Appraised Value Below Contract Price

[J Grant]

The above three posts captured some of my thoughts. Investors have an astute feel for value and do real research. Private buyers rely on a mishmash of media reports, their friends opinions, Zillow, and ultimately rely on what their agent tells them.

Agents show buyers a CMA of unrealistic price and dis similar comps. Most buyers, price homes per $Sf, and as Tim said, think of all homes as equal in this method. Then add in that a seller does not take into account marketability issues , and a possibly faulty or inflated list price.
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Denis, in your post #9 you gave a good explanation of scenario #2, a MVO versus a SC price, within a range of adjusted values. Buyers also work within a range, a range of prices.

The top end of the range is a list price, and the bottom end is the first bid. If the list price is 450k , and the buyer's first offer is 400k, the range of negotiation is from 400k to 450k. Within that 50k range, where a SC price ends up is not necessarily the best MV indicator per criteria we use. The negotiated final price is more a reflection of who was more motivated, or more stubborn, who had more cash, the RE agent input, what the interest rates were, etc.

The fact that a MVO and a SC price does not line up shuld not be an appraisal problem in an ideal world, but it is, with even appraisers using terms like, "killing a deal", or "coming in low"....

Part of the confusion is that we develop a point value per MV definition, and that is a presumed hypothetical sale, not a "real" sale. Yet, appraisers point to the SC price as proof of the most probable price. Though the SC price deserves consideration as market data, the fact remains that the SC price is that of a "real" pending sale price, and the MVO is the price developed per a hypothetical sale .

The SC price is negotiated on a date, (pehaps 3 weeks prior), by a buyer and seller with limited market knowledge, and influenced by personal agenda, and motivations. Then we have the MVO, developed on a different date, (perhaps 3 weeks later), using a certain methodology and a higher level of market knowledge.

Two separately arrived at $ amounts arrived at on different dates , one $ amount is a price negotiated by parties with a vested interest in the deal, the other a value opinion from an unbiased professional ...how likely is it that the two $ amounts should be exactly the same?

 

[Thomas Fiehler]

I only had this happen once about 2 weeks ago. My response was that I was not part of the contract negotiations so OBVIOUSLY I cannot comment on something that I was not part of. My appraisal report is a Summary Report and if there is any part they have questions on please limit the questions to specific areas and not the whole report in general. Still waiting on their reply!

 

[J Grant]

Good one, Thomas, as it is the truth..let us know how it works out!

 

[J Grant]

"The Sales contract price differs from the market value opinion. Contract prices are negotiated by parties per individual motivations and are typically not arrived at using the same criteria for deriving a market value opinion in an appraisal. It should be noted that the appraiser considered a number of additional sales and listings in their market reseach. "

How about that as a useable verbiage? It removes the "support for contract price" aspect which could be problematical, and avoids using the term "lower than" or "below" , which assumes the SC as a target amount that was not met.

 

[mark hurlock]

why the appraised value is below the contract price.

Because the contracted price is not a criteria for comparable sale selection.

 

[mark hurlock]

My bold.

This is an amazing statement.
Buyers and sellers negotiate a price to purchase a home and it has little to do with the value.

Is this what you truly believe? Or, perhaps you'd rephrase it?

Denis,

in support of J's comments, I would add how so few buyers call an appraiser before making an offer rather than the day before settlement.

 

[Calvin the Airedale]

It is an appraiser's obligation under CFR and GSE regs to analyze the sale agreement. Most (appraisers) have no idea what this means. The unfortunate placement of this section on the top side of URAR page one suggests to most that this be done at the front of the report. Properly, however, it can only be done after the MV has already been estimated.​

When your lender client is asking you why the value is lower than the sale price it is because you have failed to properly analyze the sale agreement!​

In fact, the only basis for analyzing the SC is the opined market value. Based on its closeness to MV, the appraiser can then say it's either too high, too low, or well supported by available market comparisons according to the definition of value opined. The reasons the price is either too high or low may even be apparent and if so should be touched on in the contract analysis. If they are unknown, that might be stated also.​

It's not our responsibility to support a contract price, only to support our opinion of value. But if a contract exists, we have other obligations most seem to ignore. Too often, this section is a simple recounting of facts, and not an analysis. (Please look up the definition of analyze.)​

I'm already braced for the criticism that "it's not me place to say whether someone's purchase price is too high or too low." BS! It is exactly your place, and your obligation! USPAP, GSE guidelines, and CFR rules require it!​

 

[mark hurlock]

It is an appraiser's obligation under CFR and GSE regs to analyze the sale agreement. Most (appraisers) have no idea what this means. The unfortunate placement of this section on the top side of URAR page one suggests to most that this be done at the front of the report. Properly, however, it can only be done after the MV has already been estimated.​

When your lender client is asking you why the value is lower than the sale price it is because you have failed to properly analyze the sale agreement!​

In fact, the only basis for analyzing the SC is the opined market value. Based on its closeness to MV, the appraiser can then say it's either too high, too low, or well supported by available market comparisons according to the definition of value opined. The reasons the price is either too high or low may even be apparent and if so should be touched on in the contract analysis. If they are unknown, that might be stated also.​

It's not our responsibility to support a contract price, only to support our opinion of value. But if a contract exists, we have other obligations most seem to ignore. Too often, this section is a simple recounting of facts, and not an analysis. (Please look up the definition of analyze.)​

I'm already braced for the criticism that "it's not me place to say whether someone's purchase price is too high or too low." BS! It is exactly your place, and your obligation! USPAP, GSE guidelines, and CFR rules require it!​

Would you mind posting a link or the actual wording for your reference.

As you know these documents are hundreds even thousands of pages long and for anyone to go looking for a particular reference is not practical.

Once you have done so, I will offer my opinion. Thanks.

 

[JasonHaskell]

Calvin is entirely correct. The OP is complaining that thelender is asking him to do what he should have already done. I don't care if you wrote a novel, if you are being asked for additional info regarding the sale analysis, you didn't properly analyze the sale. I see this all the time in many parts of appraisals that I review. Simply stating a contract was written on x date for x amount is NOT analysis.

 

[J Grant]

Calvin, some of your post imo is your viepoint of the "rules", and not what is actually required or asked of the appraiser.

The appraiser is asked to analyize the SC in the first section for a reason. Analyize the contract refers to arms length or not, concessions or special terms and impact on price, inclusions of personal property. I don't recall any advisory opinions or guidelines asking an appraiser to analize a contract price.

If the client etc, wants us to analyize the price , they should state that in the engagement letter. But they don't. They only ask it WHEN the SC price and MV opinion differ. To head off this request, some appraisers are now being proactive and adding a statement before turning the report in.

Here is my take,since things have gotten to the point they are.

On lender purcahse appraisals, require a statement from the appraiser addressing the relationship between SC price and MVO on ALL reports, including when the SC price and MVO match.

That would level the playing field. Right now, it is asked only when MVO is below a SC price, putting appraisers into the position of defending their MVO. If appraisers need to defend, or elaborate on how a MVO relates to a SC price, then they should do so on all purchase appraisals, including when the MVO and SC price are the same.

That, in fact, would be excellent, because it would reveal the flimsy reasoning and lack of support, outside the SC itself, for a number of times when MVO matches a SC price. For example, the three best comps out of four point to the lower range of value, there are long DOM and over supply of inventory, yet the high SC price is met, and only suported by a high price, outlier fourth comp. Require the appraiser to explain that, please!