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High Offers Offset By Low Appraisals - Fair And Balanced? Or Unfair?

Mad Girl With the amount of offers coming in on REO properties(Bank Owned Properties), there has been a new trend among buyers. The trend is to just offer as high as possible to get the property under contract. After the contract is accepted by the bank, they have to get an appraisal for the loan.

The appraisal comes in quite a bit lower then their original offer price, which means the buyers won't be able to get the financing. These buyers then have the right to withdraw from the contract based on the appraisal contingency. The deal is dead right?

Not so fast. The buyers agent has been planning this all along. The agent and the buyers will submit an addendum to the price to meet the appraisal, and will re-submit to the bank.

Now, the bank wants to get this deal done, and knows the same thing will happen with any other buyer. The appraisal has already been done. So, the bank just accepts the lower price, and the buyers get away with it. They knew the appraisal would not meet the original offering price, and they get a great deal.

With the new appraisal guidelines, this is happening more and more. Appraisals are coming in low, buyers are aware this is what's happening, they are offering high to get the property over the competition, and just wait out the appraisal to get a great deal.

How fair is it to the buyers that put in an offer closer to asking price? Is this fair and balanced? Is it unfair to the other buyers that put in a reasonable offer? Or is it a smart way to get your buyers the house they wanted?

Posted by Lisa Udy Realtor Utah Real Estate Specialist on 11/03/2009 01:29 PM

Comments (198)

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198 Comments on High Offers Offset By Low Appraisals - Fair And Balanced? Or Unfair?

NOV

Wow, seems very risky as a buyer agent to even think about recomending this to a client, first of all the buyer nor agent control the appraiser. How do they know it will come in lower than their contract price? I would never suggest this to a buyer.

Hi Tony - Thats the thing, the buyers agent figures they can get their client out of the deal with the many loop holes a buyer has. I wouldn't do it either, but I have seen it happening more and more. It's frightening.

It seems really unfair to the buyers putting in legitimate offers. Also, I agree with Tony, sounds too risky!

This seems a bit risking. I dont know why someone would do this intensionally. I could cost them thousands of dollars if it appraises.

Hi Lisa, Interesting strategy ! The buyer's agent probably has a fairly good idea of what the property will appraise for so that risk is minimized. Actually, this is the exact same ( only exactly opposite ) of the bank putting the property on the market well below where they want to end up thus ensuring multiple offers, etc.

That is an interesting strategy. Have not heard of that yet in this marketplace.

If buyer is putting in an offer without the intent of completing it and Agent is encouraging this or knowingly going along with it I see ethics problems.

Now, on the other hand, if buyer is willing to buy at offer price but hoping to get a break from the appraiser I see no problem.

Comes down to intent and that is a hard thing to prove.

I think it's a valid tactic and it works. I don't think there is anything unethical about it at all. Who is to say what the property will appraise for? The buyer cannot pre-determine this and neither can the buyer's agent. The appraiser conducts the appraisal, and what happens if the property appraises? The buyer still buys. I don't see an issue.

A new idea on how to beat the system.

I agree with Howard (post #7) regarding making an offer with no intention of meeting certainly appears unethical but if willing to go through with it should his 'plan' backfire on him then I suppose it is a rather clever strategy.

I don't think I'd be comfortable with it, however, and I am certain that I would NOT RECOMMEND this "strategy" to any buyer.... just too close to the ethical/unethical line for me.

This strategy is being used more and more in So Cal especially when buyers are using FHA or VA financing which banks are reluctant to accept.

One of my clients is purchasing a home that is owned by Wells Fargo's REO division. The contract specifically states the buyer can't cancel due to the appraisal contingency. The banks are already catching on to this strategy, like buy & bail. I don't think it will last long, but I've heard there are many Realtors recommending this strategy.

When you put offers on 25 homes and get beat out, due to lower cash offers, that could be very frustrating as a buyer.

This is risky technique and I would never advise it. As a loan officer I have seen an even riskier technique. Instead of using this technique on REO properties, I buyer will put in a high offer on normal, nondistressed property. The buyer will then apply for a FHA loan. Every FHA loan has a case number assigned, not to the borrower but to the property. The buyer is gambling the FHA appraisal will come in low and if it does, the seller is stuck because the FHA case number is on the appraisal as well so the appraisal is bound to the property until the case number expires, which is 6 months. Now the seller will forced to sell for a lower amount or wait six months.

2 months ago I was processing a FHA loan for a client and I told him the good news that the appraisal came in at the contract price. I could not figure out why the borrower was so upset until he told me this scheme. I could not believe it. Since the borrower did not put down a down payment, he just walked away. All it cost him was the price of the appraisal. When it comes to real estate, it seems that there is new scheme every day.

Lisa,

After months of this practice, some of the REO agents are getting smart. They are actually communicating with the bank and letting them know exactly what the home will appraise for, thereby giving agents who do their homework and offer a fair price a chance.

My friend and colleague actually put in a fair offer on a house with... wait for it.... wait for it..... 95 offers! My client with a lowly 13 offers finally got crazed and back out of all of them. That's crazy-making for our buyers and totally not fair. I'm glad that some banks are finally getting a clue!

Tim and Susan,

Fair or unfair, I really don't know, or if there is even such a thing in business. But for those that put in the unreasonable offer just to get rid of the people they were competing with may be considered unethical. The title is to grab your attention, and I think it worked. All I really wanted was a great conversation, and it seems as though we have one. :)

Lisa - Great technique when it works. If it doesn't and it appraises at the higher price when the client is betting wrongly.....What do you tell them then? Might be appropriate in a multiple offer situation when using an FHA or VA. But on REO's I'm just not sure. Maybe this is a property specific tactic. I have to admit it's an interesting premise. great post. Cheers

Yep, we agree with you Lisa.

Actually, anything that is legal and ethical is, in my opinion, fair. In this situation, every buyer has the opportunity to put in whatever offer they desire. There was a time, not so long ago, that buyers were scrambling to put in HIGHER offers than anyone else. Ahhh... those were the days! LOL

Tim

I don't know any buyer who is smart enough to strategize that move. Further, I don't know a buyer's agent that would recommend that risky strategy.

If the buyer's agent knows that the appraisal would come in that low, why didn't the listing agent??? Why didn't the bank.

This sounds like a simple case of a property priced too high, a contract price that didn't appraise. If the bank is willing to take the appraisal price, why shouldn't the listing agent??

We're seeing banks require that the buyer be willing to pay the difference between the appraised value, and the offer amount, if an offer comes in significantly above the asking price. Buyer pays the difference- the price isn't lowered.

If I'm understanding correctly, it IS unfair to buyers who offer 10k or 15k above asking, to have a buyer come in at 70k above the listed price, and then seek to only pay the appraised value (I"m assuming that the appraisals typically come in at or above the listed price)- I think that the banks have caught on.

This is happening a lot in San Diego. I have seen first hand my clients offer being rejected for a higher offer when our offer was pushing the high comp area to begin with and then a couple months down the line when it closes you see that it sold for less because they had to do a price adjustment.

There are some lenders that are doing the right thing with their REO's (no laughing). I have had an offer rejected not because I submitted a low offer but because I submitted to high of an offer. My client only came in 10,000 above list price and when I spoke with the Listing office to ask why our offer was rejected he informed me that the lender prices their REO's at what the true value is and they want a smooth escrow so over priced offers are rejected.

You are right Vito, one of my offers was also rejected because it was higher than listing price.

Lenders are taking either appraise value or purchase price, whichever is less.

remember back in the days appraiser asking you... "how much you want me to appraise it for?"

Seems to me that this practice is certainly risky if the buyer is counting on a low appraisal. However, I don't see anything unfair about it. Other buyers have the same opportunity to use this technique if their agents are savvy to it and they (the buyers) are willing to take the risk.

-Scott

This happens quite frequently in my market. We just had it happen with a buyer we are working working with. FHA loan. Needs 6% in closing costs. And beyond desperate to get a home, Can't compete in the market place in his price range because every listing is a REO with multiple offers, mostly cash. He just recently got into a bidding war and asked us how high he could good. We gave him a figure but he insisted on going higher to try and lock up the property.

They accepted his offer and the apprasisal came in $20k too low. The seller wouldn't budge.

This is a loophole and Laurie has stated the solution, "We're seeing banks require that the buyer be willing to pay the difference between the appraised value, and the offer amount, if an offer comes in significantly above the asking price. Buyer pays the difference- the price isn't lowered." I haven't encountered this as all my buyers have been cash buyers for foreclosures, no financing needed, so no appraisal.

Lisa - I'm with Christianne (#8) on this one. Only the appraiser can say what the appraisal will come in at. If the bank doesn't want to lower their price then they have the option of canceling with the buyer that doesn't want to pay the contract price. The bank also has the right to go back and ask one of the other buyers who put in an offer if they are still interested in purchasing the home at their offered price.

Furthermore, I also agree with Bill (#5) about banks and their REO LA's who intentionally price REO's low for the sole purpose of generating bidding wars. Is this particular practice fair and balanced - heck no its not. Personally, I find it kind of sleazy, yet REO LA's engage in this type of conduct everyday.

The only difference with this scenario is it's not the REO LA complaining but rather all the buyers who haven't a chance in the world of competing with the other gazillion offers that the REO LA and their bank seller knew they would get by engaging in this type of behavior.

uh that does not always work that way Fannie mae was adament that my buyer buy the property regardless of the appraised value. As to whether its fair why not I have no sympathy for the poor bank having to accept a lower price. the only way you can get an offer accepted is to be aggressive with values so low who or what incentive is there to sell like there would be in a normal market so the only thing is REO or a short sale here and there

Thanks Lisa, what happens in Salt Lake area and what happens in Calif doesn't take long to make it here so I'll be watching for that one. Not sure how I feel about it.

Are you suggesting the appraisal/appraiser are in cohoots?? If the property doesn't appraise out, are you suggesting that they've all conspired??

I've seen this happen too - but not because the buyer or buyers agent was playing a game, but because the buyer really wanted the house and at the time of the offer it was worth the price to him. However by the time he finally got his mortgage the market had dropped, the house no longer appraised, he couldn't get the full mortgage amount he needed and he couldn't come up with the cash differential. If the seller still wanted to close the deal, he was left with no choice but to renegotiate the sale price.

Interesting, haven't seen it here yet. I am sure many buyers who are bidding or competing on foreclosed homes are getting tired of loosing out to buyers that are working with agents in the same office. Seen that happend too much. We watch to see who closes it...what office....surprise...surprise. No we knew it all along.

This market brings out the worst in people.

Hi Lisa - Great food for thought! I haven't seen many low appraisals in our local real estate market on bank owned foreclosure homes. Just repair issues lately!

Lisa, kind of a ploy tactic, but it could backfire and technically the overpriced offer if accepted by the bank, the buyer could pay higher than true market. But that probably never happens with the appraisals these days...

A sort of related tactic that I've seen is to sweeten a low offer on a non-distressed property by waiving the appraisal contingency. The buyer is confident that it's worth more than the offer, and the seller doesn't have to worry. Seems as if that puts everyone on the "right" side.

It sounds to me like a buyer who has done his homework and has a good idea of what the property will appraise. The bank always has the option to chose the highest and BEST (maybe not the highest) offer. Sounds like the bank needs to know the market value of the property they are selling. They find out before approving a short sell.

I've heard of this. Doesn't seem ethical to me or at least it's dancing on the line between ethical and unethical. As a buyer's agent in California you have a fiduciary duty of honest and fair dealing and good faith to both the buyer AND the seller. It doesn't matter if a seller is a bank. To me this doesn't seem honest.

Well, to me this sounds like a good strategy. Plus, there is no way to know what the appraisal will come in at, so there is some risk involved on the part of the buyer.

This doesn't surprise me one bit. It may seem unethical, but it is also the way it works right now. Years ago when everything ws booming, people were outbid left and right. And the property DID appraise. That didn't seem right either to some.

I don't know about the asset managers that manage Logan, UT REO but we were doing this back in spring. The asset managers caught on when the market changed in May. They are accepting the highest cash offer when it goes over a certain threshold. After all, they do how many BPOs and appraisals before the thing even hits the market?!?! They know what it is worth. They will take the highest cash over that price, more often than not.

Listing agents don't know - last week one was confident a house would appraise. Yesterday we got the news it didn't. I didn't think it would, but he was so confident and it's his area - rural - so was he surprised!

Any agent recommending this to their buyers as a strategy better know their comparables - but what if they get an appraiser from the good old days who stretches things just to make it work? It does still happen. Risky indeed.

I agree with Sharon above. I had a newer agent asking me about the strategy and she was going to have her clients bet on the "under". I asked her, "are your buyers approved and ready to pay that price?!?!" It's a risk to play that game.

A colleague of mine (an appraiser) just told me about a similar situation - he appraised a property with an appraisal contingency clause in the contract of sale - there was a comparable sale on the subject block that sold for $20,000 below the subject's contract price. This was not a bank owned property, but did involve a seller's concession of about $18,000.

I guess there is no end to the real estate arms race.

I haven't heard of that here. I can't see that it is risky unless the buyer's lender is fudging the numbers. They need to be qualified for the price of the offer. So if it does appraise they really didn't lose anything because they got the house. If it doesn't appraise and the bank decides to stick with the purchase price, then the buyer still has the choice of paying the difference or backing out of the deal.

I guess it is working the system that the banks are handing us. If banks would get off their butts, list property for realistic prices with COMPETENT real estate agents, have a reasonble response time.....this might not happen. But hey.....lets let congress "fix" it.

Now what happens when the buyer actually thinks the appraisal will come in low and it comes in at sales price. Was this buyer really approved and prepaired to pay this price ? Just currious.

If the buyer is committed to the property, I don't see anything wrong with it. Same thing as multiple offers with escalation clauses and may the highest bidder win, as appraisals are always going to come into play.

I am not sure that there is much to gain from this strategy. For the length of time it takes to complete transactions with banks these days, buyers could probably find comparable properties for the same value. Is the objective here to back out of the deal? I my last deal with the bank, our first offer was 25% below list price; we negotiated to 12% below list price. My client hated the fact that the process was drawn out for 3 months. When the appraisat came in, it was $10K above the purchase price. I knew where the price point was. My goalin representing the buyer is to get my client the lowest possible price for the home. This does not detract from my professional responsibility, and ethics in any way.

This is a trend that is starting to occur again. It happened several years ago when prices were skyrocketing.

Some sellers will budge, others won't. Often it's the banks either as a short sale or REO that is the final arbiter.

Lisa that is happening here as well. Rather than get into a bidding war, we all know that it has to appraise as well. The bank typically has to reduce the sales price on an REO to comply with the appraisals.

NOV

Assuming the buyer intentionally plays this game, I don't see anyting unethical about it. Buyer's are not bound by a Code of Conduct.
I haven't heard this to be illegal either. However, for an agent to suggest this strategy to their buyer ..... whoa!

Lisa I can assure you an agent that recommends this is the type agent who will pay the price one day if the appraisal comes in high - low ball appraisa;s will cease one of these days Karen

Lisa- Intriguing blog and interesting question. Buyers agents are smart and the active ones know the appraisal situations in every given neighborhood. It is risky for sure. If the appraisal does not come in lower, the buyer can just default on the deal, especially with a low deposit. On our investor deals we have always tried to have a decent escrow being held to lower the risk of buyers walking. The appraisal process has a lot of holes in it right now and I foresee it to get worse before it gets better especially with FHA changing the way they do it January 1st, 2010.

seems risky...i dont know if i would reconmend it to a buyer, however, if my buyer said this is THE HOUSE we want, then if they offer higher than the next buyer that is what real estate is all about. If they offer higher than the next guy and it is under the appraisal, this is real rea estate.

But how do they know what the low offer is?

Lisa:

I have not experienced this in my area. If the strategy were used, you would certainly have to be careful to write in enough contingencies so that the buyer would be able to get out of the transaction if the appraisal should come in higher than expected. This is walking quite a fine line.

I have not experienced this either, however I think ethics is being toyed with.

Contracts are between buyers and sellers. I can't see anything unethical about this at all. The seller has representation. Their representation should be alerting them to this practice especially if the offer seems to be way too high. The seller can simply negotiate the appraisal contingency out of the contract. If they don't then so be it.

As a buyer's agent it's certainly not my job to point these things out to the seller. My buyer has made an offer. The seller can accept it, reject it or counter it. If they accept it and it is contingent upon appraisal and the appraisal comes in low then the seller and buyer can cancel the contract, choose to move forward or renegotiate.

How can this be unethical? What it is is negotiating.

Another point to consider. IF you are an agent for the buyer and have a fiduciary relatioinship then you could very well be remiss in your representation if you did not make the buyer aware of this strategy. We MUST remember who we are working for.

It is good conversation :)

This isn't a new strategy at all. It was happening on a regular basis in the late 80's and into the 90's when we were in a Seller's market and nearly every good listing had multiple bids. In the end, it's up to the listing agent to weigh the risk of the deal he's recommending the seller take, regardless of the intent of any buyer or buyer's agent. I just turned down a well-over aksing offer on a short sale listing I have because I know there's not enough room for needed concessions in that appraisal. Buyer's can't take unfair advantage of our sellers without our cooperation; we do have the last word in the form of accepting or declining the offer.

I don't really think there is a fairness issue here. However, as far as risk involved, there is plenty. That can be offset by just making it clear that if the appraisal does in fact come in at contract value, that's what the clients need to pay. If they are ok with that, then I guess it would be ok.

Be well,

Brendan

You did a great job Lisa! You got some responses....I'm not sure if it is unfair, unethical or what...who knows in this market...although, Ihave learned not to trust appraisals, especially in South Florida....As we all know, some agents will do anything (ethical or unethical) to get a deal! Great post!

"...which means the buyer won't be able to get financing."

Umm, what right does the buyer have to get financing? Why can't he just pay cash? If it's really worth what he offered, then he ought to be willing to put up his own $$$ .....

Interesting strategy....and, while I agree it's risky, the fact is that the BUYERS have been suggesting doing this exact same thing for years! Of course we must inform them of their risk....and WE DO!

What is amazing to me is how many times over the years I've recommended lower offer prices to my buyers (who insisted on higher offers to "get the house" despite the fact that I could find no rationale for such a "value"), but I would also insist that our Attorney made it abundantly clear in his "attorney approval" that "in the even the home does not appraise to full purchase price, buyer reserves the right to withdraw from the contract with no penalty". How often it happened that the house DID appraise! It was incredulous to me! Banks have always done (and used appraisals to do) what they believe is in their best interest! As long as we inform our clients (sellers or buyers) of the potential risk, I see nothing unethical about presenting various options, advising as to risk and benefit, and letting the client decide.

Assessing value has always been a challenging "experiment". Today, with the distortions of foreclosures and short sales intruding alternate "value" into the marketplace, it's now even more challinging.

Well as an appraiser I won't feel so bad now if my value comes in under the contract price. I have asked myself "how can they offer this amount" does the buyers agent even check recent closed sales? Now, this could be they are doing this trick. I don't have many that come in way under, most are pretty close, i'd like to think it is due to realtors due dilligence in checking sales before writing an offer. One other issue is the banks take soooo long, the comps have changed during the wait. Just did one the offer was dated in June!!!! heck yeah, the comps are different now. My saying has always been "it is what it is" and many times now: "it ain't what it ain't".

luckily in our area we are seeing a more stable market and even some increases. Totally depends on the arms length sales. We are still affected by bank sales (closer to market) and by short sales (appear below market) but are getting more arms length sales so that will help with locating proper comps. It is very difficult finding comps that meet all the demands on us for a purchase, by the lender. We can only use comps that are in the neighborhood boundaries, similar size, age, ammenities, and all under 90 days, preferrable 60. And don't forget we have to provide current listings as well. personally I feel the stong will survive this mess, and we all need ot remember we have to work together to get through it.

This is why so many distressed properties go to cash investors who fix them up and flip them for a profit - - and why so many homes now are not available for FHA financing for at least 91 days. Seems like the banks should take a look at cash offers versus financing offers. If the financing offers are coming in higher, this should be a flag. But I agree, many lenders are requiring the buyer to come up with the difference between offer and appraisal prices. Given that lenders often have multiple BPOs done on these properties, they have a good feeling for what the value is going to be. As for lenders that list with the BPO agent that comes up with the highest value - - these days are (thankfully)over.

As some of my fellow Californians have said, we see that all the time. It is also true that the bank is sometimes requiring buyers to agree up front that they will pay the asking price regardless of appraisal. In a short-sale dale I had a bank ask my buyer to agree to pay asking price regardless of appraisal.

It is extremely difficult to gauge what a true market value price is when buyers are willing to ask for their max qualifying amount just to get into a home. In the distressed market I have found that ethics are rare.

This is the only way in my market to beat out the competition. It is a good strategy for multiple offer REO's but not shortsales. And sometimes I have the highest offer but the bank takes a lower cash offer instead because they don't even want to deal with appraisal issues. I don't see an ethical issue at all, it is just doing what has to be done to get your clients in a house they like.

Interesting. Appraisals for REO's coming in low, and appraisals on short sales coming in high. Something is rotten in the state of Denmark.

-when ever there is a bidding war realtor always come up with creative way to help there clients-you can only pay what the appraisal is, this is the same strategy many use during the high market- - I do not blame the agents- it is up to the Appraiser to come up with the right price

I have used that strategy before......but ONLY when the buyer fully understands they may have to pay up to that amount in the case it does appraise AND that if the bank doesn't go for it, they could be out their inspection and appraisal money. I have not done this with an REO property yet (at least not with an offer I thought was WAY over what it would appraise for). The banks are wise to this though....and is why they often go with a lower offer if it is all cash....no appraisals to deal with.

Is it fair to the other buyers? I am neutral on that, assuming the home would appraise for a set amount no matter who the buyer is, and all other things equal why shouldn't the buyer willing to take the extra risk of that higher offer get the house?

Banks are catching on.... I've noticed recently that if you submit an offer on a Bank of America REO and the offer is ABOVE asking price, then their addendum comes back with a new clause: "Buyer agrees to fund any potential shortage between Buyers sales price and lenders appraised value."

I agree with those have suggested it is a risky strategy. Do they just offer and have accepted a number WAAAAY above? As I said, seems risky, what if the appraisal comes from an AMC and the appraiser agrees with the "Agreed to Price" now what do the buyers do? Looks like trouble.

Fair?

Did you tell your buyer you were going to work in their best interest? Would that be to get the house for the best price?

Our inventory is so low now that people are bidding like crazy, and I believe most of the VA/FHA offers go down the industrial schredder since sellers know they can't possibly appraise in. That leaves you with conventional and cash offers to get the deal done. With 40+ offers, there are plenty to pick from.

I think this is a case of some buyers will have to figure out a way to pay for what they are offering. My clients are very well educated on the process and make choices allowing them to win the bidding war and some get the first house they put an offer on. Why? Unlike others, I tell them how to get the property and we look at comps and figure out what a good deal is to them - and that is sometimes more than appraised value.

I don't think this is fair for the sellers but I think it is reality. Appraisers have to go on closed sales and if they are all low what choice do they have - the buyers get a deal...

Lisa - we have seen this more and more in our market in Sacramento. As the listing agent for the REO property, I can tell you it's very frustrating and difficult to swallow when you know you have a good strong offer at market value and another offer comes in $20,000 - $30,000 over it just to get the property when everyone knows it's not going to appraise. Some of the banks seems to be catching on and in their addendum they are eliminating the appraisal contingency but there are still far to many that don't.

To me, this is not really a simple issue, it all depends on the circumstances. Depending on where you are in the country, this may be a good thing. I never encourage my buyers to go above the asking price unless I can sense that they want to and the recent comps totally back it up. This has only happened once in my career and my buyers still did not get the deal.

Personally, I believe that agents who represent the buyers are supposed to help the buyers get the best price, which means to me that we get the price down for them. If the house is that fabulous and the market is that hot and the deal is that great then that's another thing, but that isn't happening in my area. Once in a while a great deal does come up, but when it does you can bet it goes fast, and with multiple offers as well. We all know that appraissals are not an exact science and mistakes can be made even there. It is really up to the agent doing his or her homework for the buyer when making any offer.

David Castle

Coldwell Banker Devonshire Realty

97 Eastgate Dr

Washington, IL 61571

www.davidcastle.biz

Nice to hear ethics discussed in these transactions.

We have not experienced that in our market yet -but I can see how some buyers would "play" the game. Thanks for the advise - this is really toying with the system and ethics. This is something to watch out for!

This discussion was worth a few CE credits!

As a REO agent in Bakersfield Calif, we see this daily. With multiple offers on each property. We spend precious time entering bogus inflated offers only to see the asset management companies settling on one that is with 10% of BPO value.

Nothings rotten in Denmark, just an observation when pullling comps.

I think the issue with short sales being lower than appraised value is the realtor needs to stay on top of current sales, and adjust the list price accordingly. Many short sales in our area are on the market a LONG time. Yes, its extra work, but if you are going to list short sales it is very important. I am also a real estate broker so understand the real estate selling/buying sides as well. In our area it seems a short sale gets listed and pretty much left to sell itself, I rarely see price changes. The bank sales I see multiple changes in prices. Maybe the banks stay on the realtor, I don't know. I suggest everyone should check comps to see if the prices should be raised. YES, its coming back a little in our area. I have completed several short sale appraisals recently and they sold BELOW appraised value. The bank sales i've completed seem to be pretty close or the appraisal or some come in a little lower, but not by much. Might be how much time one spends on checking recent sales and adjusting the listing price.

I guess one can be sneaky with just about anything!

These buyers won't perform anyway. When we get multiple over-bids, we may require the buyer to remove the appraisal contingency before we submit the offer. Even so, once they get into contract, there will be some other tactic to try to get the bank to renegotiate to a lower price. Since of course the bank won't do this, we cancel the contract and revisit the other offers.

Agents will do anything to get an offer accepted, even though they have no intention of performing the terms. It's exasperating and a waste of time - - but we're getting wise to 'em.

Sorry to burst anyone's bulbble but if the home is priced right it will appraise. I have not lost one deal due to an appraisal this year, HVCC or not.

In my experience, especially in highly competitive REO listings, it is very common. But now the sellers and asset managers are on to this strategy and will counter back "seller will not reduce price if property does not appraise, buyer to make up the difference". I think that suggesting a buyer offer way over the list price is risky, it does give an unfair advantage to the buyers who have submitted a legitimate offer based on current comps, and I am afraid that down the road there will be several lawsuits from buyers who seem to think they ended up paying more than they had to. Isn't that what got us in this mess to begin with? People letting their emotions dictate what they were willing to spend instead of what a property is truly worth!

To me the real lack of ethics again resides in the dominion of the banks. An offer is submitted and they (the bank) don't reply for six/eight/ten months. The value has declined! Yet the bank wants the buyer to waive the appraisal contingency. There appears to be no limit to the abuse banks feel justified in wielding in the demonstration of their abuse of the power they have usurped in our system. More of these vultures need to go to jail.

Wow!! No way I would suggest this tatic to a client. Way to risky and unethical. Thank you for the post!!

This has been happening in our market quite a bit. I am closing a short sale Monday where I implemented my own control into the mix. I am the lising agent. On a asking price of $165k, we got 7 offers in for at least 10k over asking price, some as high as 25k over. I knew there was no way we were going to get that price back on the appraisal. I did a muliple counter to everyone asking that they pay the difference of appraised value in cash as long as the appraised value came in at least 165k which was our asking price. We got a couple of takers and eventually settled on the strongest offer at 177k. 3 months later after both lien holders approvals, the buyer's lender did the appraisal and the price came in at 165k. The buyer is bringing in the extra 12k difference and everyone is happy. Happy sellers, happy bank, happy buyers and a happy neighborhood because I just helped raise their property values by closing a sale at higher than appraised value.

I had a Realtor tell me when we in the midst of accepting offers, just tell me what you want - we will write anything you want - he was operating from the principal that you speak of...we can make up whatever we want because the bank will HAVE to come down.

Sorry...the best buyer is not always the highest offer.

follow me on twitter:@tiffanycloud

This isn't a new idea, although if you can convince your buyers to go beyond asking price or even above their comfort level, I'm not sure that's in the buyers best interest. What happens if the property by some fluke appraises "then what happens"?
I've seen this done on multiple offers as well, and it could work. I don't know many buyers that would do this and risk paying a much higher price than they wanted to.
Not all lenders will accepted the lower offer.The next appraisal may and probably will be different than the first one anyway because of time and changing comps etc.

From a strategy point of view I don't see a problem. Just because some one offers the most money for a home doesn't mean the bank has to accept it. They have the opportunity to counter whatever terms they wish wether it's appraisal clauses or anything else.

As a buyer's agent I would certainly have my buyer's sign an addendum stating that this strategy is not guaranteed, they may have to pay what they offered, etc. You just have to be careful and CYA.

This is why I love Active Rain. You learn/ hear something new every day! Truth be told, this seems to be the banks fault to begin with. If they had priced the homes correctly, they wouldn't have to worry about the appraisal.

Someone else already said it - the banks and REO agents are now stating in their counter that if the appraisal comes in lower than the offer price than the buyer will make up the difference out of pocket

The problemis not the appraisal or the price - the problems is that there are plenty of buyers but not enough inventory

Recently the government asked the major banks to not release REOs until the first quarter of 2010 - when the government gets out of the way and stops trying to control the inventory we will be all right again -

In the mean while this I think that while this strategy sounds good it is pushing the ethics quite a bit

A few months back I was working with Taylor Bean on a Short Sale and sent them a offer for 70k . The negotiator said he would not take anything lower then 100K on this property. I told him the home will not sell for 100K impossible, the high comp was 72k.. So, after talking w/ the buyers agent they increased the offer to 100K, submitted and it was accepted. Knowing, NO WAY the home would appraiser. Sur- nuf the appraisal came in at 70K - And the negotiator said: Oh, that came in higher then our BPO at 63K...So what you want us to do? He lowered the price to 70K.. Sometimes it is a no brainier! Ethical, Sure is, as long as the buyer knows what going on and understands the bank may not lower the price and the buyer could loose there inspection and apprisal money..

Thanks so much for posting this! I don't have the time at the moment to read all the responses but I definitely will come back to this as time permits.

My first thought is I don't think there's anything unethical about it overall. This is business and it should be treated as a business and you're making an offer on a property that is on the open market and therefore competition should be expected and it's a good thing. The reality of today's market is that properties are not appraising. Everyone wants a good deal and a sound investment and there are plenty to be had. Fairness ultimately doesn't matter and if folks are constantly getting beat out by other offers, then they need to adjust their strategy accordingly to adapt to how today's market is going.

So, the buyer loves the house and is willing to pay 10k over list. The listing agent has intimated that he/she has 3 or 4 other offers expected. The buyer puts in their inflated offer with a willingness to pay the extra. Seems like to me, if the appraiser is doing his job and the buyer wouldn't have minded paying the larger price - where's the problem?

Seems no worse than the listing agent who always, always, always says they expect three offers on the property any minute. And that happens - alot.

This definitely poses an interesting question. Is it strategy? Is it the difference between a savvy Realtor or Buyer compared to Realtor/Buyer that hasn't quite caught on that things have changed in this industry.

I personally don't see this as unethical. I think that there are different ways of getting transactions closed, "everything is a negotiation", right? It's unfortunate that the process of SS takes a s long as it does & its slow to respond nature has left servicers & investors exposed. They are not netting as much as they could have 60 - 90 - 120 days earlier... and REO's aren't waiting around to keep prices at a premium.

So in answer to your question, do I think it's unfair? No. Would I practice this strategy in my own business? Nope. I just don't think gambleing with my clients money is the best way for me to business.

There is nothing wrong with this tactic. This is very common now, the listing agents should be able to screen those out.

Thank you for putting into writing what many of us hae seen in the market. I love Tiffany's #87 response and what she did with her listing offer. That is a great approach which will help anyone

I'm working with an FHA buyer right now who is willing to pay more than a home's FMV just to get SOMETHING accepted. We did just get a contract accepted (finally) and there is a possibility that it won't appraise, but I think it's more likely that it will. She's hoping that it does so that there isn't any chance of losing it.

I agree with the others who made the statements that it is all about intent.

If these buyers have no intention of actually paying their offering prices they should not be writing the offers.

Fact is banks are acting horribly, the treat buyers as chattel, they act in bad faith, they have no idea of the doctorine of fair dealing...

They have under paid people sitting far away on power trips. There is no excuse for there behavior or arrogance.

If the bank is gotten into contract then burned (less) oh, well.. It's the consumer and he sneaker agent doing an exceptional job.

After all the bank can say no, go back on the market with the apprisisal on file, of course the max sales price is set by the new apprisal, the bank is better off to stay in the deal.

REMEMBER we are still in a declining market, just one with activity. There are tons more foreclosures coming prices will continue to drop, any one who forgets this (like the banks seem to is naive).

Fact is is until the act fairly and in a reasonable time frame, all bets are off.. it is after all ultimately our tax dollars

It seems the bank should be using some common sense. If one or two buyers are putting in an offer on a property that the bank knows full well will not appraise for that amount based on the expertise of their own loan officers and other trusted agents they have worked with, then why would they except such offers. Seems to be laziness all around.

I still don't see why what the buyer's offer is matters to the appraiser. The appraiser is only able to use the comps that they have (real hard data) to come up with the appraised value. Sometimes when the offer is higher, the appraiser tries harder to come up to that value or find comps to substantiate it.

AMEN, IF PRICED RIGHT, IT WILL APPRAISE!!

The market is ever changing, day to day. Some areas coming down, some going up. This is a scary tactic, it may or may not work, and it does put extra work on the listing agents for all the offers. Then the bank cuts the commission, hello, geeze work harder get paid less, just makes no sence to me.

I have been on the listing side of this strategy and I will not accept the high offer when I know what the buyer and his agent are trying to do and I know that the property will not appraise. I rather sell the property to a buyer who is playing by the rule and submit a realistic and honest offer.

What about all cash offers? The banks don't care and for my market they take the all cash and even if the appraisal dosen't come close it is back to de ja vu times with an over inflated market and prices set by what the buyers will pay! Good strategy? Or back to the past? And another crash!!!

This may come down to which side of the deal you are working as to whether or not you think it is fair, and with the way the Utah contracts are written there is little risk involved for the Buyer. It is definitely an interesting strategy.

No one is falling for that in our market. Thet strategy jumped the shark about 2 days after it was tried. Sellers and their agent figured that out quickly. We have seen counters stating that the Buyer must bring in cash if the property does not appraise.

I just closed as a buyer's agent a deal exactly this scenario. Asking price and BPO was $487k, 7 offers, ours was $525k, highest was $540k. Bank selected ours w/o the requirement to pay the difference in cash. I told my buyer the comps I did came in at $510k, so their offer was above it. They wanted the house because of school ratings, thus the multiple offers.

HVCC appraised at $525k, and loan underwriter TOLD appraiser to re-appraise 2nd time. This time came in at $515k, same appraiser, same property (time to file a complaint?)!

Bank compromised and we agreed to purchase price of $520k. This actually saved money for buyer. Before loan was for $417k conforming and buyer had to come up with $3k cash @20% down. Now loan was below $417 w/o the $3k cash.

Wow! I would never do this to a buyer. An appraisal is an opinion of market value. Market value in part is determined by how much someone is willing to pay for the home. By offering a certain price, the buyer is demonstrating a willingness to pay that price. Haven't you been amazed at the number of appraisals you have had come in at the exact offer price? What if the home DOES appraise for the offer price. Your buyer has no recourse but to proceed with the deal or lose earnest money. Very risky!

response to #101, the only reason it matters to the appraiser, is we have to review the contract and report our findings on the URAR for purchase price, seller assistance, etc. The contract price has no baring on opinion of market value what so ever. (well it shouldn't anyway) It is totally based on condition of subject, and comps and necessary adjustments to the available comps. The MARKET is what is the basis for the opinion. I love the realtors that put a comment in the section to NOT USE AS A COMP, AND WHY, I love you guys!!!! Gives us a good reason for when the underwriter asks whay we did not use this comp, or that comp. yes, THEY are still trying to sway the values. Be honest, do a good job, know the area you are working in, be ready to respond to the underwriters who want a different value, and all is good.

My fiduciary duty is to my buyer client not the seller or other buyers. I have no obligation to play "fair" with my buyer's competition or the seller as long as we abid by the laws and code of ethics. We tried making "fair" offers to the banks. My client has to use FHA. We consistently got beat out by cash offers, conventional loans, or others bidding much higher. We finally got wise and offered so high over asking that it didn't take a genius to know it would not appraise. The bank took it, appraisal came in $25K under accepted price (actually below listed price), bank dropped price to appraised price, result happy buyer.

If the banks wise up and actually check the comps before accepting an offer, then this game will change.

I see it as a loan officer - it means we have to re-submit the loan which always gives one more opportunity for rejection so if they are cash buyers it's much less "dangerous". (Not that there is usually any danger when the loan mount goes down but if the buyer's credit is old and we re-pull and it's worse that could be a problem.)

I am currently working with buyers who have offered $25,000 - $75,000 over the listed price and are still not getting the property because of multiple offers. So, now my buyers have decided to take the risk of over bidding on properties they really want. If it appraises great! If not, they are hoping the seller will renegotiate the price to make the deal happen.

Remember when the market was determined by what a seller would pay for a property, not what the banks, appraisers and investors in MBSs decide they want it to be? If a buyer submits a bonafide (willing to buy at the offer price) above asking price offer hasn't the "value" of the property been determined?

We are seeing that some appraisals are actually going up higher than expected in our area, some very high, so I would NEVER suggest to anyone that they do this. I am sure there are many areas where this works fine for that buyer but not in our area where the values never jumped multiple times like they did in other areas.

The word Fair cannot even be used in this market.

This is a great way to put your buyer at risk. Unless you make an offer so high you know it can't appraise you are setting up the possibility for your buyer to pay more then they want. Yes, I know there are other escape clauses but if you are an agent that plays this game I will be glad to never work with you. Have Integrity and live by it.

Robby

Buyers need to be aware that the bank may ask for a second appraisal. It may be a chance that the buyers are willing to take. With a great many buyers sometimes making offers on the same homes it seems like an option that may work to at least get the winning bid.

I agree with number 43!

My 2 cents are that in a market like mine, I had a listing that was not bank owned or short sale which is seemingly rare. I listed it at $120,000. About $6000 over comps because that was what the owner wanted. I told him, even if we get a full price offer - it might not appraise and he would have to make a decision to ask for the difference in cash and risk the buyer walking or re-negotiate a lower price with the buyer. We ended up getting a cash offer for $125k with NO APPRAISAL CONTIGENCY. YAY. We totally lucked out.

Now, on the buyer side, I have clients purchasing REO's. One in particular, they settled on one and got their offer accepted was a $82,500 asking price, we offered $86,250. It should appraise - but I've been surprised before. While we were looking, they saw many that they absolutely wanted and we put higher price bids, they knew there was a chance it wouldn't appraise. I educated them on what would happen if it came down to that. But that strategy didn't work because we were competing against cash buyers with quicker closings.

The question you asked is, is that strategy unfair? I don't think so, the bank has every opportunity to ask for the difference in cash or lower the price. They make the ultimate decision.

Wow, I agree with the other comments that the ethics in this situation are questionable. I think the buyers doing this should definitely pay the difference between appraisal and offer price. Pay to play!

It happened to my clients quite a few times already. Banks are losing big time ... Banks / Asset Managers should just go to the next best offer in line. Unfortunately, bank staff are on fixed salary, do they really care? Asset managers are reviewed by how fast they can close, so do they really care how much more they can sell?

I've been on both sides of these offers & transactions. Like Steve said, nothing is fair in this market....kinda like 4 years ago when the market was going crazy then too......

Very interesting reading everyone's comments. The most common theme is that who can know what the home will appraise for. As a loan officer in Michigan most of the buyers I work with have agents who will do a market analysis to determine a "ball park" of value based on recent sales. The only time we have problems is when they can't find good comparables to determine that "ball park" figure and they just guess. I haven't been seeing over bidding too much as I have seen really low HUD appraisals and then have to work with the lenders to turn over the existing HUD appraisal due to it being a "bad" appraisal. Bad isn't determined by the simple fact it didn't appraisal at the purchase price but that the appraiser used excessive adjustments which goes back to not using the right comparable sales. These new hud appraisals are based on current market sales and acceptable adjustments. They don't always come in at bid price but some are higher and some are lower, either way they are based on accurate information.

Thanks for all the great comments!

I predominantly work with buyers. I see no issues with the tactic as long as the buyer is well informed of all the possibilities and willing to accept the different possible outcomes. Basically the buyer would need to be willing to accept that if the home appraises there it is still worth buying at that price.

It is really no worse ethically in my book than the way REO listings are typically done by listing below value to cultivate multiple offers and drive the price up.

Or how about SHORT SALE listing tactics??? Where they list it on on the tier below the actual value to cultivate a dozen offers - buyers get in an initial bidding phase - then a secondary bidding phase months later when the lien holder gets involved. Then usually end up with an unhappy outcome for every buyer involved because they waited months to hear back only to have the price driven up to where it should have been priced in the first place.

So if these types of tactics are going to be acceptable on the listing side they certainly should be acceptable on the buying side and employable by good agents working in the best interests of their INFORMED clients.

If the buyers are essentially saying, I will pay whatever price the home appraises for, up to some apparently inflated amount, I don't see the problem with it. If they are going to back out unless they get a low appraisal, that is misrepresentation. We deal with a lot of foreclosures, and I have not observed this trend. Buyers that consistently don't perform on offers can have that backfire as these REO sellers will take note.

I am reluctant to have my buyers go to high for this reason. However, we can never tell where the appraisal might come in. Sellers are reluctant to accept FHA offers and many have asked us to guarantee the price. Since most of these first time buyers barely have enough for the down payment that is not working.

What the banks need to do is get more properties out there.

I'm appalled at the attempt to rationalize this tactic! It's unethical no matter how you slice it. In my opinion, the 'professionals' using this strategy are the same snake oil salespeople who perpetrated this mess to begin with. There is no easy money to be made, folks. Hard work, diligence & perseverance are much more rewarding.

Maybe unintended or more likely "Intended" consequences for premeditation???? Would this hold up in a court of law??? if any party took you to court?? always pretty much the bottom line...

I don't see this happening where I live either. I wouldn't risk advising my client to use this tactic. But on the other hand if my client offered full asking price for a property and it didn't meet appraisal, I wouldn't have any problem asking the bank to lower the price just like I would if it wasn't a bank owned property.

I'm seeing this happening a lot in the Miami market, except the high offers are not in danger of not appraising. Our REO's really are being priced lower than market value and they are appraising sometimes at 20% over list price. For that reason they're selling like hot cakes. The majority of the REO's here are selling, and closing, above list price.

Alas - One of the things that has bothered me about our industry in recent years, is that there appears to be far more game playing going on than professionalism.

Hey, wait a minute! As long as the buyer making the "too high" offer is willing to pay what was offered provided an appraisal supports that figure, don't we simply have the market working as it should? It's no different than when a buyer offers high on a property during a "hot" market in order to get an offer in first position, that's a strategy also, remember? And as far as a low appraisal opening up the transaction for renegotiation of price down to the appraised value or somewhere in-between, that's currently a boiler plate option written in to our Montana Buy Sell Agreement already! One last point. By the time a lender sees an offer, they have at least one Broker Price Opinion on their desk and maybe two or three, are you indicating they don't know the approximate value of the property? They know. Good provocative post, nice job.

Working for the buyer, it's important to know where their head is at and what they are "ready" for. I can come up with the best winning strategy in the world, but if the buyer is not ready for the risk, then it's not right for them. I have been pretty successful coaching buyers on the potential risks, and having a "plan B" in place for aggressive strategies, but even those that seem on board sometimes get discouraged when it doesn't go their way at first.

Maybe someone could come up with some kind of buyer's guide drilling home the understanding that last laugh is best laugh, the negotiaion process can have some ups & downs but if you stick to it you are putting yourself in the postion to get the most for your money and effort.

I agree with #8. There is no unethical behavior when a buyer chooses to make an offer and rescind within the legal terms of a purchase and sale contract. In Washington state, purchase and sale contracts are written so that they are very "buyer friendly."

While I consider this tactic very risky (with the new HVCC rules, one can never tell who will appraise and certainly for how much) I hold very little sympathy to the corporate-owned sellers in these situations. Buyers have gotten the run around from them enough.

Even if a prospective buyer had the intention of backing out later in the process regardless of appraisal valuation, it is their prerogative to do so. When it comes to a legal rescission in ANY transaction, who can say that it is ever unethical?

Great food for thought, though I doubt I'll employ that strategy myself.

Casey

I wouldn't advise my buyers to follow this tactic - too risky for me. If I had buyers that were fully informed and still wanted to put in a high offer knowing that it could appraise and are willing to pay the contract price if the house appraises at contract price or higher, then why not? It really all depends on the buyer's desire to own that particular property and/or their level of risk tolerance. Everyone is different in that regard.

But I agree that I would have no problem asking the bank to amend the contract price if the appraisal comes in low - whether the home is bank owned or not. Why would any buyers want to buy a house for more than it is worth?? Not in the current market.

It seems to me that if a buyer is properly informed and understands that they may actually end up paying the amount they offered for the home, then I cannot see how this process is unfair. By making a higher offer, the Buyer is taking on more risk. Their reward for this risk is a better chance of winning the home over multiple offers. No agent should be guaranteeing that the appraisal will come in low so that the price can be renegotiated. Buyers who bid closer to the actual or fair market value take on less risk and therefor have less opportunity for reward in some cases. I cannot see how accepting an offer that is high would be a disadvantage for the bank that owns the property. A higher offer would bring in the highest appraisal possible, since many homes are appraised "at value" when they may have appraised higher if the accepted offer was higher. If the bank can actually get a Buyer to waive the appraisal contingency then it puts the bank at an even greater advantage, although in my local market I think it would be extremely rare for a Buyer to "make up the difference" between the appraisal and the sale price. In my local market I have seen a few REO Listing Agents actually price the home well below what the market value is in an attempt to obtain multiple offers at which time the bank will take the property off the market, re-price it at a higher value, and then put the home back on the market. Both the practice of having Buyers over-bid for a home and the practice of banks underpricing a home to "feel out the market" act in the best interest of the client if the client is properly informed and understands the risks involved.

Wow! Excellent feedback, some very great points made by a lot of people. Thank you all for adding your point of view. I would love to respond to you all, but it just seems to much to handle. Keep it coming, and thank you all for your comments. :)

-Lisa

Rule number one is don't play games with other people's money. Be honest at all times. Do your homework and make your buyers informed investors. If I have a buyer who wants to play this silly game I am going to tell them up front I will not be a part of it. Getting my reputation as a honest and fair Realtor has come with a cost to my bank account, but I don't take dirty money. We offer Fair Market, or a reasonable lower offer, depending on any request for consessions if the property is being sold by a private individual, and negotiate with them from that point. If our final agreement is above Fair Market then the Appraisers can straighten it out. I can sleep comfortably at night knowing we all have done a good job.

Talk about a HOT BUTTON issue huh? We see a ton of this in San Bernardino County. As long as buyer is fully prepared to pay what they have offered and there is no comingling with the appraiser I believe it's legit.

It seems like there is a full range of comments here that make sense. At the end of the day, there are a lot of ways to look at this and they all make sense. Risk, or not risk, decieve or not decieve, etc. It all depends on the buyer at the end of the day.

Great conversation! I had buyers who were winners of this concept...unintentionally. In this situation there were no other offers. We negotiated on a unique REO property to what we thought was a great price. My buyer was VA and so protected to not have to pay over appraised value. The appraisal came in $35K below the accepted price of $475K and the bank agreed to sell. The appraiser gave no value to all the extra living area, extra bedrooms and baths, and over-sized garage space because it wasn't in keeping with the home style and other homes in the area. The extra living area and garage was what made the property appealing to my buyer, so they won big time. For once I was happy that the appraiser wasn't from the area!

I sell in Palm Springs, and this has happened to me personally, the Buyer's agent wanted us to state in the contract, that if the appraisal came in at lower price than the original offer -that the seller's would sell it at that amount.

I did not allow my seller's to sign off on that addendum. Even though the realtor harassed and continually told be we would not appraise on this condo.. We Did!

I would never suggest to a seller to agree to dothis, I woulld rather lose the deal than allow the unethical practices to continue to flourish.

Loren Fox

Resort Realty & The Retnal Connection

Palm Springs

In our coastal Orange County market the supply of entry level homes is much lower than the demand. Sometimes you got to do what you got to do if your a motivated buyer. One Agent countered a multiple offer situation with X$ and asked to remove the appraisal contingency. (Now lets see who really wants the it?)

I list a lot of REOs. This is happening quite a bit but the banks are wise to it. They will always come back and ask the buyer to remove the appraisal contingency and make sure that they are willing to come in with more cash should the property not appraise. Should the buyer not be willing to do both of these things they will accept a lower priced offer. Lately, none of this has even mattered because they've been accepting all cash offers first unless they are considerably under market value.

From post #143: ...the Buyer's agent wanted us to state in the contract, that if the appraisal came in at lower price than the original offer -that the seller's would sell it at that amount.

I did not allow my seller's to sign off on that addendum. Even though the realtor harassed and continually told be we would not appraise on this condo.. We Did!

I would never suggest to a seller to agree to dothis, I woulld rather lose the deal than allow the unethical practices to continue to flourish."

I see nothing unethical with the addendum request to match appraised value if lower. This is being proactive for the buyer client. Also good job by listing agent to refuse it, better to negotiate later if it happens. I agree the buyer agent was out of line if they harrassed you over it.

Some REO agents won't consider outragiously high offers for just that reason. I think everybody is catching on to this strategy.

Both the practice of offering ridiculously high and the practice of listing ridiculously low are risky and unethical in my opinion.

It seems like you almost have to play these games with all the inventory out there plus the terrible lowballing appraisers who bring values in too low across the board ~ tough spot, new game and people as always are finding how to play the game.

In our area, the bigger problem is first time homebuyers getting bumped for a SMALLER offer made in cash.

Lisa,

This happens everyday as you say. It is risky and I would not advise the client to do so without explaining the risk.

What an interesting discussion! The banks are playing games, the buyers and their agents are playing games, and ethics on both sides are questionable.

Now this new regulation that forces lenders to use appraisers who aren't necessarily familiar with the neighborhoods adds a whole new twist to the game.

The comments here that puzzle me are those from REO listing agents who said "I have rejected offers that..."

When I was handling REO's - it was the bank's Asset Manager who made that decision, not me!

I admire all of you who can keep your sanity in this market - and I'm glad that now I just write marketing materials for real estate and no longer have to deal with the games.

We have noticed that the banks are coming back with counter offers that are demanding that the buyer remove the appraisal contingency...so much for jacking up the offer price! Many buyers are backing off of that at least in my area. We are also seeing those properties BOM when the appraisal comes in.

Maybe it will end when people are not rushing to beat a deadline and be more rational in their purchasing...

Just remember who has more control over how the game is set up. Let me see the banks got a trillion dollars from the government in less than a week last year and the rest of us still don't have have health care more than forty years later.

I haven't seen that in my market as of yet........it's clever, but a bit "shady". The ones that kill me are the CASH offers, respectable CASH offers, with no appraisal contingency, and the Bank won't accept it......would rather carry it on their books thru the winter! CRAZY!!

This questionable tactic is merely symptomatic of the real problem - the HVCC. There are no benefits to the consumer - just increased risk. The benefit is obviously the bank's and HVCC has essentially given the green light to market price/appraised value manipulation without restraint or recourse. The banks aren't even required to use state's approved forms for real estate transactions - rather they each create their own version of transactional documents that virtually eliminate any trace of protection for consumers. As an example, here in Washington, by law, banks are required to provide a "Form 17" seller's disclosure statement - yet the banks & REO companies refuse to comply and they are allowed to do so with impunity. Repeal the HVCC and make the banks follow the law in divesting themselves of foreclosed properties or the gamesmanship we're discussing in this thread is only the tip of the iceberg with respect to the buyer's creativity that will evolve in the future. And you can go to the bank on that. LOL

I've been working with a buyer since May -- a school teacher who wanted to be in her new home before school started at the end of August. We *might* be signing docs tomorrow (11/5). After losing out on offers for two prior REO properties, she, on her own, figured out that she had to offer over asking price to get an offer accepted. For a $101K price she offered $110K, then went to $116K when the "multiple offer highest & best" notice came. Her offer was accepted (8/26/09). Then after delays for desired renovation (203K) financing, it finally appraised, for $105K. She was pleasantly surprised when the seller bank signed the price change addendum. She was prepared to pay the $116K price. Her due diligence period had long passed, so there would have been no way out if the seller bank had required her to pay the difference.

I had only been aware of listing agents listing low to generate showings and multiple offers--and now know its possible for the appraisal to come in lower than the accelerated accepted contract price. I feel I can ethically tell other buyers I'm working with what has happened with this buyer, without necessarily recommending it as a strategy. Hey--this is Las Vegas...everything is a crap-shoot!

Denyce Thomas - Las Vegas

AS long as the buyer qualifies for the higher price and down payment and is willing to pay the high price, then it is ok. Gambling with your buyer's money is unethical.

The other side of the coin is that the listing agent should know what is reasonable for the property based on the CMA. Anything much higher and he should advise the seller of what may be going on. The banks are no dummies, they will take a lower cash offer versus a higher financed offer with all sorts of contingencies...

Wow, you can learn so much here on AR. Love #87 post from Tiffany.

This happened to me on my first listing last year. I knew the buyer agent was gaming me and my sellers, but the sellers really needed to sell because they had relocated. I knew the appraisal would be close, but I did my homework and did a lot of extra work justifying our price, and left it on the counter for the appraiser to use - or not. I wish I could have been with the buyer agent when she found out the house had to appraise, and her buyers didn't have an out.

This is very risky for buyers. When banks are forced into assuming realtor responsibilities (working very hard on comps), there will be mistakes because they are not trained to do this.

I don't think it's risky at all. If you make an offer and the appraisal comes in at your price then isn't the property worth it. And who ever said business had to be fair, all it has to be is legal.

Great Blog. I wish I had time to read every single post right now.

I had a offer rejected because the offer was too high. The buyer would have happily paid the offer price if it would appraise. She did not have extra cash to bring to the table.

It seems the appraisal amounts should be coming up when every decent home has about 50 offers on it. What happened to whatever the market will bear?

I did learn that if you are going to ask for closing costs, base that amount on what you think it will appraise for, not your offer price.

I wish we knew what to expect but I've seen it all. Every transaction is very different. I've even had a client offer full asking price in cash on 4 short sales and she did not get any of them, mostly because the listing agent wasn't prepared. In fact 2 of them are still active listings 5 months later at the same price. It's CRAZY and frustrating out there. I am going broke working my butt off showing homes and writing offers. Who knew?

Interesting strategy, tactics, etc. Always learning something new in AR.

Risky. Plus, if the transaction unwinds, the buyer is out the cost of the appraisal and probably an inspection fee as well. I can't think of too many buyers willing to part with upwards of $1,000 on a bet like this.

The problem lies with the appraisals and that once they are done you can't challenge them. What we are seeing is buyers agents that put into the contract that the house must appraise for the purchase price or the buyer can renegotiate or cancel the contract. So one persons interpretation of the facts carries the weight of the entire transaction. They should require 3 appraisals and then take the average - that would be fair!

I think it's fair, the banks here are dropping the prices really low so they end up with multiple offers so there are various tatics on both sides. It is a little risky if the bank doesn't agree with the appraisal but they could face the same issue with another buyer.

We were seeing this tactic alot in our market - Antelope Valley, CA. Now the REO lenders AND the listing agents are requiring the buyer's make their offers non-appraisal contingent AND requiring buyers to prove that they have the funds available to close at the higher price, if the house does not appraise as hoped for by the buyer AND their Selling Agent.

Contrary to popular belief, this was a common practice in our area earlier this year, and the agents caught on quick. The buyer may love this home - but if it's not worth it to them to come in with the cash difference, they have to put in a competitive bid and hope for the best like the rest of the buyers.

What we are seeing is more buyers NOT requesting closing costs if they really love a house, which in the end means more money for the REO lender/seller. This seems to be working better.

I really appreciate everyones comments - it's amazing how things can be different in so many areas. Good luck everyone on your offers.

I've seen this here in Phoenix and had clients bid against agents with that mentality. I tell them if they don't have the money, don't make the bid! I can't guarantee that a property will appraise and if they don't have the money to make up the difference, then they shouldn't be over bidding the property.

We have had several instances where the bank requires the buyer to make up the difference between the offered priced and the appraisal. This isn't just for bank owned....an agent in our office had it happen with a short sale as well.

It is definately a risky proposition, and I wouldn't recommend deliberately bidding over value on a home to my clients, but that said, I would never write a contract without an appraisal contingency. After all, by that time, the buyers have paid for the appraisal, and probably their home inspection as well, so if the home doesn't appraise, why should they pay more than market value for the home as well?

Had the reverse happen fairly recently with my buyers! We are pretty sure that the appraiser didn't look through the entire contract and went with the number on the first page - rather than the addendum on the last page which had the final agreed upon sales price listed. Because nobody could challenge the appraisal (ie; the sellers), my buyers paid $3K less for the property than they had planned. As first time home buyers, it worked well for them, but I can't say the same for the sellers.

I must be naive! I'd be a wreck trying to do something like this on purpose and I've never heard of this until this post!

Sounds risky to me as well; I think I will let other agents pursue this angle. In any event, it doesn't appear to be fair ~ Brad

I see lots of interesting things in this anything but cookie cutter business. People will always do what they think it will take to get what they want. The listing agent has a responsibility to make recommendations to the asset managers regarding the value of the property. Multiple offers or not, the listing agent has an excellent sense of appraisal values, after all there have been many done on the property before he accepted to market the listing price as well as his own market analysis. The seller always sees the dollar signs on the contract first, but can almost always be brought back to see the terms and realize that he stands to lose out if he loses a valuable buyer, not just an offer that appears to have value. Is it unfair for buyers to submit high offers? As long as I am offering my buyer solid direction about the consequences of his offer, I am only representing that which I am hired to do. Should we tell buyers they can't make an offer at a certain price? Not unless we want to slow the whole market down again. I hope that we can get more over list price offers accepted and appraised and keep property values headed back up and at the very least, get the market stabilized enough that more buyers decide it's time to buy.

We are seeing the bank (REO) loss mitigation officers insert a clause to their addendum that states that the buyer agrees to cover any difference between appraisal price and offered price in cash. Game, Set, Match

The more often appraisal contingencies are waived and the buyers required to add cash, the better off we all will be. Half the houses out there are unsellable due to negative equity. With buyers putting more cash down at lower prices, we may have something to sell in a few years as these buyers move on with their lives.

Tom Johnson

http://ERAHouston.com

This happened on one of our REO properties. It was listed for $105,000 and I received multiple offers with one of them being an FHA offer for $175,000!! When I asked for everyone's "Highest & Best " offer and let them know that the seller would be asking everyone to show proof of funds if their offer is over list price as there would not be any reduction between offered amount and what the appraisal comes in at. When I received the "Highest and Best" back from that $175K FHA offer it was $105,000! That ridiculous offer did not work for that buyer - thank goodness!

Too many comments to read so I will just have to add my 2 cents.

If we are professionals, we do our homework. We should have a clue, only a clue, as to what a properties appraisal value should be. It is a crime to see listings that are priced ridiculously below market in an attempt to stimulate multiple offers. Many of those offers will be at prices derived by throwing a dart at the pricing dart board. No thought was given to appraisal by the listing agent (or asset manager, in many cases) so why should the buyer's agent care about appraisal? If the buyer can't get an offer accepted, there will be no appraisal. If it takes an eye-popping offer to get accepted, so be it. Of course, the buyer better be willing to buy the property if it does appraise. But why would that be bad, Mr/Ms Buyer? The property is "worth" what you offered.

Mr/Ms Listing Agent, if you do not like that practice, do your homework. Price correctly. Tell the buyer's agent to expect a counter offer that removes the appraisal contingency. Discourage wildly overpriced offers.

John Juarez, REALTOR

Windermere Properties of the East Bay

510-673-0686

Banks are onto to these tatics and when the contract comes back from them, they are taking out the appraisal contingency.

Boulder City Steve

I think this is just one of the many/many signs of how broken our market really has become.

Not quite sure why buyers would put in a high offer only to eventually get their offer accepted at the "appraised" price. As an investor, I'm picking up properties at about 50% of after appraised value and what could be deemed approximately 70% of what the property may be appraised for in its current state. REO's are plentiful in my neck of the woods and I would be buying all day long if the funds were available because many of these properties have been on the market for 9+ months at levels at or around 50-60% of market value only 2-3 years ago.

One of the best blogs and comments that were ever listed on AR!

I actually read all 174 comments. I was going to reblog or write my own blog about this, but I decided not to. I don't want any REO or short sales agents to see this about what I'm talking about :)

First off clarifications on the post. The original post talked about using an FHA loan. That is a very important point because the appraisal is stuck with the property. Any other FHA buyer is going to have the same issue. The second thing is it deliberate intention not to pay that much. They don't have that much or they don't want to.

Is this legal? Yes. I was amazed nobody said this was illegal. Does it violate the NAR code of ethics? I'm not a Realtor(R) so I'm not sure, but since nobody brought that up I'm assuming it doesn't. I personally have a code of ethics and I believe my standards are higher than NAR's.

Now to point out the risks to the buyer; it is likely the buyer is out the cost of the appraisal and the inspection fee. That can be a pretty penny. If you are doing this strategy you had better have another out as well or kiss the earnest money goodbye potentially. You had better educate your buyers on this risks!

Now the honest/ethical/snake oil etc. issues. I work as both buyers and sellers agents and see both sides of the coin. Let me ask these questions first:

Is it fair the banks won't look at short sale packages in a timely manner why the homeowners credit is being further destoryed and potentially their asset?

Is it fair the REO and short sale listing agents deliberately price there property WAY below market to generate a bidding frenzy?

Is the HVCC fair, smart, intelligent, or a good idea?

Is it fair on short sales after the offers are submitted the listing agent comes back and asks for the highest and best?

No matter what you think these are the rules that we live with in todays market. This is the first tactic I have seen that potentially levels the playing field for the buyers.

Broker Bryant summed it up best I work for my client and it is my job to get them a house and make them happy. If you are upset then to bad learn how to counter. Is it my fault I'm a better agent than you?

I had never heard of this strategy before and I have been involved with short sales. Interesting.

These days, it would appear that all is fair in love and...real estate.

Lisa,

I often is apalled by the prices set on REOs. That's where the crime occurs. They are so often artificially brought so low.

Hi Lisa,

Good question. I have heard that it's being done but here in our area (Sacramento) the banks are getting wise to this. We had a panel of three REO agents at a recent Women's Council of REALTORS luncheon and they all said that the banks are starting to take this into consideration when looking at offers. This panel also said that many of the banks they deal with want to know that the buyers have really seen the house and are not accepting offers sight unseen which can also be problematic for them.

DeeDee

Lisa,

That's creative, but does involve some buyer risk if the appraisal comes close to the sales price. Vegas is seeing that activity, too.

This is a first for me. I haven't come across it and I definitely would not recommend that strategy to a buyer on a financing contingency. Especially since those danged REO addendums have so many fuhgeddaboudit clauses anyway. Cash buyers and no appraisal: if they want to play it that way, then all we can do is advise, advise, advise.

This market is so weird.

I have not heard of that happening here. It's way to risky for the buyer.

NOV

We have seen some banks/asset management companies refusing to lower the price if multiple offers have been received.

#149 You're right, it's a new game, and as a buyers agent, we have been offering asking price and the appraisals are still coming in to low...we didn't plan it that way, it's just the way it goes.

#188 We are seeing the same, they won't come down on the price...I have one right now that won't come down.

#185, at this point buyer doesn't have to worry, the latest trend here in AZ is LOW appraisals .

One year ago, we were offering WAY over asking in multiple bidding wars, it's now gone the other way.

It's a new road block, right along side of COE not closing anywhere NEAR on time, and banks canceling the loans 2 weeks after the scheduled closing date!

This is a really tough market...seems to be getting tougher every day.....

Thanks for the share Lisa!

Roxy

As long as listing agents continue to price properties below market to get mutliple offers, this is going to be a method used by buyers to get their offers accepted. With new appraisal rules, most appraiser in our market are being conservative. I would not recommend that my client offer more than what I would expect the property to appraise for but it seems only risk is the money they spend for inspections and the appraisal if the value comes in low and the seller won't lower the price. Seems like a solid strategy to me.

Banks have not been playing fair with buyers. A buyer puts in a reasonable of even great offer and then can't even get a response until weeks later, only then to be told that there are multiple offers. Now they must go through another round and submit their highest and best. This is very frustrating for buyers. It is a buyers choice waht they elect to offer on a home. If it does not appraise at that value then everyone, seller and buyer alike, must know look at what that property is valued at. Fair? Does not seem that it is a matter of fair or unfair but rather a matter of being where the market has gone.

In working with my buyers, I always go through sales comparables thoroughly with each offer made and let the buyers know that they must be comforatble with the amount they choose to offer. However, they are well educated on what the amounts are that other homes have sold for. Until the banks start operating differently, well see tons of different strategies developed. Like it or not.

My most recent FHA appraisal - received Nov 4 - came in over the selling price - so this strategy can go either way. It seems to me that the REO Company has received multiple appraisals and BPO's and should had a good idea of the value. If an FHA buyer is coming in with a high offer, the REO should know what to expect.

I don't think it is unethical at all, just making it known in public as a strategy should stop it soon enough. I agree with Lisa that something is going on and I believe the the buyers agents are telling their buyers this strategy. Pay whatever the seller wants because most of the time it won't appraise and we'll renegotiate the price. I've just had 2 where the buyer and their agent were shocked that the seller said 'take a hike' I'm not selling for that appraisal price, I'll keep it instead. Great strategy on their part huh?

Lisa, interesting point. The way the market has been the 16 months, who knows what is fair and what is not. The bottom line is that nobody is going to give their property away.

Very interesting. How I see it is that your buyer is in charge, of course, and you have to be careful with the advice you dispend. I realize that some may be using this as a strategy to beat out the other offers. Well, if that knowledge is out there that this sometimes works, should YOUR buyers be aware of this? Where do you draw the line. Dispensing information but not advice? But who can ever guarantee what the appraisal will come in at. Seller (sellers agent) should have some responsibility in knowing at least a fair price that they believe it could appraise for, and not just take the highest bidder. IF there is a smaller adjustment to be made, it would seem fair for the banks to reduce the price, since they would have to go through the marketing and getting into a contract with a new buyer, and often they just want to get it sold, now. If the difference is large amount of money....what was the listing agent thinking? Or are appraisals really that much off the mark anymore?

For the most part, I believe we need to keep our clients informed, and let them decide what level of risk they want to take. If they want the house, and suspect that somebody else may be applying this technique...well...what to do, what to do. You are just trying to get them the house they want.

NOV

Lisa. This tactic works and the risk is minimized if the Buyer's Agent knows his/her values for the home. It has been working here in So Cal for quite awhile.

However, now the Listing Agents are countering this tactic by countering all offers above the anticipated value. The highest bidder who waives the appraisal contingency wins. Both the Seller and the eventual Buyer are happy and it is all ethical.

The seller doesn't HAVE to take the highest offer. In a "regular" market or "sellers" market we would get multiple offers and the highest offer isn't always the best offer. Ability to close, lack of contingencies, quick close date, working with the seller on occupancy, size of EMD, etc all play a part in accepting an offer. This shouldn't change because the seller is a bank.

Lisa,

This could BACKFIRE! If it does appraise..... the Buyer will say "but YOU told me..yada,yada". It isn't worth my license to try that ploy!

Kathy Opatka

#198, yes, it could backfire if you don't understand the home comps, or let your buyer risk more than they can afford and you don't have a contingency. In my case, the buyer offered the maximum they could qualify for on their loan, which was much higher than list price. But they were willing to pay what they offered if it appraised. We had a contingency, and the bank agreed to meet the lower appraised price.

NOV

Yep, it works if you're willing to roll the dice. I'm not.

NOV

Lisa, it seems you have been working under the false assumption that buyer "A" is somehow required to act "fairly" to buyer "B" when trying to buy a home.

In fact, what you're describing is nothing new, at all; this has been going on since I started selling homes in 1971, and was probably going on long before that time.

Buyers, and even more so, their agents, are supposed to act in their own best interest, not in the interest of someone else, particularly a competing buyer. The agent, using his/her skill, is certainly acting prudently, ethically and within both law and regulation by advising their client (the buyer) to use the system to achieve their goal.

The problem isn't what the buyer and the buyer's agent is doing; it's the incompetence of the federal government who have imposed ridiculous regulations and procedures on banks and appraisers.

So, if you wish to question the ethics or integrity of anyone, call your local Congressional Representative and US Senator, if they'll even both to talk to you.

NOV

I have had a customer use this strategy. I didn't know this was actually being used in a methodical manner. It all stared off innocently. He made offers on several short sales he intended to buy and rent out. Then as he found things wrong with them, he would lower his price. By the time the appraisals came in, he was down to them. One came in higher and he had to go back up. It has worked!

I don't know that I would recommend this as a strategy. I think it could blow up in you face.

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