Home Sellers

For What It’s Worth: Can an appraised value be too accurate?

By Ryan Lundquist

Should you be suspect when the appraised value comes in right at the contract price? It’s easy to think there is something fishy going on, but should you be alarmed? Maybe. Maybe not.

YES: If the appraiser intentionally “hit the number” or brought the value in at the contract price even though the property is clearly not worth that amount, it’s time to be concerned. Appraisers are supposed to be an unbiased and neutral party to the transaction instead of deal enablers to help escrows close. The appraiser’s job is to measure value rather than meet the contract.

NO: If a property has been on the market for an adequate period of time, the contract price might actually end up being a reasonable representation of value. For example, if a contract is $325,000 and the range of value for competitive sales in the neighborhood is $320,000 to $330,000, it’s hard to argue a contract price at $325,000 is not reasonable for the final appraised value. Unless there is a clear reason why the value should be closer to $320,000 or $330,000, it’s perfectly legitimate for the appraiser to reconcile the value right at the contract price. When an appraiser does this, he/she is basically saying, “The buyer and seller nailed it and the price reflects the market well.” This also shows respect toward the home-buying process because the appraiser recognizes the property has been vetted on the open market and has gotten into contract at a level consistent with competitive data.

However, let’s consider today’s market where homes are sometimes getting into contract at crazy high levels very quickly. On one hand it makes sense because values have been rising in many Sacramento neighborhoods and price ranges. Yet on the other hand some buyers are tired of competing , so they end up making absurdly high offers in hopes of catching a seller. This is especially true for properties priced under $400,000 since there is only one month worth of homes for sale but multiple months of buyers competing for this limited supply.

Enter the appraiser. It’s understandable that a buyer offered such a high amount since buyers need to bring their A-game in today’s frenzied real estate climate. But does the high offer really represent the market? If so, it’s OK for the appraiser to reconcile the value right at the contract price. If not, we should expect the appraised value will be coming in lower. One buyer might be willing to pay that higher amount, but if you lined up 100 qualified and interested buyers, what’s the most probable price they would pay? That’s a good picture of what market value looks like – and that’s what an appraiser is measuring.

When the real estate market feels aggressive it’s easy to lose sight of where value is. But at some point we need to step back and take an objective look at pricing – much like an appraiser would do. What have similar properties sold for recently? What are competitive homes getting into contract for in the neighborhood? Yes, the market is “hot” in the county, but what is the market doing in the immediate subdivision? These are questions appraisers will be asking after a property gets into contract, but in reality they are perfect questions tobefore a property is listed and before an offer is made.

Ryan Lundquist is a certified residential appraiser in the Sacramento area. Contact him at http://sacramentoappraisalblog.com/.