The Appraisal Conundrum: When The Contract Price Exceeds The List Price

by Michael Hobbs

So, what do you do when there is a real estate appraisal contingency and the contract price exceeds the list price?

A) Pray
B) Cross your fingers
C) Hope
D) Prepare
E) All of the above
F) None of the above

If you answered anything but F, you have a fighting chance at success, however long those odds may be. Although humorous, the question and corresponding answers highlight the anxiety that many real estate agents have recently experienced in a market where multiple bids have returned.

Otherwise forgotten as a relic of a bygone decade, bidding wars have become quite common in a number of neighborhoods and at a number of price-points. Clients will hear agents speak of “being ready,” “first mover advantage” and to “bid strong.” All of these are comments to prepare the buyer for the competitive real estate market out there, where “if you snooze, you’ll lose” can be quite commonplace.

Fast forward: the real estate agent’s buyer “hooked one” out of the limited inventory pool of active listings, but had to do so at a contract price that exceeds the list price and to provide assurance, the buyer included an appraisal contingency in the offer. So now what?

Whether you’re the listing agent, or buyer’s agent (think all-cash purchase), one of the most important steps is to prepare your information for the real estate appraiser in the same fashion that you prepared your buyer for battle. It is quite likely that you and your buyer have seen substantially more two-bedroom, two-bathroom condominiums in, say, the Gold Coast in the past month, than the real estate appraiser has. How do you overcome this market knowledge disparity?

1. Share Your Research: One thing you can do is share your research of the area and your CMA with the real estate appraiser to show that prices are moving upwards in a given development or neighborhood. As the buyer’s agent, another huge benefit you can provide to the appraiser is to summarize all of the showings that your client has visited and bid on unsuccessfully or visited and not preferred. By providing this “inside” information, you are assisting the appraiser to better understand your buyer’s intentions and highlighting facts that may not be obvious, and possibly undesirable, from only looking at the MLS listing sheet and accompanying photos.

2. Share the Offers: One often overlooked, but weighty, set of fact that agents have is the total number of offers received and the individual price points and terms of each offer. Why does this matter, you ask? From the standpoint of the appraiser, they have a duty to reflect what typical buyers and typical sellers are currently doing in the market at that moment. Maybe that accepted offer was not the highest offer, but the strongest offer or the fastest to close. This is great information for the appraiser and for the buyer’s lender, because it helps them understand what type of competitive market the buyer is in.

3. Share the Contract Price: One final piece of critical information that the agent likely has that the appraiser does not is the contract price of one or more currently pending sales that may have been considered by the buyer. In an appreciating market, pending sales routinely are better indicators of current market activity than closed sales, which may have gone under contract as much as 45 to 90 days prior. Unfortunately, the appraiser may have only been given 24 to 48 hours by the lender to complete the appraisal report, so stacking the deck with legitimate sales and market information is truly in your client’s best interest.

In summary, good agents know that better-informed appraisers are not only critical to this transaction’s potential successful closing but also your upcoming transaction, because the property under contract today will become the next listing’s comparable sale tomorrow.

Michael HobbsMichael Hobbs, SRA, LEED GA, RAA is a speaker, educator, author and president of PahRoo Appraisal & Consultancy, (PahRoo.com, 773-388-0003), a consulting and appraisal firm that specializes in residential and commercial real estate and the education of green and energy efficient adoption.

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