This blog post goes out to all the Realtors who have had a deal fall through because the appraised value was below the contract price. Some of you may even had multiple offers with most of them were even above the appraised value. If this has happened to you, first and foremost: I feel your pain! You are thinking to yourself, “If I have 4 different buyers willing to pay $400,000, how could the appraiser say that it is only worth $390,000?” Well, there is nothing wrong with that logic. But keep in mind that as appraisers we are tasked with giving our “opinion of value” and that value MUST be supported by facts and market data. We can’t just say that we THINK it is worth $400,000. We have to prove our case supported by facts and market data (aka Comparable sales, listings, and market trends).
Now, I know what you’re thinking, “Aren’t four separate signed contracts considered facts and/or market data?”. Absolutely they are! It is a fact that 4 different buyers are willing to pay $X and this is certainly considered to be data from the market. A good appraiser will take those facts into consideration in his/her analysis.
Why should an appraiser want to know this information?
How can you prevent this from happening again? Tell the appraiser. Bring him copies of the offers to the inspection. Email him the offers. Why? Here are couple of main reasons.
- Is the contract price above list price? Multiple offers could help explain this. We are required to analyze the sales contract and listing history for the subject property. In most cases our clients require a comment/explanation when a contract price is higher than the most recent list price. Knowing that there are multiple offers indicates a strong demand for the property at that specific price point. If a home was only listed on the MLS for 5 days and has multiple offers, it most likely indicates that the list price is at or below market value. Or it could signal that inventory levels are low and buyers have very few alternatives. Or maybe both.
- Multiple Offers will alert a good appraiser to dig deeper. If I am analyzing comparable sales and they are indicating a value below the contract price, maybe I need to call the agents on the listings and see if I am missing something (perhaps one or more of the comparables were distressed or estate or relocation sales and sold below market value). Maybe I need to look deeper at the current market conditions. Are inventory levels low? (Typically below 3 months would raise a red flag.) Maybe I need to look further into the median sales prices and see if the trend is showing significant price appreciation. In an increasing market, the appraiser should adjust comparables that sold several months ago upwards to bring that sale price to today’s market conditions. However, this needs to be supported by market data. (Infosparks can be a great tool for this if used correctly. Stay tuned for an upcoming post/video showing how it works and how you can use it in your practice.)
It's not a magic bullet, but it could make the all the difference.
I also want to be clear that I’m not telling you that if you have multiple offers you are guaranteed the appraisal will support your contract price. However, this information can be a significant piece of the appraisal puzzle. Because an appraiser must provide support for their value opinions, it’s critical that they seek out and receive as much information as possible. That’s where you, as real estate agents, come in. In my practice, I make it a point to ask if there were multiple offers. But even if the appraiser who is appraising your listing doesn’t ask, I highly recommend you make them aware that there have been multiple offers. To take it one step further, I strongly suggest you provide the copies of the contracts so the appraiser can keep them in their Work File as further support for the value conclusion. Anyone can say they had multiple offers but we can put much more weight on those offers when we know for certain they exist.
Remember, appraisers can’t just go out on a limb and appraise a property at the highest possible price. Our definition of market value tells us we must appraise it at the most probable price (here is a previous post which goes into more detail - Market Value: Probable vs. Possible). When we are finished adjusting our comparable sales, we typically end up with a range of values. The dispersion of that range can vary (typically less than 10%), but let’s just say for this example we started with a contract price of $400,000. The range of adjusted comparable sales prices is $380,000 - $405,000. If the appraiser was handed four signed contracts with contract prices of $390,000, $395,000, $400,000, and $405,000, it may give them that extra support they need to reconcile their final opinion of value at the upper end of the range. After all, we are supposed to be determining the most probable price for which a property will sell. To take it even one step further, if the appraiser analyzes the market and determines that there is a shortage of inventory and prices are increasing, they may be even more inclined to be more aggressive with their opinion of value.
But without actual support and evidence, the appraiser can’t go out on a limb alone. Information about multiple offers may not make a huge difference in the appraised value, but it could make enough of a difference to get your deal closed! Providing information about multiple offers to the appraiser is not just a service to him or her but also a service to your client! For more information see my post on Tips for Real Estate Agents to Avoid a Bad Appraisal.
APPRAISER / REALTOR FACEBOOK GROUP
I have created a Facebook group for local Realtors who have appraisal questions. I will be sharing some great information that will help you understand things from an appraisers perspective and some tips to help you in your business. You are encouraged to jump in and ask any questions you have. Just click below and then click the "Join Group" button.