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Crazy contracts & condos are less popular

By 17 Comments

I have two things on my mind today. Let’s talk about condos and then some of the crazy contracts we’re seeing happen right now. Then I have lots of visuals for those who are interested.

CONDOS ARE NOT ALL THE RAGE:

It looks like condos aren’t so popular these days. During the pandemic buyers have been saying no thanks and instead focusing on homes with more space. No matter how you look at it there are fewer condo sales happening, and that’s telling. If you’re not local, what’s happening in your area?

MARKET NOT COLD: One thing I want to clarify is just because condos haven’t been as popular doesn’t mean the condo market is dull or cold. Inventory is still sparse among condos, so don’t expect to get the deal of a century. In fact, there is not an oversupply of listings among condos at this time. Inventory is really tight. 

CRAZY CONTRACTS:

It’s common these days to see the appraisal contingency removed and many buyers are even offering to pay above the appraised value (if it comes in lower than the contract price). Anyway, I’ve been getting lots of questions about this, so here are some thoughts:

1) Value is not found in the contract: The reality is value is found in the comps – not the contract. Technically the terms in the contract shouldn’t matter because the only thing that counts is comparable data. Of course I realize some appraisers are swayed by the contract, and that’s unfortunate. Ultimately if you find yourself worried about the terms, I’d recommend focusing instead on communicating well with the appraiser because the comps are the bigger factor.
 
2) Offering above the appraisal: When I see a contract that states the buyer will pay above the appraised value by a certain amount if the appraisal comes in lower, the practical part of me wonders if the buyer actually thinks it’s not worth what was offered. But since my job is to be objective, my curiosity about the buyer doesn’t mean anything for the appraisal. The bottom line is I cannot let that influence my perception of market value. Besides, offering to pay more might not be about the buyer’s perception of value at all. Instead it could be a strategy to get an offer accepted. And most of all, the comps are what matters – not what an individual buyer thinks about value.
 
3) Hiding information: I was asked recently if it would be OK to only give the appraiser the purchase contract without an addendum that had further terms. Look, I’m not a lawyer or broker, but from my perspective I’d ask that you please give the appraiser the entire contract instead of holding something back for whatever reason. In my mind when this happens it seems like the goal is to try to influence the outcome of the appraisal, and that doesn’t smell right. Let’s keep it transparent.
 
Anyway, this is a loaded topic. Lots of emotions. What are your thoughts? Any stories to share? Please do so in the comments.
 
MARKET UPDATE VIDEO: Here’s my latest market update where I unpack glowing rebound stats. Watch below (or here).
 

WAY TOO MANY VISUALS:

Here are some new visuals. You are welcome to use these in newsletters and social media with proper attribution. Scroll quickly or digest slowly.

I hope that was interesting or helpful. Thanks for being here.

Questions: What are you seeing with condos right now? What’s happening with contracts too? Anything you’d like to see change?

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Reader Interactions

Comments

  2. Ryan, As usual we so appreciate the detailed graphs. What is your opinion of comps which were negotiated above list price and appraisals were waived or cash transactions? Glad to see you are back and hopefully healthy and on the mend.
    Bob McKiernan

    Reply

    • Thanks so much Bob. That’s such a good question. I find when doing valuations we have to essentially appraise the comps so to speak. In other words, no matter what we always have to ask whether the comps sold at a reasonable level or not. This might seem offensive to some, but it’s how it works.

      I think of a property that sold for a lofty amount five years ago and recently sold about $500,000 less than the price back then. Theoretically this property should have been worth way more in today’s market, but the reality is it sold for too much back then. Thus when choosing comps on a nearby property years ago I shouldn’t have blindly used that $1.8M sale because it was inflated. IN other words, just because it is a closed sale doesn’t mean it’s a reasonable reflection of the market.

      The same holds true with some properties selling with appraisal waivers. If these homes are selling too high, we have to take these “comps” with a grain of salt. Thus in some cases we’re going to just not use outlier sales because they clearly sold for too much. By the way, we don’t tend to hear about properties with appraisal waivers selling for too little.

      Of course the struggle is if we get too many homes closing like this we start to wonder if it can start to inflate the market. At some point when we see many properties closing at higher levels we wonder if it can begin to pull the rest of the market up. Though if we’re only talking about one property selling for too much it’s probably best to look at that one “lone ranger” as an outlier rather than a trend.

      Reply

  5. Ryan, we all appreciate you so much! Thank you for taking the time and effort to put out this clear but critical data at a glance.

    Reply

  7. I respectfully beg to differ on your definition of the value of a property. When my clients offer to pay the difference between the appraised price and sales price, it’s because they feel given the inventory out there, it’s worth the sales price to them. The appraisal is for the lender’s value. Its not really an indicator of the buyer’s value (price willing to pay) in a sellers market. But I do respect your take on it because your value is for a different purpose which is, to protect the lender.

    Reply

    • Thanks. I appreciate your take and tone here. I don’t know that we are actually saying something different because there are two definitions to consider. I highlighted one of them and you highlighted the other. There is market value, which is what most buyers are willing to pay. I’ve included Fannie Mae’s definition below. But there is also such a thing as value to an individual buyer. Someone might think a property is worth it to them and pay more for whatever reason and this price may or may not represent market value. I think we see this show up quite a bit. Maybe a family member needs to buy that home next to Mom’s house, so they’ll pay more than others would. Or maybe we have a really tight market and a buyer is willing to pay above what is reasonable to others. Or maybe a buyer is doing a 1031 exchange and he/she need to pay more to get the deal done because of a pressing timeline. In short, I think what I’ve said and you said actually fit together when we consider both these realities. Or maybe my tea isn’t working well yet this morning…

      Fannie Mae’s 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.

      Reply

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