Why does the appraisal ALWAYS come in at the contract amount?

why does appraisal value equal contract priceI get asked this question a lot, so I thought I would address this issue that many people are curious about. I don’t think it happens ALL the time but I know real estate agents have seen it enough to question why it seems the appraisers value is the same as the contract amount.

To understand this it helps to have an idea of how appraisers arrive at their value opinion. We estimate value by looking at the three approaches to value, which are the cost approach, the income approach, and the sales comparison approach. While the first two approaches are certainly relevant, and given consideration when they are appropriate, I am only going to discuss the sales comparison approach in this post. The appraiser must use a minimum of three closed sales, and many times our clients also want us to consider competitive listings and pending sales. There are several scenarios that can occur with how the contract amount compares to the sales used in the report.

Appraiser’s must first determine what sales they want to use as comparables. I wrote a previous post about this that explained the difference between the two. After the comps are chosen we determine the differences between them and the subject property and then dollar adjustments are made to the sales which reflect the market reaction to these physical differences. After these adjustments are made to the sales, however many you use, a range of  adjusted sales prices is provided. It is from this range that an appraisers final opinion of value is made. The appraiser must reconcile how the contract price on the subject property fits into this range. If the subject property is an arms length transaction, meaning two unrelated parties were acting in their own best interest under no duress, then the contract amount can be considered legitimate and then compared to the range of value provided by the sales. If the contract amount is within the range of comparable sales and listings then it can also be considered as another reliable value indication, in fact it is probably the best indication of value. It is with this scenario that the appraisers final opinion of value will typically be the same as the contract amount.

The second scenario that can occur involves the contract coming in higher than the range of comparable sales. This typically occurs when the house is not properly priced when it is listed. Many times owners will price their home based on their emotions and not how the house fits into the current real estate market and what other similar properties are selling for. If the indicated range of value provided by the sales comparables is lower than the contract price, then of course the appraisal amount WILL NOT be the same as the contract. It is highly unlikely that a home will appraise for the contract amount if similar recently sold homes, and current listings, are sold and listed for lower than the contract amount. Buyers will not typically pay more for a home if they could buy another similar home for a lower amount. The best way to prevent this from occurring is to get a pre-listing appraisal.

The last scenario involves the contract price being lower than what other similar homes are selling for or listed at. Examples of this are distress sales that occur during a divorce, estate sale, or quick sale situation. If the current market for similar homes indicates a higher value than what a house is under contract for then the appraisers final opinion of value can be higher than what it is under contract for. The contract amount does not always dictate what the home will appraise for because many times a home will be priced lower than normal in order to sell it quickly and these scenarios are the best example for that. As long as the market supports a higher value the appraisal can come in higher than the sales contract. These are the three most common scenarios that occur when a purchase appraisal is performed.

What are your thoughts on this matter? If you have anything to add or questions to ask leave me a comment below I’d like to hear from you.

If you have any real estate appraisal related questions you can call me at 205.243.9304, email me, or connect with me on Facebook., Twitter, or Youtube.

 

Comments

  1. If the contract price falls right in the range of competitive sales for the neighborhood and seems like a reasonable and well-supported value, it makes perfect sense to reconcile the value to the contract price in my opinion. I have no problem doing that at all.

Speak Your Mind

*

 

Sign up and get valuable content!

  • Get local real estate market data
  • Learn valuable information from a seasoned appraiser
  • Find out what adds value to your home

I respect your privacy. Your information stays with me.