Some of our borrowers, who are well aware of comparable sales and market conditions, often become very frustrated when appraisers fail to appraise the homes they are buying for more than the contract price.
SIDEBAR #1: Will Capital Investment Save The Economy? James Thorne is one of many who think it will, posting, “Ignore the bubble calls. We have a Goldilocks economy and capex super cycle.” Mr. Thorne, like President Trump, believes that the massive amount of investment for AI, energy, and the reshoring of manufacturing (by other countries) will keep the economy humming. This is in very sharp contrast to all the pundits predicting corrections, recessions, and/or crashes, e.g., Steve Hanke, Jeff Snider, Peter Schiff, Danielle DiMartino Booth, Darth Powell, Nick Gerli, and Brent Johnson. I remain on team-recession in light of negative consumer sentiment and labor market conditions, but we’ll see…
SIDEBAR #2: Our Condo Desk Remains Open and Streamlined (so agents will get faster responses). This is a reminder to all agents that if they have questions about a condo complex’s financing eligibility, our condo desk stands ready to help.
Here are some of the reasons why appraisers correlate to contract price.
- Sellers Aren’t Stupid. 😊 In other words, appraisers are taught that the contract price is often the best indication of market value in a free and open market. Why would a seller accept a below-market offer? And yes, appraisers know there are exceptions where distressed or naïve sellers accept below-market offers, but these are rare.
- High Appraisals Raise Red Flags. If an appraisal comes in too far over the contract price, underwriters often become suspicious and wonder if there are undisclosed issues (and then demand inspections). We once had an appraisal come in $100,000 over the contract price in a market with $700,000ish homes. The underwriter demanded inspection reports, and it turned out there were significant foundation issues. This is why lenders don’t like to see very high appraisals, and most appraisers understand this.
- Sellers Refuse Concessions. If sellers become aware of the high appraisal (even though lenders are careful to keep appraised values confidential), sellers will be less likely to grant 11th-hour concessions for condition issues. Appraisers understand this as well.
- Appraised Value Is Often Not Market Value. This is something I blog about often and it is something we explain to frustrated borrowers. Appraisers must adhere to strict appraisal guidelines, such as correlating to the contract price, not correlating to pending sales, correlating to closed sales only, and not correlating to other offers. And as a result, appraised values often don’t reflect market values. I tell the story often of a property that had 13 offers over $1 million (proving that its market value was over $1 million), but the appraisal came in at $850,000 because there were no comparable sales anywhere above $850,000.
There are probably other reasons as well. But my main point is that even if buyers are getting a stellar deal, appraisers will more often than not correlate to the contract price.
And it is up to lenders and their agents to explain to buyers that their appraisal does not mean they are not getting a stellar deal.
Appraisals are not public record, they often do not reflect market value, and they are largely just a document in a loan file to indicate there is adequate collateral.
