We often have buyers bidding for houses in very competitive markets because of the lack of inventory. In these situations, appraisals often come in under contract price. This frightens buyers because they think they are paying too much for the property.
But, we explain to buyers that the “appraised value” often does not come close to reflecting “market value” because of the rules appraisers are forced to follow.
Appraisers have to use closed comparable sales to bracket their value estimate. They also are supposed to use comparable sales that are within a mile of the subject property, and that are of similar size (within 20% of square footage).
These requirements, among others, unnecessarily constrain appraisers. Appraisers can address but are not allowed to correlate to pending sales and/or other offers (in multiple bid situations) for the subject property. Appraisers, for the most part, have to ignore “current market” conditions in hot markets because there are no closed sales that reflect current market conditions.
Remember that the definition of “market value” is: the highest estimated price that a buyer would pay and a seller would accept for an item in an open and competitive market.
In almost all situations where our appraisals come in low or under contract price, the buyer could easily re-sell the property immediately for equal to or MORE than what he or she has agreed to pay. That fact alone is indicative of “market value”, irrespective of what an appraisal says.
Buyers need to understand this reality so they do not panic when an appraisal comes in low.
Final note: many appraisers well understand the above inconsistency; they simply are forced to comply with “the rules.”
Founder/Broker | JVM Lending
(925) 855-4491 | DRE# 01524255, NMLS# 335646