It doesn't really matter what you or I think the value of the property is.............

I had an email conversation this week with one of my buyers.

It's a conversation I've had many times.

What price to offer on a home is the question.

Of course there are many variables when computing what to offer.

It usually starts with comparable sales that I pull up.

Once in a while, my buyer has something to say about that also.  They may have knowledge of a property that closed escrow nearby.  But sometimes that property isn't like-for-like, or perhaps the sale is to old to be considered a comp.

My buyers concern was overpaying for the property.

I re-assured them by stating that it really doesn't matter what I think or they think the fair market value of the property it.

What really matters is WHAT THEIR LENDER thinks the fair market value of the property is.

Why?  Because their lender is only going to lend them 80% (in the case of a conventional loan), or 96.5% (in the case of an FHA loan) of the value from THEIR appraisal.

So in that sense, there's really no need to worry about overpaying.  Your bank will pretty much dictate what fair market value is for the property, and the sale is contingent upon the property appraising at the accepted purchase price.

That almost always puts my buyers at ease knowing that the whole purchase process has to jump through several hoops of valuation by different parties

 

 
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20 Comments on It doesn't really matter what you or I think the value of the property is.............

FEB
09
2011
1 Featured Post

I use the same approach as well and it works to put the buyers mind at ease
1:34am • #1

That is so true.  I would like to "take advantage" of a the lender's "appraisal".  For investment properties, the lender might ask for 1. the past 2-3 years income and expense statements, 2. rent roll, and 3. schedule E before the final calculations.  The only deviation would be for "all cash" offers in which case there is no lender.  I would then look at the recent assessed value from the tax record, and the date / price the property was last sold.  For income properties, I also have my own spreadsheet which calculates the GRM, cap rate, etc.

Other than that, it's the "LAFS" factor.  If it's a "LAFS" (Love At First Sight) property, then all the rules do not apply: get as close to / or above the asking price as possible...
2:01am • #2
321,423 Points 18 Featured Posts Attended Rain Camp Called Shot Master

Ralph, that is exactly the same how I explained to my recent buyer.  I told her it doesn't matter what I think, what the comps come up, it is what the appraisal matters.  I also told her she will not overpay the property, the lender won't let it happen anyway.
2:16am • #3
180,081 Points Outside Blog
You are right the appraiser may have the last say, but If there are comps available I'm sure you'll be within range. I have delt with appraisers that have been off mark. In Jersey they allowed a 15% margin of error. Nice post.
2:38am • #4
1 Featured Post Outside Blog

I tell buyers the same thing all the time. It doesn't matter what we think, rather it matters what the market thinks. That's why we have comps. I usually give a scenario of if they were the Seller and trying to sell their house and according to market value it was worth $350k. Well a buyer thought it should only be worth $325k. Would they accept that offer? Good post.
3:01am • #5
1,139,183 Points 154 Featured Posts Outside Blog Attended Rain Camp Called Shot Master

Excellent post, Ralph.  It makes sense - free market economy, but lots of people don't think this way.  Nice job.
4:44am • #6
354,520 Points 30 Featured Posts Outside Blog Attended Rain Camp Called Shot Master

Ralph,

Another great post and good answer! I've suggested it for a feature article because I do believe it's worth it! All the best to you!

The question is so common and you have a way of providing an uncomplicated answer. Thank you! I've bookmarked this one too. I tried to re-blog it and give you credit for this great blog but I got message saying re-blogging was disabled even though the button is there.... hmmm.
7:08am • #7
1,225,273 Points 79 Featured Posts Localism Sponsor Attended Rain Camp Called Shot Master

Good morning Ralph,

Love the answer to the question. I too am suggesting this for a feature article.
7:19am • #8
578,516 Points 2 Featured Posts Outside Blog Attended Rain Camp Called Shot Master

Hi Richard,

I use this approach as well.  Then I'll get a comment like, "Well I'm going to make sure the lender knows my yard is more level than all the closed comparables".  Well, knock yourself out! Cindy
7:36am • #9
535,983 Points 71 Featured Posts Outside Blog Attended Rain Camp Called Shot Master

I like this approach. This works well for 95% of the buyers. It's that 5% that make me open the Tylenol...
10:20am • #10
374,842 Points 2 Featured Posts Localism Sponsor Outside Blog

Ralph - I always write it into my contracts the the contract is contingent on the property appraising for the sale price.  that usually put them at ease.
10:36am • #11
447,681 Points 11 Featured Posts Outside Blog Called Shot Master

Ralph, this is very true, it certainly takes a lot of the stress away from the buyer.
10:46am • #12
275,890 Points 17 Featured Posts Localism Sponsor Attended Rain Camp Called Shot Master

So true.  Buyers are comforted by the thought of the assurance of value through an appraisal. And the need to have the house appraise does help sellers get real.  You have no sale if the house does not appraise.  Full stop.
12:24pm • #13
125,466 Points 1 Featured Post Outside Blog Called Shot Master

Great info & so true, their bank will definitely make sure they don't over pay!
3:40pm • #14
394,545 Points 22 Featured Posts Outside Blog Attended Rain Camp Called Shot Master

One thing that buyers that are financing their homes need to realize is that a lender is never going to allow them to pay more for a house than what it is worth... So if the appraisal comes back higher than the agreed price, the buyer can be confident they got a good deal.
5:18pm • #15
872,624 Points 47 Featured Posts Localism Sponsor Attended Rain Camp Called Shot Master

Ralph, this is a discussion we often have with our Sellers. It doesn't matter what they or we think their house is worth - the appraiser is going to ultimately call the shots when we have a contract. That's why we meet the appraiser at the house, to be sure no upgrades or comps are overlooked.
9:35pm • #16
207,833 Points 1 Featured Post Outside Blog Hit Router Attended Rain Camp Called Shot Master

Ralph - overpaying is always a concern ... but as you point out, the system is set up to make thatvery difficult, if not impossible to do.  When I really push buyers ... it seems they are far more concerned about being able to "underpay" and get a bargain ... fortunately the market seems to be changing slowly again toward a reasonable negotiation of contracts.  Thanks for sharing!
9:57pm • #17
FEB
10
2011
210,274 Points Hit Router Called Shot Master

Hi Ralph. I agree completely-sellers do not seem to understand this when the appraisal comes in-
3:32pm • #18
FEB
11
2011
150,055 Points 1 Featured Post Outside Blog Attended Rain Camp Called Shot Master

Ralph, this is a good approach until the property doesn't appraise and you have to convince the buyers to pony up a few thousand dollars more to make up the gap.
12:12am • #19
FEB
13
2011
517,944 Points 6 Featured Posts Outside Blog Called Shot Master

Excellent post Ralph!  I'd like to post it to my facebook if you are ok with that!
10:46pm • #20

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