How do we choose comps in such a lopsided market? I had a great question about this recently, so I wanted to share some thoughts. Anything to add? I’d love to hear your take in the comments.
UPCOMING PUBLIC SPEAKING GIGS:
- 2/9/2022 Yolo Assn of Realtors market update (details)
- 2/18/2022 WCR El Dorado market update (details)
- 2/25/2022 Placer Assn of Realtors market update (details)
- 3/15/2022 NARPM Luncheon (details)
- 3/22/2022 SAFE Credit Union market update (details)
- 4/28/2022 SAR Think Like an Appraiser (details)
QUESTION: With so many listings receiving offers above list, and people having to pay the shortfall between the appraised value and the contract price, how do appraisers look at comps? If a property sold at $580,000, but it actually appraised for $547,000, and the buyer paid the difference, which number do you use? $580,000 or $547,000?
ANSWER: Here are a few things on my mind.
1) Weigh the comps:
In any market (not just today) we have to weigh the comps. Or another way to say it is, we have to appraise the comps so to speak. What I mean is if something clearly sells for too much, it’s reasonable to give that property less weight in our analysis. Likewise, if a property sells for too little, we might also give less weight to that sale. Granted, selling for too little isn’t as common lately, but in past markets we regularly considered whether short sales or bank-owned sales sold below market value.
2) One sale doesn’t make or break the market:
It’s important to note one sale doesn’t make or break the market. This means one lofty “lone ranger” sale doesn’t all of the sudden mean the rest of the market will go to that level. This would be like saying that record-breaking $7M sale in Shingle Springs from August will pull the rest of the market up. Nah, I don’t think so. Or Zillow buying a house for $40,000 more than the comps will cause the rest of the market to rise. Nope. If one sale closes at $580,000, but the rest of the market is below $550,000, we won’t arbitrarily accept $580,000 as the new neighborhood price threshold. The same would hold true if a different house sold at $450,000. This one “low ranger” (sorry) won’t automatically drag the rest of the market down.
3) Using the final sales price:
It’s a really good question whether appraisers will use $547,000 or $580,000. Realistically appraisers might not even know about the lower appraised value because it’s not automatically disclosed in MLS or from agents in the transaction. And there isn’t some sort of appraisal database where appraisers know about the appraised value either. Ultimately, even if I knew what it appraised for, I’m not going to use the appraised value because that wasn’t the official sales price. To be fair, is it possible it appraised too low? Yes. At the same time, if the property really was worth $547,000, maybe the buyer legitimately paid too much at $580,000, right? Again, this is where appraisers need to weigh the comps and ask whether they sold at a reasonable level or not. I realize this sounds subjective, but weighing comps has to do with looking at the entire market and weighing sales against other ones, so there is an objective element here. I’ll be checking out recent and much older sales, competitive sales, listings, pendings, withdrawns, lots of geeky metrics, and even similar neighborhoods. I’ll also be making graphs to help visualize where it looks like value is at right now. If something did sell for too much, it’ll probably stand out because it’s disconnected from the rest of the market – including pending contracts. So maybe I won’t use the higher sale as a comp in my appraisal. Or maybe I can use it but give it less weight. No matter what, I won’t automatically use a sale without thinking through why it sold for more than others. But here’s the thing. If pendings contracts are all around $580,000 too, and other neighborhoods have also risen quickly, maybe it’s the market… In that case I need to recognize prices are rising and then adjust my comps up accordingly.
4) Unfairly judging the original list price:
It’s important for appraisers to be cautious about judging the original list price. What I mean is the original list price is a starting point that could be reasonable, too high, or too low. I’m not saying it’s unimportant. I’m just saying it may or may not say something about value. The truth is value is found in the comps – not the original list price OR the contract price. For instance, a friend told me about a property that got into contract about $200,000 above the original list price recently. I know it’s easy to think it could have a problem appraising that much higher than the contract price, but what if the property was priced $200,000 too low? This is where appraisers (including me) need to be careful to be objective and not give the original list price so much weight to essentially say, “I can’t bring the value in that high.” Nope. Value is found in the comps – not the original list price.
5) Instagram and market value:
I’m seeing images floating around Instagram about market value. The images tend to say things like, “The appraised value is one professional’s opinion,” and “Market value is what a buyer will pay a seller.” That sounds maybe sorta kinda hopefully true, but let’s dive deeper. The truth is what one buyer is willing to pay could represent market value (what the bulk of buyers would pay), but sometimes what one buyer pays is more like individual value because it’s totally disconnected from the rest of the pack. So, if a buyer pays above all the comps and pendings, it doesn’t automatically represent market value. It would be like me buying a house for $750,000 in a $350,000 neighborhood. I can pay that, but just because the seller and I agree on the price doesn’t mean it’s market value. Does that make sense? And here’s the kicker. What if a buyer paid 20% lower than the comps? Would we say it’s market value since the buyer and seller agreed on the price? I doubt it.
The bubble question:
I did a YouTube Live last week and here’s what I said when someone asked about a real estate bubble. This was all off the cuff it the answer should start at 58 minutes. Enjoy if you wish.
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Questions: What do you think of the points above? What did I miss? Anything to add?
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I had a perfect example last week. I had appraised a house for a purchase 3 weeks prior on the next block of a house in a gated development. It came in below contract with narket based adjustments made. Buyer made up the difference and it closed over appraised value. House #2, is under contract, same house, without granite counters, but with screened patio for $10,000 over last house and over asking. I applied my market adjustment, used my sale from 3 weeks ago, came in $5000 higher, but was still $10,000 under this contract price. Buyer will make up the difference. Not my problem. Buyers act on emotions. We do not. No one says they can’t buy. They just need some skin in the game. I’m doing VA 100% loans. VA can override me.
Thank you Helen. I appreciate you sharing. Where is market value in the midst of all of this? It’s not always an easy question to answer these days.
What I am finding in this market, its safer as a listing agent to price off ALL the comps NOT the unicorn. I end up getting my client more offers to choose from by pricing at or below market than above. If there are NO comps or old ones I still pick the more conservative lower side and let my clients know that IF the market corrects us upwards….. fantastic. And if it doesn’t, buyers will not perceive us to be price gouging. With so much buyer fatigue I’d rather be reasonable than unrealistic. Managing seller expectations in this market is key.
Thank you Elizabeth. I really like your strategy. I think it’s spot on with stats I see at my desk too. My sense is to maximize the price you often need a bigger pool of buyers (not always). After about ten or so offers, the offers really start to look about the same. I think giving buyers some space can actually help the seller maximize value. Too much space of course makes things insane (like pricing $200K below).
I actually just came from a house in Roseville where the owner told me a model match house was recently purchased $100K above the list price. I’ll have to research this of course, but I was told a Bay Area buyer was running out of time and they had to secure an escrow, so they swung for the fence in order to secure a property. This is good for me to know because it’s important not to just look at this sale blindly. Knowing the story can be key to understanding value. Now of course I’ll compare this sale to others. Was it priced too low maybe? Or is this a new outlier sale that is disconnected from the market? I don’t know yet, but my goal is to find out. Where is the market in the midst of all of this? That’s the question.
Hey Ryan, great, timely post. This is why it’s important for real estate agents to be willing to talk to appraisers when we call with questions. We can’t do our jobs well unless agents are willing to share details on transactions, especially the ones that are above or below what reasonable market value is. And us appraisers must be willing to do the research to determine whether a sale is an outlier or represents a new trend to watch.
Thank you Joe. Well stated. Totally agree. There is definitely lots of insight to understand from agents. Sometimes the details I get from them can absolutely shape my perception of value or neighborhood trends.
Nice discussion. If I have several comps and a couple were bid up and are outliers, I will weight my sales in reconciliation accordingly. My fear is always that if there are outlier comps, what made them outliers and could my subject also be an outlier if placed on the market today?
Thanks Gary. Yeah, that’s the question. Why are they outliers? And is it actually the market? We just got done with the most aggressive market we’ve basically had. And here we are in an ultra hot market still. I like your last question in particular. If the subject was listed for sale, what would it actually sell for?
Great post Ryan. Im beginning to think the term “market value” needs re-defining. In a normal market it means one thing, but in a market like this it means nothing when there is limited inventory.
Yeah, I hear you. The irony of course is my example was pretty close. Getting bid up $30K or so is very easy to do in today’s market. But being that the person who asked the original question was curious about a range like this, I figured I would keep the numbers tight. It’s crazy out there.
Last year I wrote a blog post saying mortgage rates needed to go up. I had someone unsubscribe that day after he said I’d given myself over to wokeism. I really don’t know what he meant, but I’m positive it wasn’t a compliment. But I stand by what I said. Mortgage rates this low have played a massive part in helping to create a frenzy. All that said, there are other layers here that have helped create this chaos too, but there is no mistaking we wouldn’t be where we are today without rates having done an extreme limbo session.
Now let’s keep watching as we are on the cusp of 4%. What time we’re living through.
4% is not realistic that’s half the inflation rate.
What do you mean Scott? Would love to hear you expand on that if you want. No pressure. By the way, now that you have an approved comment you can post freely (unless you share a link – that’s always moderated). Thanks eh.
Thanks for the insight Ryan. In Austin, Texas and the surrounding areas markets have gone crazy again. Within the previous 30 days we are seeing trends similar to May and June of last year. Multiple offers way over list price, and value changing rapidly. I’m back to calling Realtors on pending sales to see where they will close at. Realtors can often share what the contract price is, which helps to understand the current trends.
Thank you Slade. Sounds familiar as our market is also nuts right now. I totally agree regarding insight. It really helps to talk to agents.
In determining whether a property has sold above market value as the result of receiving multiple offers, I examine a property’s market segment ratio of original list price to sale price. If a market segment property is selling or has sold above or below the mean or median of that ratio then that analysis provides a good indicator of what market support there is for a particular property’s sale price. Marketing times for and seller concessions for market segment properties should also be taken into account.
Thanks Rodney. All good things to consider.
Great points, Ryan. It is easy to get caught up in the original list price and put too much emphasis on it rather than looking at the final sale price in addition to all of the other value indicators. I think that is where appraisers excel (as they should) because they look at multiple value indicators to arrive at what they believe (through education and experience) to be the market value of the property they are appraising. It’s easy to just look at price per square foot or think that just because two people agree on a price that it is market value because it’s not for the very reasons you pointed out. Lots of good points to chew on, Ryan.
Thank you so much Tom. I always appreciate your take. I have heard that quite a bit lately about two people agreeing on price. Maybe that represents the market. Maybe it doesn’t.
Do you consider private sale ( not listed in the mls) homes when appraising a home ?
Hi Rdw. Yes and no. Typically I’m not going to use private sales – especially if I have no way of understanding the details of the transaction. Moreover, why use a private sale if I have the vast bulk of the market happening on MLS? I suppose there are some markets where appraisers need to use private sales though if that’s how the sales are happening. But the key is the appraiser being able to understand the details of the sale. Here is a post I wrote about the subject. Let me know if you have any questions. https://sacramentoappraisalblog.com/2013/01/24/can-appraisers-use-private-sales-as-comps/