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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