If an appraisal came back at $327,462.44, would you be concerned? For starters, I think most of us would scratch our heads and wonder how in the world the appraiser got so precise at 462 dollars or 44 cents. Either the appraiser is an absolute value wizard or something else is going on. I can’t speak to why an appraiser would reconcile value that precisely, but I do want to kick around the idea of a range of value in real estate. I’d love to hear your take in the comments below.
Sometimes we get so locked into thinking a house is only worth a certain amount. Most of us wouldn’t get so exact like the example above, but we do often say a house is only worth whatever the contract or list price is. Thus if the appraisal comes in lower, everyone is frustrated. Let’s consider the following points though.
- There is always a range of value: When we sell something on Craigslist, we list a certain price, and we’d like to get that price, but realistically we would probably be happy with an offer somewhere close to the price. For instance, I am trying to buy a drill press on Craigslist right now (for woodworking, which is one of my passions). I found one the other day listed at $150. I offered $100, and the owner said no. I then upped my offer and through conversation discovered the owner wasn’t really set on $150 at all, but rather $125 to $150. If we lined up other buyers for this drill press, they’re probably not going to say market value is exactly $150, but they might instead think market value was anywhere from $125 to $160. In other words, nobody would bat an eye if the drill press sold at $125 or even $160. This is exactly how it works in real estate in the mind of buyers. When assigning value to a property, buyers are going to look at similar homes, consider their budget and loan approval amount, and ultimately be comfortable with a reasonable price range. For instance, buyers might consider a realistic price for the house above to be $323,000 to $330,000.
- Appraisal Comes in $1000 lower than contract price: So buyers make offers on the property, and the seller accepts an offer at $324,000. The appraiser comes out and appraises the property at $323,000. When this happens, many agents say, “This is ridiculous. Why could the appraiser not just give me $1000 more?” I get the frustration because if the contract price fits very nicely in a tight and reasonable range of value, it’s hard to see how the appraiser could argue against that as if the appraiser is an absolute value genius. I’m not arguing for the appraiser here in this example as you can hopefully pick up in the following comments. But I do want to remind us that appraisers cannot invent or give value – even $1000. If the contract price really is pushed above what the market would reasonably pay, and there is no way to really support that on paper (the appraised value has to be supported), it makes sense to see the appraisal come in lower. In this case it may be suspect, but I can’t say that for sure. For reference, it’s actually not fishy for an appraiser to reconcile the value at the exact contract price if the contract price is realistic. When the appraiser does this, the appraiser is simply saying, “Yep, the price is good, and I can’t argue against it.” The appraiser might say something like this in the report: “The sales price falls within the range of values indicated by comparable properties and represents a reasonable value for the subject property based on an analysis of comparable properties and market trends. Therefore the opinion of value in this report was reconciled to the sales price.” Of course this assumes the appraiser wasn’t “hitting the number” so to speak to make the loan work.
- Reconciling to the Lower or Upper End: Despite there being a realistic range of value for a property, sometimes it’s best to consider where a property is going to fit on the value spectrum. I find sellers sometimes struggle with this because they always want top dollar. But sometimes fetching the highest price in the neighborhood simply isn’t possible. Maybe the house just doesn’t quite compete at the very top of the range of value because of slightly less upgrades or some other minor issue. So an appraiser might look at sales at $330,000 and give those sales less weight in the final value because they are slightly superior, but then look at sales at $323,000 and give them the most weight because they are the most similar in market appeal. Additionally, if all the offers on the property were coming in around $323,000 or lower, the market has probably spoken, and it likely makes sense for value to be reconciled around $323,000. Or if we have one high offer at $330,000 and all other offers were at $323,000 or less, this might also say something about the market. Not always, but maybe.
- Willing to Budge on Contract Price: Sometimes it seems the real estate community gives too much weight to the original list price and the contract price. It’s as if the offer is made and then negotiation is over. There is no further budging. But there is still room for negotiation based on the pest report, home inspection, the appraisal, and a number of other factors. When new information is discovered through the course of a transaction, it should be okay to negotiate. Part of a lack of negotiation is the byproduct of a market with such low housing inventory. Sellers have been in the driver’s seat for years, so they have not had to negotiate as much. But as inventory presumably rises in years to come, this staunch belief about the contract price being holy is going to have to budge.
I hope this interesting and helpful.
A CHEAT SHEET FOR AGENTS TO USE: If you are a real estate agent, I highly recommend you communicate in detail about the property to the appraiser during the inspection (or before the appraisal is finished). Consider talking about any upgrades, the number of offers made on the property, price level of offers, and anything that might be relevant for the appraiser to know. Don’t pressure for a certain value, but help tell the story of how the market responded to the property. DOWNLOAD my “cheat sheet” for appraisers and please use it.
Questions: What else would you add? What is point #5?