Why doesn't the contract price set the appraised value?

The contract is the question, not the answer

When a file lands on my desk with a signed purchase contract, the contract is telling me what one buyer agreed to pay one seller. My job is to find out whether the rest of the market agrees.

The definition of market value printed on the standard appraisal form (Fannie Mae Form 1004) starts with the words the most probable price a property should bring in a competitive and open market. Most probable. Not the highest. Not the one a single motivated buyer wrote down after touring the house twice and falling for the pizza oven.

That definition also assumes the buyer and seller are typically motivated, well informed, and that the house had a reasonable time on the open market. A contract can meet all of that and land right on value. It can also be the product of a rushed weekend, a family deal or a seller credit that quietly propped up the price. The appraisal exists to tell the difference.

The contract price does not drive my conclusion. It is the claim. The closed sales are the evidence.

What the rules make the appraiser do with the contract

Nobody is pretending the contract is not there. The rules require the appraiser to deal with it head on.

• The lender has to send it. Fannie Mae's Selling Guide says the lender must provide the appraiser with a copy of the complete, ratified contract.
• The appraiser has to analyze it. The appraiser must say whether an analysis of the contract was performed, report the results, or explain why it was not done. The appraiser certification on Form 1004 says the appraiser researched, verified, analyzed and reported on any current agreement for sale.
• Concessions get reported. The appraiser reports the total dollar amount of loan charges or concessions paid on the borrower's behalf, and Fannie Mae counts non-monetary items too.
• The price can be shared, a target cannot. Fannie Mae's Appraiser Independence Requirements let a lender give the appraiser the sales contract, but prohibit giving an anticipated, estimated, encouraged or desired value.

Then comes the part your borrower feels. For a purchase, Fannie Mae sets the property value for the loan-to-value ratio at the lower of the sales price or the appraised value. The contract can cap the value the lender uses. It can never lift it.

Why five offers are not five pieces of evidence

The most common pushback I hear on a purchase is, "But there were five offers." I believe you. I still can't use them the way people hope.

Here is why. The winning offer is, by definition, the highest number anyone wrote down. Market value is the most probable one. Those are different jobs. A bidding war tells me demand is strong, and that matters when I read the trend. It does not tell me the winner's last $40,000 was paid by the market rather than by one buyer who really wanted that school district.

The losing offers are not sales. They didn't close, they often had different terms, and I usually can't verify them. A closed sale has a recorded price, a date and a house I can compare.

Picture a hypothetical. A house goes under contract at $1,050,000 after five offers. The best similar sales nearby, adjusted for their differences and for the market's movement to today, point to $990,000 to $1,020,000. The offers explain why the price ran. The sales explain what the market has proven so far. If the next few homes on that street close near $1,050,000, the next appraisal gets to use them. That is how a new price level gets earned.

For the buyer's side of that story, see what happens when you offered way over asking.

What I check when a file is under contract

When I analyze a contract, I read it the way an underwriter reads a pay stub: looking for what makes the number bigger than it looks.

• Credits and concessions. A $1,000,000 price with a $30,000 seller credit is not the same deal as a clean $1,000,000. I report the concession and consider how the market reacts to it, which is not always dollar for dollar.
• Personal property. The hot tub, the furniture package, the golf cart. If it is in the price, it is not real estate.
• Listing history. Was it listed low to start a bidding war, or did it sit and get reduced three times? Days on market and price changes tell me how hard the market pushed.
• The relationship. Sales between relatives, business partners or a landlord and tenant are not always typically motivated.
• The gap to the evidence. How far does the contract sit above the best closed sales, and is the market trend strong enough to close that gap by the effective date?

If all of that lines up, the value can land on the contract. That happens a lot. It happens because the evidence got there, not because the contract did.

What a loan officer can do before the order goes out

Most contract surprises can be spotted before the appraisal is ordered. Here is the checklist I wish every file came with:

1. Send the whole contract. Every counteroffer, addendum and credit. A missing addendum can turn into a revision request, and revisions add days.
2. Get credits in writing and in one place. If closing costs, rate buydowns or repair credits are paid by the seller, make sure the contract says so.
3. List anything that is not real estate. Furniture, equipment and vehicles should be named, not buried.
4. Ask the agent for the price story early. Which closed sales supported the offer? If the honest answer is "none, we just really wanted it," you now know to run the low-value math with your borrower.
5. Run the lower-of math up front. Show the borrower what their down payment and mortgage insurance look like if the value lands 3% or 5% under the price. Nobody likes that conversation. Everybody likes it better before escrow than after.
6. Route facts through the proper channel. Under the independence rules, loan production staff do not order or manage the appraisal or talk value with the appraiser. The agent's fact sheet of upgrades and sales can go through your lender's process. A target number goes nowhere.

For the line between helpful facts and pressure, read whether an agent can tell the appraiser the value needed.