I share this story often during our Mortgage 101 Seminars.
We once had a transaction in Berkeley involving a property that was listed for $850,000, and there were more than ten offers for over $1 million. The market value for that property was clearly over $1 million b/c there were so many buyers willing to pay over $1 million in an open market.
The appraised value, however, was much less b/c the highest priced comparable sale in the area was only $850,000. The appraiser knew about the other offers and he knew the market value was probably over $1 million, but he was constrained by appraisal guidelines.
The appraiser could only use comparable sales within one mile of the subject property that closed within the last three months. He could not correlate to the other offers or similar pending sales at all.
The appraisal came in at $850,000 and this is clearly a case where the appraised value did not equal the market value.
This happens all the time in “hot markets” where there are multiple offers, and prices are increasing too fast for comparable sales data to keep up.
Further, if appraisers push value too far in an attempt to support a contract price, other issues arise. An underwriter will likely call for a full review of the appraisal that will probably result in a significant cut in the value. Or worse – if the appraisal makes it past underwriting, investors may refuse to buy the loan on the secondary market b/c they are unfamiliar with Bay Area markets and the property appears over-valued on paper.
In any case, prior to the meltdown in 2008, appraisers could correlate to other offers and even pending sales to some extent, but nowadays they are not allowed. Appraising is all about closed sales and tight appraisal guidelines.
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