We’ve all been there before, whether as an appraiser, a buyer, or a realtor.  The  Salt Lake County market is hot.  Entry-level housing is the hottest price point.  The property has multiple offers.  What do you do?  And what is the true market value of that property?  While this scenario is not uncommon, I experienced something somewhat unique this week and I wanted to explore two things in this blog post: (1) What is the role of multiple offers?  And (2) What is market value?

What is the Role of Multiple Offers?

Here’s the scenario I experienced this week: I was appraising a very basic twin home – you know, the kind that share attached walls to their neighbors.  Very basic home, definitely entry level housing.  This home was 1511 Square Feet in size.  The broker had it listed for $239,777.  It was on the market for only 2 days before receiving 11 offers at or above full listing price (according to the broker).  My appraisal was for financing purposes – the contract price was $265,000.   That is a whopping 10.5% above list price.  Like I said in the intro contract price above listing price is not too uncommon, especially in a hot market and especially in the entry-level housing price point.  But a contract price that is 10% above list price?  Yes, that is atypical.

Market Data

Before we automatically say “yes it’s worth it” or “no way it’s not worth that” we must look at the market data.  I found four twin homes in the subject’s same development (same year built, same design, same builder, same general layouts with some minor differences).  Here is a brief summary of these four sales in comparison to the subject:

  • Subject:  1511 Sq Ft under contract for $265,000 (listed for $239,777)
  • Comp 1 sold 03/19 for $263,000.  It was 1925 SqFt
  • Comp 2 sold 02/19 for $257,000.  It was 1569 SqFt
  • Comp 3 sold 12/18 for $221,000.  It was 1530 SqFt
  • Comp 4 sold 10/18 for $223,000.  It was 1420 SqFt

Right away we find that the highest sale in this neighborhood sold at $263,000.  And it was over 400 SqFt larger than the subject property.  But this data does not tell the full story.  The subject had some minor updates and in the world of appraisal lingo the subject is considered “C3” condition (on a scale of 1-6, 1 being brand new and 6 being unlivable).  Comps 1 and 3 were similar Condition as the subject.  But Comp 2 (which sold for $257,000) had been completely renovated and was in superior C2 condition.  (Comp 4 was in more dated condition, inferior C4).


Through the market data you can start to formulate a tighter range of value.  Initially it is apparent that the contract price of $265,000 is not supported.  Further, because Comp 2 is superior in condition the subject’s value may not even be as high as $257,000.  Whereas Comp 4 was a dated sale and Inferior condition.  So we know it’s not worth as low as $223,000.  Based on the subject’s updated condition and increasing market trends, I reconciled at a value of $251,000.  On the one hand, that is $14,000 less than the contract price.  However, that is also $11,223 (4.7%) higher than the listed price.  

Multiple Offers

After submitting the report I got a couple calls from the listing broker who was unhappy with the appraisal.  He explained that they had 11 offers that were all at or above full list price ($239,777) and they’ve got people waiting in the wings if this deal falls apart because of a “low appraisal”.  He said there were two sales in the neighborhood he knew of that sold higher than the appraised value of $251,000 (these two sales were the ones I already referenced – one was significantly larger and the other was superior in Condition).  The broker was adamant that because he had multiple offers higher than $251,000 why can’t the appraisal come in higher than $251,000.

Manipulating the Appraisal Contingency

So what is the role of these multiple offers?  To answer that we need to dive inside the mind of the participating buyer and explore a dirty little secret in the world of real estate: offering more than you believe the appraisal will support leading to renegotiation. 

I hear you – “What!?  That actually happens??”  Yes.  A lot.  Built into the REPC (Real Estate Purchase Contract or “offer”) is something called the Appraisal Contingency.  Basically if the home does not appraise at or above the contract price then the parties go back to the drawing board and negotiate further.  And in the entry-level housing price point where that market segment is extremely competitive some buyers and/or their agents use a technique where they’ll offer much higher than the list price with the expectation that the appraisal will come in short in which case they can go back to the seller and renegotiate the price down to the appraised value.  Why?  Because the high offer price appeals to the seller who’s trying to get the maximum return and so they often go with the highest offer, even if there are 11 offers on the table.  In this case, I’m not even sure the buyer thought the house was worth $265,000, but it got their offer accepted!!

Desperation and Emotion

Another factor in the world of multiple offers in entry-level housing.  Let’s say these buyers have looked at condos, townhouses, and there’s very little on the market.  And what is on the market typically sells within 7 days or less, and often above list price.  This is a hot market, there’s an extreme shortage in the entry-level market segment, and buyers can easily get emotional and/or desperate.  There’s a growing sense that “if I don’t get into a home now the market will keep going up and up and I’ll never be able to afford to buy a home”.  The fact that buyers can be emotional and/or desperate is a great segue to a brief discussion on Market Value.

What is Market Value?

Integral to every single appraisal report is the Definition of Market Value.  I’m going to bore you with Fannie Mae’s definition of Market Value because it includes some vital bullet points that will tie in to our discussion above (with some editor comments and/or emphasis added by me):

“Market Value is the most probable price (not the highest possible price) which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. (1) Buyer and seller are typically motivated (not desperate or acting on emotion); (2) Both parties are well informed or well advised, and each acting in their own best interest; (3) A reasonable time is allowed for exposure in the open market; (4) Payment is cash equivalent; (5) Price represents normal consideration for the property sold unaffected by special or creative financing or sales concessions. 

In other words, market value is not the highest price a particular buyer is willing to offer, but the most probable price the broader market is willing to pay.  When buyers or sellers are not typically motivated (i.e. a desperate buyer motivated by increasing prices and a shortage of inventory and an emotional fear that they will miss out on their chance to get into home ownership) they do not act in their own best interests.   

A Realtor’s Perspective on Market Value

I come from a real estate family.  I’ve heard it said by many realtors that “market value is whatever a buyer is willing to pay for a house.  If someone is willing to pay X, why isn’t it worth X?”  I can tell you from my experience in real estate that’s a valid question.  However, it does not take into consideration two important facts: (1) It does not take into consideration the definition of market value and all the criteria requisite to establish “market value”.  (2) You can pay whatever you want to pay if you’re paying 100% cash for something.  But when you’re leveraging other people’s money (i.e. Loan) you don’t get to make the rules because you are not assuming the bulk of the risk. 

If you’re putting down $100,000 cash on a $500,000 purchase that sure feels different than if you’re putting $500,000 of your own cash on the same purchase.  You’re going to act different.  You have a lot more skin in the game to lose.  You’re going to make 100% sure that your investment is actually worth $500,000. 

Let’s transition that to the entry-level market segment.  Many of these home buyers are coming in with 3-5% down.  So at $250,000 that may be only $12,500.  So to someone coming in with $12,500 what do they care if the home is worth $250,000 or $265,000?  If they lose their job and eventually foreclose all they lost was the $12,500.  Meanwhile the lender is out 95% or more.  The fact is that people act differently when they’re putting 100% cash down.  So the argument that a home is worth whatever a buyer is willing to pay doesn’t work in the world of money leveraging and loans.

Wrap up

So what happened in the case study above?  Well, I spoke to the realtor on two occasions.  I explained how I’m not perfect and that I’m happy to do a reconsideration of value if he has better comps (and explained that process).  However, I know he didn’t have any different comps because two days later I got a request from the lender with an Addendum to the contract to reduce the purchase price to my appraised value of $251,000.  The lender didn’t want to loan on anything more than their LTV of the appraised value.

What did you think?  I’d LOVE to hear your feedback and keep the dialogue going!