙂
Ditto what Cheryl said about using Ryan’s cheat sheet. It helps me a lot…and talking about it with potential clients helps me get listings.
On one of your final points, you say “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.”
I don’t think that is necessarily true. Most buyers and sellers don’t understand the appraisal process. They think of it as a key part of the transaction that they have no control over. And, by making an offer like that, I think it gives them some feeling of control.
Instead of getting to know how appraisers work, I hear so many fellow agents, buyers, and sellers say things like “All we can do is pray/hope for the best” or “I don’t want to upset the appraiser so he will give us a good number.”
Thank you Corey. That’s so great to hear.
I appreciate your perspective about why buyers might write that, and I’ll take that to heart. My gut reaction as an appraiser is to think the buyer is worried about the value coming in at contract or above. To be fair there is probably something to that in at least some of the cases because we don’t see this type of language on deals where it is very obvious where value is at. Yet this verbiage really only shows up in an aggressive market with tight inventory, so it could be more symptomatic of the market instead of value too. But I think you have a tremendous point, and it 100% underscores how important it is to not judge the value based on what the buyer has written. Thanks for your prod to think about this differently.
You have the right perspective as an agent. Kudos to you Corey. I also see the same thing where a huge percentage of real estate agents have a very hands-off approach to communicating well with appraisers. I find many agents are reactive in their communication instead of proactive about sharing the right types of information in the right way. For any onlookers here is a screencast to walk through how to use the “info sheet” I mentioned in this post. I did a webinar for a loan officer a while back and this basically recorded what I said. Check it out if it’s relevant and let me know what you think. https://youtu.be/f6y-8KsVJkE
Great post, Ryan. To me, this is the heart of the disconnect between agents and appraisers. Many agents believe that if 20 people are willing to pay a certain price then its gotta be worth it, right? On the other hand, appraising is focused on historical sales prices, so it is important to have a good knowledge of what is currently happening. Keeping up with inventory levels, pending sales, etc. is key to this. We, as appraisers, need to bridge the gap between the historical sale and current activity.
Well stated Tom. I appreciate your thoughts and agree with you. Your comment reminds me of something I hear on occasion that agents look to the present and appraisers look to the past. I get the sentiment, but I don’t know that it is true. It might feel true about appraisers looking to the past, but if we are doing a current market appraisal we absolutely need to consider the past market (probably represented by sales) and the current market (probably represented by pendings, listings, DOM, SP/LP %, feedback from the real estate community, etc…). Indeed, appraisers can bridge that gap as you stated. Yet if agents are only experiencing appraisers using old sales and not making time adjustments up when they are needed, then our comments are only theoretical.
I love the points you make, Ryan……I’ve had several conversations lately with realtors on this very topic. One just this week who made the comment, “ but there were 10 offers on this house” in the same breath she told me she that there were no comparables to support her listing price…..I would love to share this with some realtors I know and work with…. Is it okay to share this?
Thank you Robyn. The struggle is real. This is exactly why agents need to help their sellers sometimes select the strongest and most reasonable offer rather than the highest one. I had a Realtor on Facebook tell me lately she is seeing some buyers offer a few weeks of free rent to the seller after escrow closes instead of making absurdly high offers. That is an interesting tactic. Anyway, please do share away. Thank you sincerely. For reference, I have five ways to share as listed here: http://sacramentoappraisalblog.com/share/
FNMA Definition of Market Value:
Market value is the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:
• buyer and seller are typically motivated;
• both parties are well informed or well advised, and each acting in what he or she considers his/her own best interest;
• a reasonable time is allowed for exposure in the open market;
• payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and
• the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
The key phrase in the Fannie Mae definition of market value pertaining to the subject at hand is the assumption that the price is not affected by undue influence. If the buyer is making an offer property knowing that there are 19 other competitive offers coming in at the same time it can be reasonably assumed that there could be undue influence in making the offer. Therefore, the contract sale price, under these circumstances, may not meet the Fannie Mae definition of market value.
To determine whether or not the contract sale price meets the definition of market value, other very recent sales, and perhaps pending sales, of similar properties in the market area would be available to support the contract sale price. Twenty offers on a single property does not a market make. If the contract sale price is representative of the market value, as defined by Fannie Mae, then other recent sales or pending sales should be available.
If a buyer is making an offer that is 16% above listing price and it is coming in with all cash, then there is no problem. But if that buyer is purchasing the property with financing then the appraiser must value the property using the Fannie Mae definition of market value. If there is supportive evidence in the market that the contract sale price meets that definition then there is no issue. If there is not any supporting evidence in the market then the market value differs from the contract sale price. I did not mean to get too wordy here but I guess that is how wound up.
Thank you Tom. I appreciate your thoughts and in the words you scribble you are always welcome to be short or long.
I like the word “probable” in the definition too. That idea influences the word picture in the image I created above. If you lined up 100 interested buyers, what would be the most probable price they would pay? The tricky part is sometimes buyers feel they have to offer at list price or above even though the list price might not be a reasonable representation of value.
I suppose that the listing price could have been significantly below the true value but I don’t think that is very likely. The key question is would the buyer offer 16% above asking if there weren’t any other competing offers? Would they even offer full asking price in that case? It will all come out in the wash when considering competitive properties and what they are selling for.
Tom,
Although a bit wordy, very prudent information. However, we are in a market where there is a lot of “undue” influence with so many properties having multiple offers. Unlesss the buyer is able to pay the difference, it is our role as real estate professionals to advise our buyer to make the best and highest offer that the data supports. Offerring to pay more of the seller’s closing costs can help as well. I’ve come across some listing agents who don’t run net sheets for each offer. A lower sales price with better terms can often be the best offer as to net to seller. Interestingly, a cash offer with a short close can net the seller less (due to the tax proration) than a financed offer. I use a spread sheet that shows all of the terms, including net to seller, when presenting mulitple offers. Oh, darn, I got wordy as well!
Great stuff Cheryl. Thank you. I had an agent tell me recently that her sellers passed up a cash offer for this very reason. The seller said, “Wait, I’m going to net more with the financed offer, right?” The answer was YES, so the seller was patient and waited a little longer despite there being a cash offer on the table. Thus cash doesn’t always win. I think it is really smart for sellers to think in terms of the net price as you mentioned, and buyers ought to help increase the net to the seller where possible. We just aren’t in a market where buyers have the luxury of asking for too many repairs or credits back. Buyers need to up their game, try to make a personal connection where possible, and bring an offer that helps them stand out somehow.
The video is here: https://youtu.be/M8gACMOFDzo
Address is: 6433 Fordham Way, Sacramento, CA 95831
The listing and sale prices seem accurate: https://bit.ly/2JyHRFG
Mid-century modern seems to sell for 20-25% more than other local properties of similar size.
Thank you WB. This is great. I can’t wait to watch it. Fordham is a strong street in South Land Park. I just checked the listing and it really did sell at $645K after being priced almost $100K lower. I see there were 5 offers total too.
Excellent and informational article. I am currently a buyer. There is a house that is on the market for $299k. I went to see the house and fell in love with it instantly. My agent told me that the seller was already receiving offers over 300k. I didn’t want to make the offer too high, since houses in the area currently sell anywhere from 259k to about $315k. A week later an offer was accepted, but it wasn’t mine. I called my agent who told me that the seller accepted an offer between $325k and $335k according to his listing agent. I was shocked. I heard of homes selling for either 10k over or lower the asking price, but 35k seems unusually high. Well, I told my agent that if the contract does fall through, keep me as the backup. The house is still listed as “Active” to this day; no Contingency, no Pending, no Accepted Offer, even though I was told an offer was accepted over a month ago. I’m wondering whoever made such a high offer is having problems closing the deal because it won’t appraise that high. Bottom line is I love this house and would still want to be in the running of possibly buying it should their contact fall through. Is this a possibility, or am I wishing for something that will never happen?
Hi Tom. It sounds like you’re in a very competitive market. I’m not sure if you’re local or not, but I know things around $300K in Sacramento feel just about the same right now. It’s hard to say what will happen in your situation. I think theoretically if the comps and all data are at $315,000 or less, we’d think an appraisal would rightfully come in lower than the contract price. Though this could be a situation where a buyer pays above the appraised value too, which means the property could close at $325,000 if that’s the case. I will say the highest offer isn’t always the best offer, which reminds sellers to consider which offer is the strongest and most likely to close. It’s easy to get distracted by the bling of a higher offer, but that doesn’t necessarily mean much.
On the other side of things it’s sometimes surprising to see how a property appraises at a certain level. I saw this happen with a previous neighbor’s house. I was baffled that it actually appraised that high. The appraiser of course could have just “hit the number” unfortunately even though the property should’ve appraised much lower. Or to be fair maybe the appraiser saw something I didn’t since the appraiser went through the entire appraisal process (and I didn’t).
I guess in part it’s good news the property is still listed as active. If that’s the case, then it should be available on the market. If an offer has been truly accepted, it’s a bit of a wonder why the status has not been changed to pending. I would think MLS rules would require than to be the case if the property truly is off the market. But maybe there is a technicality why the property is still technically “active”. I think if your agent could find out what the deal is, that would be helpful for you so you can either move on or stay around. It would also be better news if the agent was accepting backup offers. Maybe have your agent reach out to see if that is the case. If no backups are being accepted, that could be a clue that things are moving forward with the current buyer.
Best wishes.
I know this post is a couple years old, but still relevant in today’s market. Currently our market is seeing people purchase homes $50-100k above list with appraisal gaps or as cash offers. Does this data show up for comps when appraising other homes or do these high values just push up values of neighboring homes in future appraisals?
Hi Michael. This data does show up technically. I mean, we can see the original list price at $50,000 and then the final sales price at $550,000. But we don’t know for sure if someone paid cash above the appraisal or not because we don’t know what is appraised for technically. So in one sense we have some data here, but we don’t know the full story unless we hear directly from an insider to the transaction. The same holds true with appraisal waivers. We don’t know how often they’re done or when they’re done unless an insider to the transaction gives us the scoop.