A REALTOR® increases the list price from $100,000 to $107,000 to match the contract price due to multiple offers. Is this a good practice? Appraisers say no and here is why: the practice of increasing the list price when there are multiple offers alters the MLS statistics which appraisers must rely on to properly perform their work.
In the above example, when this sale closes, the MLS statistics will show a 100 percent sale price/list price (SP/LP) ratio, rather than 107 percent, which is the true SP/LP ratio. When this practice is repeatedly used by agents in the market, the MLS statistics are distorted on a larger scale.
Spring can be an especially challenging time for REALTORS® and appraisers. As strong demand and undersupply conditions put upward pressure on prices in the market, the appraiser may have difficulty supporting the contracted purchase price with the historical data that must necessarily be used; meaning closed sales. It may even be necessary to use comparable sales from the previous spring/summer due to lack of recent sales.
Appraisers will look to current MLS statistics, as well as, active, contingent and pending listings. This is an attempt to more accurately approximate current market conditions. Again, using the above example, the true SP/LP ratio of 107 percent tells a story about the demand for this subject property. In general, SP/LP statistics that exceed 100 percent tell a story about overall market demand that can be used to support the need for positive time adjustments, or to support an opinion of value at the upper end of the appraiser’s adjusted range. Accurate SP/LP ratios are also useful when appraisers include listings as additional comps, and many lenders still require listings.
The appraiser must fully disclose the listing history in the appraisal report. If the contract price is over list price, the appraiser is likely to discuss the reasons for this in the report. Therefore, it is not necessary or useful to increase the list price in the MLS.
Communication between the REALTOR® and appraiser is encouraged at any time in the process prior to report completion. This is a good opportunity to share information about the property condition, updates, showing activity, and multiple offers.
Appraisal reports are heavily scrutinized and reviewed, often by out-of-state lenders and underwriters unfamiliar with local real estate markets. An appraisal is a “supported” opinion of value, and the results of the appraisal report must be “credible”. Therefore, it is imperative that appraisers provide strong supporting evidence for their value conclusions.
REALTORS® play a critical role in providing appraisers with additional tools and information needed to best reflect current market conditions. Who better than REALTORS® who are on the front lines with buyers and sellers daily? Accurate SP/LP ratios are a valuable tool, especially with current strong demand and low inventories.
