Why do appraisals often match the contract amount?

In purchases, buyers are curious why the appraisal amount matches the purchase price. I don’t think it happens ALL the time but I’ve seen it enough to question why as well. To understand the process it helps to have an idea of how appraisers arrive at their value opinion. Appraisers estimate value by looking at three approaches to value,  1.) Cost Approach 2.) Income Approach 3.) Sales Comparison Approach.

While the first two are relevant, and often given consideration when appropriate. The sales approach is the most common in most transactions. The appraiser must use a minimum of three closed sales, and many times the client (banks) also want the appraiser to consider active 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.

Appraisers must first determine what sales they want to use as comps (comparable) after 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 differences. After the adjustments are made to the sales, a range of adjusted sales prices is provided. It’s 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 appraiser’s 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 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 comps 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 short 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 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.

Make sense? Feel free to contact me with any questions.                                                                                 


Image from www.robgolfi.com

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