"Look at all these offers!"
We're in a season where having only 1 offer on a home is a warning sign that the listing price was likely far, far too high. What weight can an appraiser give to offers in their analysis of market value?
A common errant statement in real estate is that "Market Value is the highest number someone is willing to pay." We'll cover why this is not the case in another blog, but today, we'll narrow in on what an "offer" is.
In a common real estate transaction an offer is:
A contractually binding offer to "pay" a certain amount of money (or to secure financing to pay)
Made under many or few contingencies
95% of offers that come across my desk (perhaps 20-50 in a week) have the following contingencies:
Financing - the offer will only be realized IF the buyer can secure a mortgage. In the case of FHA/USDA, this means that not only the buyer but also the property will be held to different standards.
Home inspection - the offer will only be realized IF the home inspection is up to the satisfaction of the buyer.
Appraisal - the offer will only be realized IF the market value of the home is as much or more than the offer being made.
Read that last one again. The offer is not a real thing until the market value of the home is confirmed to be at least at the offer level. If the market value is below that, the offer isn't worth the paper it's written on, it is null and void (of course the parties can choose to renegotiate, but that would constitute a "new" offer).
In essence, every contract that includes an appraisal contingency says "I'm willing to pay X if and only if it is confirmed that the property is worth at least X." I can offer $1,000,000 dollars on a beat-up shack in a flood plain, but if I check that box, my actual offer will be not one dollar more than the market value of the property.
If however, offers come with a variety of exceptions to this (ie. offering to pay $5,000 over the appraised value, waiving the appraisal contingency entirely) then the actual "offer" may in fact be above the market value. However, if there is financing, lenders will not lend above the market value. Someone is going to have to come to the table with cash. This is the #1 rule in real estate (far more fundamental than location): Cash is what fundamentally makes markets. A healthy market can only grow if there is an increase in the cash being injected. Otherwise, the market is frothy, and will eventually become overheated and revert to the mean growth trend.
When individuals in the market are willing to put their money where their mouth is, then we have data to support that the market is experiencing an "up to the minute" increase. Those listings may not be closed, but individuals have made non-contingent offers, and that can represent the most recent, real data for the market. This is the kind of data that may be considered by the appraiser in choosing what end of the adjusted range they may place the final opinion in (in this case, likely the higher end of the adjusted range, if all other factors are equal).