Should You Pay More than the Appraised Value of a Home?

When the home prices were rapidly rising, most people comfortably made high offers without worrying about the appraised value. Most of the time, the appraisals would meet the target. Now, partly due to falling prices and partly due to the new appraisal system, 20-30% of appraisals are coming in low, leaving buyers to wonder whether they should pay the purchase price or the appraised value.

Should You Buy a Home for More than the Appraised Value?
The simple answer is no. Of course, there are exceptions. If you’re buying a distressed home by a major architect at a bargain and planning to fix it up, you may well want to pay more than appraised value because it will be worth much more once it’s restored (assuming you do it properly). However, odds are good you’re paying all cash in that scenario, and may not even get an appraisal.

99.9% of home buyers aren’t in the situation, which means that 99.9% should not pay more than the appraised value, especially in a declining market.

Why You Shouldn’t Pay More
Paying more than the appraised value essentially means that you’re paying more than the house is worth. You’re losing money right out of the gate. Given that home prices in many areas may still slide downward, why would you willingly lose money on day one?

In addition, lenders will base your loan on the appraised value, not the purchase price. If you opted for 20% down, then the lender will only lend you 80% of the appraised value, which means you’ll have to produce extra cash to make up the gap between value and price. The other option is to find a different type of loan, but that will cost you much more in interest.

What If the Appraisal Is Wrong?
This does happen. If you feel the appraisal is wrong, you can get a second appraisal or appeal the first one, especially if inaccurate comps were used. However, you should carefully research the factors behind the appraisal. If the square footage is wrong, make sure that the actual square footage matches that listed on the property records at the assessor’s office. If it doesn’t, you could be dealing with an unpermitted addition. Although it would appear to increase the home’s value, it could actually cost you a bundle to correct defects in unpermitted construction.

How to Handle a Low Appraisal
In the event that an appraisal comes in low, you can do one of the three things:

Make up the difference in cash.
Ask the seller to renegotiate the sales price.
Cancel the deal.

Personally, I would choose either two or three. With two, I would ask that the purchase price be reduced to the appraisal price. Some sellers will offer to split the difference. I wouldn’t do that, because even if you split it, you’re still overpaying. The seller may insist that they “need X dollars from the sale.” That may be true, but if the home appraised low, they’re not going to get it. They can either accept less or stay in the house.

I know it’s difficult if you really love a house, but you have to be prepared to negotiate hard or walk away if the appraisal comes in low. In this market, it doesn’t make sense to go into a home in a position of weakness.

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14 Responses to “Should You Pay More than the Appraised Value of a Home?”

Carnival of Personal Finance: New Zealand Edition! | Man Vs. Debt on July 13th, 2009 1:31 am

[...] Aryn from Sound Money Matters presents Should You Pay More than the Appraised Value of a Home?! [...]
yajaira on July 22nd, 2009 1:12 pm

how about when the property is bank owened ?
Aryn on July 23rd, 2009 9:01 am

Unless the property is completely trashed, in which case it likely won’t qualify for a loan and an appraisal might not be done, it will still be compared to other properties to determine a fair value so I still wouldn’t be willing to pay more than the appraised value. Where I live, decent REOs are bid up to fair market value anyway.
Des Little on August 26th, 2009 3:29 pm

I am curious about how much more an appraisal should be versus what i am paying for the home for it to truly be worth the investment. I am paying 161,500 for a 2,067sqft home that “appears” to be in good condition, we will see what the home inspector says though.
Aryn on August 26th, 2009 5:46 pm

From what my loan officer told me, most mortgages come in at the offer price. Very few come in above it unless you’re really getting a great deal.

It really depends on your reason for buying a home. If you’re buying it as a investment to bring profit, maybe you want to find something for less than it will appraise for. If you want to find a home to live in for 10 years or so, don’t pay more than the appraisal, but don’t walk away from home you love that’s in good condition because you’re not getting a huge bargain.
Scott on October 20th, 2009 6:14 pm

What if the house needs a roof within the next few years; do you take the appraisal (that came in low) and discount the roof from the appraised value?
Aryn on October 21st, 2009 11:16 am

Scott, that’s certainly a negotiation point with the seller. They may not give you the full cost of replacing the roof because you’ll have the current roof for a few more years at least. But you might be able to get some concessions for it.

However, if the seller is a bank, they probably won’t go lower than the appraised value.
Autumn on October 31st, 2009 10:04 am

We are renting a house that we would like to buy. The owner owes close to the county appraised value, but his fiancee wants $45,000 more because of what they put in it. If a house is appraised at $305,000 by the tax appraiser, will an appraiser rate it any differently, especially $45,000 higher?
Aryn on November 2nd, 2009 12:37 pm

Hi Autumn,

It’s tough to say what an appraiser will value it for. When you buy the house, the appraiser usually sets the value at the purchase price, but then can adjust up or down with time. If it’s been owned a while, the tax value may not be the true value. It’s best to have a professional appraisal done. You should also look at similar houses on similar lot sizes that have sold in your area in the last six months to see what they sold for. If you figure out an average price per square foot and then multiply it by your square footage, you should get a pretty good idea of the value.

You can use Redfin’s advanced search features to search sold homes by lot size, square footage, and number of beds and baths.
Ved on November 17th, 2009 5:16 pm

Hi,
I made an offer for a house for 155К – it is a short sale, and the bank approved it, but then I went to see the appraisal value and found out it was only 118К – I am about to close the sale, but now I am thinking to renegotiate the deal for for 120К. WHat do you think I should do? And yes the house is not in move in condition it was estimated 15000 to complete renovations.
Aryn on November 18th, 2009 11:10 am

Wed, that sounds like a pretty bad deal, however you might be stuck. If you’re outside the contingency period, you may not be able to back out without losing your deposit at the very least.

Frankly, I’m surprised you were able to get a mortgage for that much over the appraised value. Even if your renovations increase the value, you may not make enough improvements to bridge the gap from 118K to 170K.
Ved on November 18th, 2009 12:24 pm

Hi Aryn

Well the situation is I had AS IS signed by me to close on October 28. But the bank came back almost a month later and proposed closing on november 19. They rushed HUD to me one day before closing just today and they were supposed to do it 5 days before at least. I had not made a deposit surpisingly, and I am a cash buyer, so technically I am not in obligation to buy the house as closing is 3 weeks late. Am I right? I am thinking to back out today… Thanks.
Aryn on November 18th, 2009 12:34 pm

Hi Ved,

Since the bank is also in violation, my feeling would be that you could back out. I’m not a lawyer, though, so for peace of mind, call a local real estate attorney to make sure the bank can’t force you to close or sue you for breach. It will cost a few hundred dollars for an hour of their time, but a few hundred is a lot cheaper than $155K!
Ved on November 18th, 2009 2:02 pm

Thanks again )