Why do appraisers get a copy of the contract? Doesn’t this set the value stage? Someone asked me this recently, and I wanted to respond with a few thoughts. I’d love to hear your take in the comments too.
Things to Remember about the Appraiser Knowing the Contract Price:
- Fannie Mae Requirement: If you didn’t know, the Fannie Mae appraisal form requires appraisers to analyze the purchase contract. Fannie Mae wants appraisers to list the contract price, date of contract, whether the seller is the owner (a safeguard against fraud), and if there are any concessions offered to the buyer. Moreover, if the contract cannot be analyzed, the appraiser has to explain why. See the text below straight from Fannie Mae.
- Valuable Data: Purchase contracts can provide valuable information to the appraiser. Sometimes there are listed repairs, credits offered, personal property given, or other incentives that might be influencing the agreed upon price. Other times there are a series of counter offers that help tell the story how a contract price was negotiated.
- MLS: Even if Fannie Mae did not ask appraisers to analyze the contract, appraisers would likely have MLS data during a sale, and then the complaint would be that appraisers are using the MLS pending price as a target value. Thus the issue is appraisers need to be objective about the value regardless of the information they have (and having more information is a good thing when valuing a property).
- The Bad: Appraisers can use a contract price as a target, but it shouldn’t be the goal to meet a certain value since appraisers are supposed to be objective and unbiased. We all know properties get into contract too high and too low at times, so appraisals shouldn’t “hit the number” every single time.
- The Good: There is nothing wrong with reconciling the appraised value to the contract price if the contract price represents a reasonable and supported value for the neighborhood. When doing this, an appraiser might say the following: “The contract price falls within the range of values indicated by comparable properties and represents a reasonable value for the subject property. Therefore the opinion of value in this report was reconciled to the contract price.” Or in layman’s terms, “Yep, the buyer and seller nailed it. Value is solid right where they agreed. How can I argue with that?”
Straight from Fannie Mae (p. 564 of the Seller’s Guide): All appropriate financing data and sales concessions for the subject property that will be or have been granted by anyone associated with the transaction must be disclosed to the appraiser. Typically, this information is provided in the sales contract. Therefore, the lender must provide, or ensure that the appraiser is provided with a copy of the complete ratified sales contract and all addenda for the property that is to be appraised. If the contract is amended, the lender must provide the updated contract to the appraiser to ensure that the appraiser has been given the opportunity to consider any changes and their affect on value. If the lender is aware of additional pertinent information that is not included in the sales contract, the lender must provide this information to the appraiser.
Questions: Do you think it makes a difference in the appraisal when the appraiser knows the contract price? Appraisers, what do you like or not like about analyzing the contract as a part of a purchase transaction?
The market ripened early this year. Buyers have simply been ready before sellers. On one hand listings and sales have been at fairly normal levels for the first two months of the year, so we can say the market is normal in that regard. But buyer demand really took off last month as pendings in the regional market were up by almost 30% compared to last February. This is the part that is not normal, and why we can say the Spring market ripened early.
One Paragraph to Explain the Market: Well-priced listings are going quickly and experiencing multiple offers, but otherwise properties are sitting on the market if they are not priced correctly. Buyers have been anxious to get into contract, but at the same time they seem to be showing discretion by not readily pulling the trigger on homes with adverse locations or issues. This has led to a sense of many current listings feeling like leftovers since they’ve been well vetted like thrift store clothing. The good news is we are reaching the time of year where more listings should be hitting the market to help alleviate the pressure of a lack of good inventory. Lastly, it took a few less days to sell last month, inventory decreased, and the sales to original list price ratio increased (all normal in Spring).
NOTE: I am posting once a week now, and this means my big monthly post will have less text, but a few more graphs (Placer, Sacramento County, & Regional Market).
Two ways to read this post:
DOWNLOAD 45+ graphs HERE for free (zip file): Please download these 45+ graphs here as a zip file (or send me an email). Use them for study, for your newsletter, or even some on your blog. See my sharing policy for 5 ways to share.
SACRAMENTO COUNTY:
PLACER COUNTY:
SACRAMENTO REGION (Sac, Placer, Yolo, El Dorado):
Questions: What is driving buyers to get into contract? Is it low rates? Is it a sense of needing to get in a home before values rise too quickly? What do you think?
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