NOTE: I subscribe to Inman News, and although this is a letter from a U.S. broker, when I read it, I felt it provided an accurate description of what a suggested list price is all about in real estate even here in Toronto.
I've been working with many buyers over the summer who ended up in multiple offer scenarios and who had to go over asking in order to "win the multiple offer" game! Many buyers wondered about why they had to pay over asking price and I think this letter addresses the subject succinctly.
If you have any questions, or comments, don't hesitate to email me.
Letter to the Editor
By Inman News, Thursday, September 3, 2009.
I'm amazed recently at the perception of both the real estate buying public -- and sometimes other real estate professionals -- as to what they believe the purpose of a list price is, and what role they believe an appraisal company, hired by the bank, serves in the sale and purchase of a home. I also wonder if buyers and sellers, prior to selling or purchasing a home, are provided with information from their real estate professional as to basic real property valuation techniques so that they (the consumer) can formulate a smart and informed offer price or list price based on their own perception of value.
Real property valuation techniques haven't really changed over the years. When it comes to real property, there are five things that cause a home to sell and thus impact its value: Location, condition, market conditions, advertising and price. Out of these five elements, pricing is key. Most successful sales are a result of a property's list price being in proper alignment with the other four elements.
Is a home's list price reflective of its value? Absolutely not. A list price is only an offer from a seller to sell and is simply a "call to action" for all interested buyers to step forward and make a claim as to the property's worth. A home's true value is determined only by the worth, usefulness or utility to a purchase who may have a unique and special purpose for its use. This very simple sentence is essential in understanding value within the current real estate market and overcoming the current appraisal problems which are stifling sales from closing.
Does an appraiser determine a home's value? It's an interesting question in lieu of the current appraisal problems creating a burden for both real estate professionals and consumers. The answer to the question is no, an appraiser does not determine value. The purpose of an appraisal ordered by lenders is to provide an analysis as to whether or not the lender's funding decision is sound.
In a home purchase transaction, a lender will usually grant a loan to a buyer based on the loan-to-appraised-value ratio. A buyer may opt to modify the appraisal contingency paragraph in a purchase agreement, which eliminates the need for a property to appraise at the contractually agreed purchase price.
Let's consider the following scenario: A home is offered by the seller at a "call to action" price of $500,000. Due to current high demand for affordable properties, the fortunate seller receives multiple offers, some over list price. The seller selects the best offer with a purchase price of $515,000, but unfortunately the appraised value comes in at $5,000 below the agreed-upon purchase price.
Now the real question of subjective value comes into play. Just how valuable is this property to the buyer? As it turns out, the buyer is willing to pay the difference in cash between the purchase price and the amount which the lender agrees to loan. Why? Because this property's location is closer to the buyer's employment location and the buyer sees better value in offsetting the monetary difference for the house rather than paying for the rest of his career in employment commute expenses and time.
Who determines value? If you guessed a listing agent or an appraiser, or even a home valuation Web site, think again. Value is initiated by a buyer who wants to buy and a seller who desires to sell. A home's true value is determined only by the worth, usefulness or utility to a purchaser who may have a unique and special purpose for its use. The true value of a home isn't known until escrow closes
Cindy L. Morgan
Huntington Beach, Calif.
* Inman News is the leading source of independent real estate news, information, advice, research, opinion and commentary for industry professionals and consumers alike in the U.S.