7 Reasons sales contracts come in higher than appraisals

Top reasons sales contracts come in higher than appraisals

I hear agents make the statement all the time that “the appraisal came in low” or “the appraisal wasWhy sales contracts come in higher than appraisals lower than the contract price”. I always get the impression that the people who say this believe that the appraisal is wrong, however, today I would like for you to consider this situation from another perspective. Rather than thinking that the appraisal is low, have you ever considered that the contract was unrealistically high? Today we’ll look at reasons sales contracts come in higher than appraisals.


If you’ll think about it, the appraiser is the only unbiased party to the whole home buying transaction. The buyer is understandably in love with the home they are purchasing. The listing agent obviously wants their client to get the highest price for their client, and a large sales commission for their efforts doesn’t hurt either. And finally, the loan officers pay is usually based in part on the amount of the loan they make, the higher the loan the more they get paid.

The real estate appraiser has minimal financial interest in a home buying transaction and this is usually limited to a fixed fee for performing the appraisal. The appraiser’s payment is set up this way to prevent their judgment from being swayed. If an appraiser’s pay was tied to how high the appraisal was then this would have a devastating effect on the real estate market and the economy.

Because the other parties to the transaction do have a larger financial interest there can be a tendency for them to sometimes have an overly optimistic view as to the value of the real estate. In my 25+ years as an appraiser I have seen every situation you can imagine so today I want to share with you what I have found to be the top reasons sales contracts come in higher than appraisal so that this can hopefully be prevented in the future.

Don’t be guilty of these seven things

1) The agent let the seller price their home- We all love our homes because we have both money and emotions tied up in them. The problem with pricing a home based on our emotions is that it does not take into consideration what is reflected in the market. It only considers the value we feel our home should be worth.

I write a lot about “what the market is saying” because we have to strongly consider this. Market data is the great equalizer because it gives us perspective in pricing and helps us to price our home based on what other similar homes are selling for and it takes out our feelings out of the mix.

2) The agent priced the home high to get the listing- I have heard that some agents do use this method to get listings. Setting a high list price may get the interest of the seller and want them to use you to sell their home, but is it realistic?

Setting a high list price can result in it taking longer to sell the home and, in the end, result in a sale price lower than what they could have gotten if the price was set more realistically at the start.

Using this technique to price a listing can result in deals falling through because the sales contract was higher than the appraisal.

3) The seller over improved their property and needed to ask over market value to recoup their costs- The cost of home improvements and renovations is not cheap so it is natural for the owner/seller to want to get the money they invested in their home out of it when they sell. The problem with this is that market data may show that the value of the improvements is less than their cost.

While some home improvements do have a very good return on the investment there are those that do not. My go-to example for this situation is an in-ground swimming pool. Installing a swimming pool can cost upwards of $25-$30,000, however, it is rare that you will get that much out of it when you sell your home. The exact amount of value that the pool provides is based on where the home is located and how much value buyers in the area place on this type of amenity.

One way to prevent any over investment in your home is to get a “subject to” appraisal before the renovations are started so that you will know what your home will be worth after they are completed. Obviously, you will want to think twice about renovations that will cost $50,000 if it only increases the value of your home by $25,000.

There is also the enjoyment factor that you must consider. Swimming pools do provide a lot of family enjoyment, which is worth something so you may need to accept the fact that while you may not be able to recoup the hard money cost of the pool you and your family did find pleasure in having it, which is worth a lot also.

4) The seller never verified the hearsay of how much the neighbor sold their home for, thereby over pricing theirs- This is something I hear a lot when talking with homeowners during the appraisal inspection. They will point out that their neighbor down the street sold their home recently and he got so much for it.

I once did an appraisal for a homeowner who based his asking price on what his neighbor told him he sold his house for. Unfortunately, the neighbor inflated the price a little.

My client listed his home too high, and the home just would not sell. I did an appraisal and found out the home the owner was basing his price on sold for less, and since I used that home as a comparable, the appraised value was lower than what my client had his home listed for.

The good part was that the value I arrived at was based on what other homes actually sold for. This gave my client a value that was based on the market and it compared well with other homes. Two weeks later my client had a contract.

5) Supply is low and demand is high, right?- One thing that some sellers believe in a market like we are in now, where inventory is down and demand is good, is that you can price your home as high as you want and you will get it, however, this is just not true.

There is a difference in pricing your home at the top of the market and pricing it over the market. Pricing it at the top of the market is more realistic because it reflects the aggressiveness seen in the market we are in now. One of the signs of an aggressive market is multiple offers. Is this something you are seeing?

Pricing over market value is totally different because it does not reflect true value. Pricing a home in this manner is begging for long days on market and a low sale price to list price ratio because it will take longer to sell and will probably require many price reductions. Sellers who price their home in this way are really not interested in selling and are just fishing for that one buyer that is willing to pay what they want. The only problem is that if the seller is going to get financing the contract will most likely be way over what the appraisal comes in at.

6) Zillow said it was worth this much- Even with numerous things being written about how inaccurate Zillowzillow "zestimates" are not accurate is, sellers still place too much emphasis on setting a list price based on what their zestimate is. The bottom line is that the zestimate is based on inaccurate information and cannot be relied on to estimate the market value of their home. The zestimate uses inaccurate square footage data, therefore giving a faulty price per square foot estimate. This, in turn, results in zestimates that do not reflect true market value.

Zillow does provide comprehensive sales information for the markets they cover because they obtain the sale price and date from public records, however, beyond that information it should not be relied upon for pricing a home.

7) List price was based on the incorrect square footage- Pricing a home based solely on its square footage is not the best approach but I know it happens, so that is why I am including it here. I have seen this occur numerous times throughout my career.

Owners or agents will invariably price a home based on the inaccurate square footage of the home. They will think the home is larger than what is actually is and this will cause it to be priced too high. When the appraisal is done and the home turns out to be smaller, the contract price will be higher than the appraisal.

The remedy for this situation is to obtain the square footage from a reliable source, such as from the plans, from a prior appraisal, or getting it measured. When the square footage is known then the list price will be more accurate.

As you can see, there are numerous reasons sales contracts come in higher than appraisals. Don’t let this happen to you or you’ll have a bad selling experience.


Can you add any other reasons sales contracts come in higher than appraisals? Leave me a comment below and let’s keep the conversation going. As always, thanks for reading.

If you liked this post subscribe by email (or RSS feed). Thanks for visiting.


  1. Great article Tom! I too am seeing a frenzy in the market all the time these past 4-6 weeks here in California, and have come across many buyers and sellers that are simply not knowledgeable of the market area or market values. ie: One Seller admitted Dementia, and frequently a buyer is from out of state. I prodominately work for the VA, so I see multiple offer situations all the time with people who don’t have downpayments, and in many cases the buyer is from out of state, and never been to the area. The only knowledge the buyer may obtain of the area is from a good buyers agent, which is possible, but hardly likely. On the high end, a buyer may be comparing prices to a completely different market area, and say “relative to that price in that area, this house is way more affordable.” Once, again, not knowledgable of the area or values in the area is also a reason why a contract price can not be supported, and can happen on the buyers side as well. Great stuff here.

    • Thanks, Gian. There are many reasons why this can happen and the ones you mention are interesting. This is exactly why appraisers exist, and why banks want us to provide a value on their collateral. I have also had people comparing prices in my area to where they came from to but you really cannot do that. You have to compare apples to apples. Thanks for sharing.

  2. Really good, timely article. We’re in a low inventory, multiple offer environment in my area and I’m seeing all of these.

  3. Good information as always Tom. This is an increasingly common situation that appraisers are currently dealing with, and realtors are frustrated with. Another consideration is the lender guidelines, requirements and overlays: especially bracketing. Some lenders require a closed sale equal to or greater than the appraisers final appraised value, after adjustments have been made. This requirement can make it difficult to appraise the highest sale in the neighborhood.

    • I agree and totally understand the agent’s frustration. I find that going into other similar market areas can help to locate sales that reflect the hot market but only after recent sales and current listings within the immediate area have been analyzed. I’m not talking about just pulling high sales to get the value up but looking in other comparable neighborhoods to find market support for the increasing values.

  4. Albert Mattheis says

    Hi Tom,

    I enjoy your articles and appreciate your perspectives.
    In this case, it seems most of the items are only reasons why a house would be listed higher than an appraisal, not actually go under contract higher.

    A couple related items. Appraisals are based on facts in large part and we are required to bracket things and support our adjustments. A lot of agents don’t worry too much about that. As an agent once told me, you don’t make any commissions on the sales you talk yourself out of. Since the buyer typically does not have access to all the information that appraiser’s and agents have, they don’t know what it’s really worth. and the agents typically won’t dissuade them with facts for fear of losing a sale. Buyers rarely have an appraiser consult prior to writing a contract, but some should. The people who want to buy there own lot and build a custom house definitely should hire an appraiser before finalizing their plans because they almost never get their moneys worth due to over-improvements, poor design etc. It’s like the old appraiser saying about in-ground pools here in Maryland (or any northerly local). “If you want a house with an in-ground pool, buy a house that has an in-ground pool.” Otherwise that’s just a hole in the ground you throw money in. If you want a custom built house, buy one, but don’t build it yourself unless you are a builder, or you don’t mind losing a bunch of money. But if you must, then do yourself a huge favor and hire an experienced local appraiser first. The appraiser makes a good consultant. People will spend $10,000 on an architect, but nothing on an appraiser, and then they wonder why there house is worth a hundred grand less than they put into it. Spend $500 on an appraiser consult and save yourself $100,000. Now that’s a good deal, but one that too few people take advantage of.

    • Albert, I agree with everything you say. I think most people do not consider how much an appraisal can save you money as they are just looking at how much it costs. I like your saying about pools and buying a house with one. That is the exact truth because then you are getting what the market says it is worth rather than what it costs, two totally different things. Thanks a lot for your comments as they add a lot of insight from the appraiser’s perspective.

  5. Tom,

    Really good, timely article. We’re in a low inventory, multiple offer environment in my area and I’m seeing all of these.

    • Thanks, Joe. We are seeing similar activity in some areas around Birmingham too. Let’s hope the market stays hot for the rest of the year, huh?

  6. Thanks Tom. I see #5 all the time too. I find many people read headlines of a “hot” market and then project the headline on their pricing instead of letting the comps in the neighborhood speak.

    • I agree Ryan, that is why I don’t like general statements about the real estate market, especially on a country or regional basis. Since real estate is all about location we have to look at specific neighborhoods or subdivisions to get accurate market data.

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.