How agents can use multiple offers to help the appraiser

multiple offers and appraisalsGot multiple offers?

I think agents are missing out on a secret weapon at their disposal. What is the secret weapon your ask? Multiple offers. As you probably know, multiple offers can occur during the sale of a home when more that one party wants to purchase the property.

This can occur when the number of buyers is higher than the available inventory. It appears that this may be the situation in many areas of our country right now. This has left some real estate agents frustrated when the appraisal comes in lower than the contract price.

Have you been in this situation before and didn’t know what to do? Rather than wait for it to occur and then react to it at that time, I think that agents should be proactive and plan ahead.

Remember what Mom said about sharing?

You can do this by sharing information on the multiple offers in your appraiser information packet. If you are not providing an information packet to the appraiser I highly recommend that you start doing this. It can help the appraiser know more about the house and the updates it may have had as well as information about the neighborhood.

Appraisers could be described as value detectives. The more evidence you have that supports the contract price the more convincing your argument is. This can help the appraiser better understand how the agent came up with their listing price and the subsequent contract price. While it is not the appraiser’s job to support value, providing proof of multiple offers does show them that more than one person is willing to pay a certain price for the home.

By looking at this demand, and comparing it to the available supply of homes, it is possible to better understand the economic forces working to bump the contract price into a higher range than previous homes have sold for.

Providing the appraiser with copies of the contracts can also add proof about buyer behavior. It is one thing to say that a property had multiple offers and it is another thing to back that up with evidence.

The appraiser’s job is to provide an opinion of the most probable price for a property, which is not necessarily the highest price. When multiple parties are making offers that are at the top of the existing price range this helps to move the needle from highest value closer to most probable value.

The truth about high contracts

With all of this being said, I do want to add another perspective to the situation. High contracts do not always equate to an increasing market. There are situations where buyers do make high offers just to ensure that they get a contract on a property, especially if the inventory is low.

This is where further detective work is necessary, and the additional information about days on market, inventory levels, and multiple offers helps to put everything in context.This additional information may indicate that the high offer is way off base depending on what the market data shows.

In the appraisal process appraisers are required to use a minimum of three closed sales, which will provide a range of value. The appraiser then reconciles a final opinion of value based on the sales and the current temperature of the local real estate market. Low inventory levels, high demand, and low days on market can all provide support for reconciling a value at the upper end of the adjusted value range.

If you have a property that is under contract at the upper end of the range have you done your homework to prove that this is supported by market data? Did you provide this support with the information you provided to the appraiser? Keep in mind, it is not acceptable to coerce the appraiser for a high appraisal but have you laid out the evidence and support to show that your property is actually worth what it is under contract for? These are all things to consider in today’s market.

Question

Do you have any other questions about how multiple offers can be used to help the appraiser? If so leave a comment below and we’ll keep the conversation going. As always, thanks for reading.

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Comments

  1. John Fucarino says:

    I have had this discussion far more times than I would like . The job of the appraiser is to determine the most probable price the home would sell for based on prior information. When a realtor sets the price higher than that it does not matter how many offers they get . Justifying the high price by saying low inventory is a formula for another housing bubble , which is happening by the way . The realtor says “there was a bidding war” . The very simple answer is the winner of the bidding war should add the cash over the appraised price . I could go on and on but the bottom line is realtors are incompetent and are only concerned with the commission .

    • You make some great points John. I do think that you have to look at the whole picture to get a better understanding of the market you are in. I agree that if a realtor sets the price unreasonably high this does not automatically make a market but if property values are increasing, inventory is low and you have multiple offers it has to be taken into consideration. That is why I like to look at listings and pending sales because they give us a picture of how things are NOW, not 3 months ago. I also agree that after looking at all the data if the value cannot be supported then the buyer should make up the difference out of pocket.

  2. Kenny Habeeb says:

    Agree with your last, Tom. Not long ago I saw what looked to be a good listing comp. I called the agent, who was unusually helpful in telling the story of the run up to pending status. There were four offers all hovering around $1.4M, which was already one hundred thousand above list, and a fifth buyer then shut the dance down by offering $1.7M. I wasn’t appraising that property, but if I had been, that high number would not have been my first choice as final reconciled value. 😉

    • Wow, Kenny, it sounds like that is a very hot market you are in. That is a good point you make about multiple offers on the pending sales as well. They can also give us an indication of the market’s reaction to the area the subject home is in. Thanks for sharing.

  3. Mark Van Zeelt says:

    Interesting article Tom. I suppose, in a way, multiple offers are similar (in an inverse way) to active listings. We are already accustomed to reporting on active listings that are similar to the subject. These are instances where there is a willing seller, but buyers are not willing to act at that price. This would indicate an upper limit to value. The rationale being; if a similar competing property is available, why would anyone pay more for the subject?

    Multiple offers are where there are willing buyers, but the seller is not willing to act on the lower priced offers. This would indicate a lower limit to value. The rationale being; if multiple buyers are competing for the same property, why would a seller sell for less than other offers?

    But in both cases, since there is no “meeting of the minds”, so they cannot be conclusive evidence. But, they still can be evidence.

    • I agree with your scenario but wouldn’t there be a meeting of the minds at the higher price limit with the multiple buyers and the seller? If there are multiple buyers the highest price may not always be the one accepted for various reasons. Maybe the buyer that is the second highest offer wants to pay cash in a quick closing. There are various ways for this scenario to play out depending on the situation both buyer and seller are in. Thanks for sharing your thoughts.

  4. Having multiple offers is definitely a piece of the valuation puzzle, and they can help tell the story of value to a certain extent. As an appraiser I use the number of offers and price levels as data, and I have no problem mentioning the specifics in my appraisal report too. Of course I always have to consider that some offers are made simply to secure an accepted contract. Or buyers offer at list price in a competitive market because they think otherwise they won’t get into contract. Moreover, some buyers offer more than a property is worth because they are putting very little money down (and they happen to be able to qualify for the loan at the list price (which may be too high in the first place)). Thus at times I’m reminded that having multiple offers doesn’t always mean value is there. It is a part of the story though and can provide strong supplementary support for value, so I commend you for prodding agents to please communicate this to appraisers.

    • Thank you for the thoughtful reply, Ryan. You have made some great points regarding multiple offers and offers and the high end of the range. The offer is really just the beginning of the story and not the end. Just because there is a buyer willing to sell for a certain price and a buyer willing to pay that price does not mean that is the true market value of the property. The true market value is the most probable price that the majority of people would pay.

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