I was talking with a Realtor recently and he was telling me about an escrow where his buyer ended up paying $20,000 above the appraised value to make the deal work. There really wasn’t any value-related reason why the property should have sold that high, but the seller simply refused to budge on the price.
Do high sales become new comps? When a property sells for too much, it’s usually obvious. If everything else in a neighborhood is selling lower, and there is one “lone ranger” sale without a compelling reason why it closed so high, it’ll likely be considered an outlier by an appraiser. Take the example below where one very plain bank-owned listing is pending at $310,000, yet zero competitive sales have sold above $280,000 over the past year. Moreover, the highest listings in the neighborhood are at $285,000.
If this property actually does sell at $310,000, it shouldn’t set the pace for neighborhood values because it clearly doesn’t represent the market. Other listings in the neighborhood might try to match the new sale of course, which could start to put some upward pressure on the market, but overall one lonely sale doesn’t make or break a market. That’s why appraisers can either utterly ignore an outlier or consider the sale but give it very little real weight in a valuation.
But the appraiser doesn’t know about the out-of-pocket cash: The truth is appraisers won’t always have the inside track on the details of a transaction. After all, the Listing Agent might not write “buyer paid $20K out-of-pocket” in MLS or readily disclose that during a conversation. However, even without inside information, it’s still obvious when a property is an outlier, and an outlier shouldn’t be treated like a market sale when it obviously deviates quite a bit from the rest of the pack. This is where the power of graphing comes in handy so recent sales and listings can be plotted to help show what the market is doing.
Is it just me or are Fannie Mae sales high? A good case-in-point for properties that have tended to sell above others in the Sacramento market are Fannie Mae foreclosures. Several years ago foreclosure sales represented 73% of all sales in Sacramento County. During the “foreclosure flood” where bank-owned properties were unleashed in mass, they were priced very aggressively and usually had almost no repairs made by the seller either. In contrast, today’s foreclosure market is very different in light of an extremely low housing inventory in the Sacramento area. This has caused sellers like Fannie Mae to generally list their properties at higher levels – and sometimes even 10% above other listings in a neighborhood. This is why I find myself being very cautious about relying on these sales as comps since the final price often does not reflect the true market. By the way, do you think Homepath financing not requiring an appraisal might have something to do with these properties closing so high?
Any insight or stories to share? Your comments are welcome below.
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Ryan, you are going to hate me for saying this, as I’ve we’ve talked about this before… I still tend to be on the side of defining the “true market” as not what the appraiser thinks it’s worth, but what someone is willing to pay. Your example is perfect… a seller that won’t budge, and a buyer that still sees the value and says, “Ok, I’ll buy it – even if it’s $20K over the list price.” = market value, which should definitely be considered for future comps. Love you man.
I don’t hate you at all, Keith. No way my friend. I understand what you are saying and I know agents and investors are likely going to see the issue differently. The key is the definition of market value, which I listed below too (https://sacramentoappraisalblog.com/tag/fannie-mae-definition-of-market-value/). Sure, this one buyer was willing to pay $20K above all others because it’s really not easy to get into contract. But if you lined up 100 buyers, the vast majority of the rest of the market has not been willing to pay at that level, which shows that market value is indeed less than this one outlier. The support for this comes when analyzing all other sales and listings in the neighborhood. In this case I would say the buyer did personally value the property at the contract price, but that’s not market value.
Value surely has a subjective element because a buyer is attracted to a property for certain reasons, but there is also an objective element that is bound by geography. For instance, a buyer from a higher dollar area like San Francisco or New York might be willing to pay way more for a house in Sacramento, but that doesn’t really make their offer consistent with market value. Or private equity funds might be willing to pay more than all others too because they can. On the other side, you might bring in buyers from other parts of the country where values are far lower. These buyers would offer less, but that doesn’t equate their offers to being market value just because they made the offer at that level. Know what I’m saying?
Fannie Mae Definition: Market value is the most probable price which 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: (1) buyer and seller are typically motivated; (2) both parties are well informed or well advised, and each acting in what he considers his own best interest; (3) a reasonable time is allowed for exposure in the open market; (4) payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and (5) 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 appraiser is an advocate of the lender and the bottom line is that they want to know what the majority of people would pay for the property if they have to take it back in foreclosure. It is easier to unload an REO property if 75% of buyers are willing to pay a certain price as opposed to 5%. In a way it is similar to not being able to use custom built homes as comps because, while the person building the home is willing to pay $50,000 for the kitchen of their dreams it probably will not return that amount if it were put on the open market.
Thanks Tom. I think you’re so right about the majority of buyers. That’s a big part of establishing market value. You mean custom comps shouldn’t be used for tract houses, right?
Yes Ryan, custom built homes really don’t reflect market market since there is not market exposure.
Gotcha. Thanks Tom.
With so little inventory, someone may be willing to pay extra cash above the appraised value for several reasons. There is just no other house this month in that area and they need to move. Their mother (the babysitter) lives on that street. It has a great layout. They like the updated (fill in the blank).
If it is a trend, the comps will catch up as houses are sold for more money. Ryan, you are correct, the appraiser just looks at the sold price, not the loan-to-value. That may give a hint but is hard to figure because if it is being bought as a rental with a loan, the buyer is putting down a higher down payment anyway.
Perfect examples Janice. Specific buyers really might be willing to pay more for a certain house. These buyers may or may not represent the rest of the market. That’s why it’s important for appraisers to really know the neighborhood and research properties. Just because something closed at a certain level doesn’t mean it is a legitimate comparison. Ah, data… (which is what I have right now on my desk).