When available house inventory is low and buyer demand is high there is little doubt that a sellers' market is at work. This certainly implies that sellers occupy the driver's seat when it comes to negotiating with purchasers. This is true, to some degree, but it is far from an absolute truth. Buyers walk away all the time; some sellers are left with houses that could have been sold yet are not. Why, then, would a seller ask for a high price that is not supported by appraiser comparables? What other realities are overriding the dangerous prospect of no takers?
What Are "Comps" and How Are They Selected
In determining the market home values of subject properties, certified appraisers look to see what similar and neighboring homes recently sold for. Three words: similar, neighboring and recent -- each is open to interpretation. Obviously the task is easier in a condominium development, for example, where townhomes or apartment units are fairly identical in structure and floor plan. Still, appraisers can valuate single family residences using comparable homes based on square footage, as well as the number of bedrooms and bathrooms. One maxim is that comps should always be within 10 percent in terms of square feet measurements.
Location matters too. A comp might be proximate to the subject property yet situated in a very different neighborhood. Schools districts might be separate, and the condition of roads and infrastructure could diverge. Timeliness of sales is also subject to vary. Often, recent means a house was conveyed within the previous 90 days. Yet if the market is sluggish in a given area, appraisers can look back at sales further in the past. Needless to say, many variables are involved when it comes to choosing the optimal properties to serve as comps.
Why Would Anyone Pay More than the Comps?
When once caught in a marital scandal, the famous director Woody Allen notoriously explained, "The heart wants what the heart wants." Upon finding the house that conforms perfectly to a wish list, a buyer finds it difficult to reject the sales price, even if it is patently unreasonable and unrelated to property value. In other cases, bidding wars develop a momentum all their own and buyers can get swept up in the upward climb of offers. Related but distinct, when cash offers are made, a higher offer is effective in blunting the hope of a quick closing that cash promises.
How Do Sellers Justify Asking for More than the Comps?
Is it cold calculation -- or just plain nerve -- that motivates a seller to exceed the comp values in conceiving an asking price? It could have something to do with time. Comps tell a tale of the past -- 30, 60 or 120 days ago. They can not foresee, nor can they foretell, how home values will appreciate (or depreciate) months and years from the sale date. It is not unethical or impractical for a seller to think about such things, and act accordingly.
The realtor's multiple listing service (MLS) offers a database of properties and detailed information on each one. These assist the seller in making final decisions regarding the price at which to list the house. This is not to discount an appraiser's valuation; it is a piece of the process by which a seller decides on the property value. By the same token, a higher price is not always arrived at through this comprehensive approach. Ultimately, sellers know that, even when the market favors them, they should have sound reasons for exceeding the comps.