When listed properties get multiple offers, sometimes all or most of the bids are in a similar range or band. Sometimes, there may be one buyer who’s lost out on several multiple offers and spikes the price high to make sure that he or she “wins”. That ultra high price, far more than the other willing and able home buyers were offering to pay, is called an outlier. (We are seeing a lot of this in Silicon Valley.)
When that house closes escrow, neighbors and real estate professionals themselves see the closed price, and may be amazed at the amount the new neighbors paid, as it often sets a new high for the immediate area.
Below is a sample scenario of bids in a “band” of pricing with one outlier.
Sample list price $999,000
Offer 1 $999,999
Offer 2 $1,100,000
Offer 3 $1,250,000
Offer 4 $1,200,000
Offer 5 $1,000,000
Offer 6 $1,260,000
Offer 7 $1,275,000
Offer 8 $1,400,000
Offer 9 $1,325,000
Offer 10 $1,265,000
Offer 11 $1,215,000
Offer 12 $1,335,000
There will always be a couple of offers that come in close to list price, despite all clues that a property is under priced and the activity leel is high. Offers 1 and 5 are essentially at list price and they haven’t got a chance. Half of the offers, 6 of 12, are between 1.2 and 1.275 million. We’d call that a band of pricing. There are 2 in the 1.3s and 1 at 1.4.
The offer at 1.4 million is $65,000 higher than the next best offer, but the buyers don’t know the prices being offered. If no one had spiked the price, anything over 1.3 would have trounced the rest of the offers. But we just never know how high a very highly motivated buyer will go.
Will that one spiked sales price or outlier establish the value for the neighborhood?
Not by itself, it won’t.
Appraisers look for three comparable home sales in establishing valuation for residential real estate. Real estate agents do too. One sale in a tract could be a fluke. Several of them and you have a trend – something more dependable, indicative of rising values for the region as a whole.
Home buyers do not want to be outliers, but if they have lost a number of homes and see prices continuing to rise, they can project a likely value a few months into the future and decide it’s better to pay the “two months down the road” price today and get the house rather than continue to lose as prices go up and up and they risk getting priced out of the market. So they may pad what they think is reasonable just to make sure they get their home this time around. Of course, this is a seller’s dream. Recently I sold a home where there was this sort of buying activity with most bids in a band and one super high. My seller’s response? “Scrape me off the floor” followed by a simple “let’s take it”.