Denver suburban area sales prices vs appraisals?

Question

I'm wondering if those who have made deals in the last 3-4 months in the Denver suburban area are finding that sales prices and appraised values are way off. My impression (as an inexperienced investor spending a boat load of time looking at MLS results and listings) is that the frenzy for buying properties has been driving up sales prices (folks paying well over asking costs in some cases) and possibly inflating asking prices as well. I have heard that about 1/3 of the offers/deals fall through - maybe that is typical across the country - and I'm wondering if that is due to any one factor over another, including discrepancies between offers and appraisals.

I am currently waiting on an appraisal with the clear feeling that I am going to be looking at a low appraisal. However, due to our escalation clause and stated willingness to pay x-amount over appraised value, I'm getting more nervous as the days go by.

@Brandon Turner recommended we take action. So, I did! After 3 rejected deals, I landed one. Apparently it's OK to screw up on your first deal - so I'm expecting that to happen, but hoping the appraisers are stepping up values as home prices go through the roof!

Dan Mackin · Answer

The appraisals are still seeming like a bit of black magic at this time. It can be the difference of a few days to dramatically modify the final value. It all depends right now on what is showing right when the appraiser is looking. If you have a place UC that has some easily verifiable comps then you can easily guess what the appraiser is going to do. If it's a very unique property it can be anyone's guess. You can always refute the appraisal value if you can find valid proof of some mis-valued comps in the report. I've done it before to bring the value up to where it was supposed to be. Again though, they have their system and sometimes they just "conveniently" come in right at the value you need. Amazing how it works out like that...With your escalation clause that shouldn't affect you too much at this point, unless you're saying it's already caused you to be much higher than you originally hoped. If you did the numbers right on this deal then even the appraisal discrepancy coverage shouldn't plummet your numbers. Biggest thing is that if it comes in low, go over it with a fine tooth comb to see what you can get them to change. Could be worth thousands to you!

Joshua Meyers · Answer

I'm seeing a bunch of homes that AREN'T appraising for what the contract price is, but most of these buyers seem to be happy to just pay the difference and still close. This market is crazy

Travis Sperr · Answer

@Patricia Miller The properties ability to appraise has everything to do with the listing agent. If the listing agent meets the appraiser at the property - with comps and the other 10 offers in hand showing more than one was willing to go up to $212k and cover an appraisal difference, there is a pretty good argument the value is above the $199k the property was listed for. I do understand you are the buyer on this one - but you are directly effected at how good the listing agent is at selling the value.What does stand out to me is that you are willing to put 20% down and make up $20k in appraisal if needed - looking at putting upwards of $60k down on a house that needs rehabbed? Unless you have more money than you know what to do with - or love the area to live there- I have to tell you that there are better deals out there, not as easy to find as the MLS but they are available.You mentioned you wouldn't mind if this one fell apart to start over, if you really feel that way then blow it up and move on.

Bill S. · Answer

@Patricia Miller I had a deal with an escalation clause and an appraisal clause. The buyers paid $10K over appraisal and covered the difference ($345,000 sale price). I had three offers at or near their purchase price and all with similar clauses. I can't see where that wasn't the value/market for that property but the appraiser didn't see it that way. Personally I don't see why people pay retail for anything but Wal-Mart goods. When you shop where everyone shops you pay what everyone pays give or take a few dollars.

Patricia Miller · Answer

Thanks a bunch, @Dan Mackin - your advice is always clear, concise. It is tempting - despite warnings - to speculate on what properties will be worth in 6 months to a year. However, since we offered $14K over asking which was $199000 (invoking the escalation) I am set to reject the final deal with an appraisal that falls below the difference we stated we were willing to make up... unless the buyer will come down to that amount, of course. I think I have learned, otherwise, that beginning an investment "career" should not be done in April, May, or June. I kind of knew that, but got a little overly impatient.@Joshua Meyers I'm seeing plenty of properties selling anywhere from a few thousand to $25 K over asking without knowing what the appraisals were -- so I was wondering! I've lost out on a 10K under offer (embarrassing attempt for here in Denver), a cash offer of 6K over, and a 25K over with escalation clause. Apparently it was a "tie", but our stated reluctance to make up any sizable difference in appraised value left us short on that deal. (Dodged a bullet on that one, I think) Then I ask myself - just because some are willing to do it, does that make it a wise choice? (A fair analogy might be following the herd of cattle over the cliff.) An experience investor will likely see when to back off. As a new investor I don't want to go too far off the path (or close to the edge, whatever that is). Given the largely terrible rent/purchase-price ratio we are seeing in these suburbs (some worse than others) - I figure that in the case of our current pending purchase, I would have to hang onto this property a bit until either rents go up or property values rise to a level that justifies fix and flip or BRRRR. However, since we can use this as a "2nd home" for the short term to justify the uncertain status of its investment potential (with a family member paying low rent to cover costs) we can pretend this is house hacking to convince ourselves we have launched!It will be another few weeks until our appraisal comes through - thanks for the feedback, all!

Adilah Curry · Answer

Why not pay $0 out of pocket for the price difference? Renovation Loans can be an excellent solution to a low appraisal...many people are simply unaware that the solution exists...we'll actually be rolling out a free online CE course very soon for Colorado Agents (and anyone else that wants to attend) titled Understand Renovation Loans. If you have questions about options specifically related to your situation, just inbox me :)

Kevin Grinstead · Answer

nice. Sounds like the craziness we deal with everyday

Patricia Miller · Answer

Update: Appraisal has come in at $212K - just $1K under contract price, $13K over list price. And so it goes in Denver. @Kevin Grinstead @Travis Sperr @Dan Mackin @Bill S. @Joshua Meyers

Patricia Miller · Answer

Hello @Dan Mackin - I don't expect much from this property - any 2/1 condo I can find rents for don't exceed $1500 and are often even far under that - except for in some of the more pricey areas. So if the purchase price today is around 2K - this is not a cash flow property. Will rents catch up anytime soon? I would probably be foolish to expect that. Because the property is in pretty good shape, albeit with older appliances/finishes there might be a possibility that in a year or so, some upgrades could produce a small profit if the trend continues with rising property values as it has in the Denver area for the past few years. Meanwhile, I could have a place to live to see how it plays out.

Kevin Grinstead · Answer

Hi Patricia, We have a full appraisal protection and the buyers went for it. We will see what happens through the process. The seller's agent is the one that will help protect your out of pocket expense like Travis said. I am planning on doing everything I can to meet the appraiser and show them the other offers that we received. There are deals even in the MLS but most people are jumping on them quickly. There are other ways to look at MLS to get a better deal and also, of course finding deals yourself can make the process easier and cheaper. A good realtor can help you find deals from people that haven't already listed and can maybe assist you and themselves in finding a deal that can benefit all parties.