Several realtors have asked why borrowers are willing to pay over appraised value.
There are several reasons that we have observed: (1) the buyer is a 27 year old social media employee with $11 million in stock options, and money is not a significant concern; (2) the buyer is getting a massive gift from relatives, and money is not significant concern; (3) the buyer is a cash-laden overseas investor who wants to park money in the States ASAP no matter what; or, most importantly, (4) the Realtor did a great job of explaining to the buyer why appraisals do not always reflect “market value” and why the buyer is not “over-paying.”
We have seen transactions in Berkeley and Oakland with ten or more buyers willing to pay as much as $400,000 over the list price. The list price might be $900,000, and almost every offer might be over $1.3 million. With so many buyers in an open market willing to pay $1.3mm, the market value is clearly $1.3mm (no matter what an appraisal might say).
The problem for appraisers is that they are not allowed to use offers or the most current market data in their appraisals. They are forced to use closed comparable sales for data. In a hot market, closed comp data might be ridiculously dated. This often forces appraisers to come in below market value; they have no choice when there is simply no adequate data to correlate to.
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