Why did it appraise “low” even with multiple offers?

It’s been a frenzy to get offers accepted lately in the Sacramento area since inventory has been so low. While lower inventory is good for sellers to attract offers, it’s frustrating for buyers because it’s not always easy to get into contract right now. This has led to situations with multiple offers – and even offers above asking price.

Do appraisers pay attention to multiple offers and the price level of offers? Generally speaking, in my opinion multiple offers do say something about the way the market perceives a property at a particular price level. This is basic economics – supply, demand and what a pool of buyers are willing to pay. Obviously if buyers are consistently offering over the listing price, and there are no funky concessions built in to the offer, it’s hard not to think that multiple offers at or above asking price doesn’t say something about market value. However, it’s important to realize offers above asking price are not always indicative of the worth of a property or appreciating values for that matter.

Three scenarios where higher offers might not represent market value:

1) “Offer Above” Strategy: Some buyers are offering over asking right now as a strategy to get a contract accepted. After getting beat out of other purchases for weeks or months on end, buyers inevitably get tired and offer more money to secure a contract. I’m not talking about buyers offering higher because of rising values, but rather making an offer at a higher level solely to get into contract. The rationale is that it’ll be easier to enter contract at a higher price level and then deal with a potentially lower appraisal to negotiate the price back to a reasonable amount (market value). I cannot tell you how many times I’ve seen this strategy lately. Some agents I’ve spoken with have even rejected blatantly high offers because they are clearly a desperate attempt to beat everyone else out and get into contract. At the same time, the strategy has also backfired when the appraisal actually comes in at the higher level (that’s another blog post). The irony here is that appraisers sometimes get blamed for a “low appraisal” when the value comes in below the contract price, but with a strategy like this, the appraisal probably should come in below the contract price.

2) Spending Other People’s Money: Financing can definitely influence higher offers. After all, it’s easy to pay more for something when you’re not spending your own money. For example, FHA offers dominate the market right now in Sacramento, and they commonly come in higher than conventional offers because buyers only have to put down 3.5% of their own money. Many times buyers get down payment assistance too, which means they are literally putting zero money down. Additionally, FHA buyers tend to offer higher amounts to justify the seller giving a credit of 3% to the buyer to help cover closing costs. A higher offer like this ends up being a win-win because the seller nets the same amount as an offer without concessions and the buyer gets financial assistance to get the deal done. However, the question we must ask is if the more aggressive nearly 100% financed offers represent market value. For example, if there were 10 offers on a property and the top 3 offers over asking price were all FHA, and cash and conventional offers were at lower levels, it’s worth weighing whether financing has impacted the top three offers or not.

3) Overpaying Happens: Sometimes buyers simply overpay. This happens more frequently with cash buyers when there is no appraisal or lender used – especially when the buyer is from out-of-town or less familiar with the local market. While I’m not a baseball expert by any means, the example of the recent offer to purchase the Los Angeles Dodgers is a striking picture of potentially overpaying, and thereby very relevant for real estate folks to consider. Magic Johnson and a group of businessmen are shelling out two billion dollars for the Dodgers when the previous highest sale of a baseball team was the Cubs for $845 million in 2009. Again, I’m not a baseball analyst or sports team appraiser by any wild stretch of the imagination (I wish), but unless the buyer is seeing something nobody else is, this purchase sounds like it’ll be an outlier comp rather than set the standard for all other future sales. Time will tell though of course. We shall see.

Check out the following two graphs for a greater context on housing inventory in Sacramento County over the past year and the past decade.

The Bottom Line: All things considered, it’s important for appraisers to evaluate each transaction and understand the nature of the sale for the property being appraised as well as the comps. The appraiser will use closed sales and current listings to help establish value, but information pertaining to the number of offers and the price level of offers is also worth consideration because it usually tells us something about the market. However, multiple offers and contracts above listing price are not always an indicator for how the market really views the property because there are definitely other reasons why buyers might offer more than the asking price.

NOTE: This is not to say the market hasn’t been heating up lately. I’m only saying not every multiple offer scenario is indicative of higher values.

Any thoughts? I’d love to hear your comments below.

If you have any questions or Sacramento area real estate appraisal or property tax appeal needs, contact me by phone 916-595-3735, email, Twitter, subscribe to posts by email or “like” my page on Facebook