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.

If you like this post, share it!

Hide Sites

Comments

36 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 )
Lisa on March 22nd, 2010 8:46 am

If I feel I was “screwed” by a Countrywide / FHA mortgage what should I do? Who do I contact? A lawyer?

Long story short … I had to have a FHA Assessment/Inspector that came in and assessed the property. He assessed it at $90k, asking was $87k. However, I did not know the actual assessment on record for the county is $30k. I think it was appraised high to allow the mortgage. This was my first home, and although ignorance is not an excuse … i took everything I was told at face value. Including a home inspection that should not have passed (but that is another story).

Thank you for your help!!!
Aryn on March 22nd, 2010 10:05 am

Hi Lisa,

Property tax assessments vs home loan appraisals can be a little odd. I don’t know which state you’re in, but in California, the assessed value may lag significantly behind appraised or market value because of the way our property tax system works. Also, the land value is separate from the dwelling value in a property tax assessment, but combined in a real estate appraisal.

However, you could have another appraiser out to reappraise the property and see if they agree. If they don’t, contact a real estate attorney for advice.

As for the inspection, if your inspector missed items that were obvious or should have been discovered, you can sue them. Again, contact a real estate attorney for advice.
mike on March 25th, 2010 1:39 pm

We are in this EXACT situation. The funny thing is that the bank appraisal came in right at our own original estimate for the house, but at the time we decided we couldn’t have been right. If this falls through, next time we’re going in with more confidence in our own appraisal.

If sellers do not want to cooperate, that’s ok, but the bottom line is that in this market an honest appraisal represents a defacto maximum they should expect for their property, and whether they like it or not, if the Jones’s down the block sell their house for cheap, it DOES impact the market.

Why aren’t sellers having banks do these appraisals up front and setting more reasonable ask prices, thus saving everyone from hours if not days of wasted time??? The whole painful offer-counteroffer process becomes completely moot when the bank rolls in and values the home at less than even the initial offer!

This market won’t turn around until the economy warms back up, and thus people have the cash and the willingness to cover the appraisal-to-contract gap out of their pocket.

Wake up, sellers!
Aryn on March 25th, 2010 5:20 pm

Really, it should be Realtors ordering appraisals before putting a house up for sale. Banks don’t get involved until a mortgage application is submitted, which only happens after an offer is accepted. However, a serious seller should definitely get an appraisal AND an inspection before going to market. Then at least you know what to expect.
tom on March 29th, 2010 2:09 pm

I am a first time home buyer in Texas. I have been renting for ~ 10+ years.. intially because I just didn’t want to buy and then the prices were escalating too fast for my comfort.

To be honest, we placed a couple of bids on properties closer to their 2005 Tax appraisal prices. In the absence of a paid for appraisal before the initial offer, I am using the County tax appraisal as the max I will go for. I believe in a falling market, there is no reason I should be paying more than what it is currently appraised for by the county.

I have the patience to wait it out. The luxury of time is the best luxury to have when I am looking for a good home at a reasonable price.
Aryn on March 29th, 2010 2:58 pm

In California, it’s not typical practice to order an appraisal before making an offer. The purchase appraisal is ordered by the lender once the offer is accepted and you enter escrow. Instead, look at recent sales (three-six months) for comparable homes within the neighborhood to figure out how much to offer. Unless your county visits every home to reappraise it every year, the tax appraisal is not a true value indicator. There could be interior improvements that affect value, but are not calculated into tax appraisals. In addition, tax appraisals often have errors, such as incorrectly recorded square footage or more or fewer rooms.
Michael on April 23rd, 2010 11:08 am

I wish the decision to walk away from the deal was easier. We were just informed that the appraisal came in $30k less than our negotiated purchase price (which was already $35k less than asking). I really don’t think the comps used were representative of the house. The comps were all track homes on small lots while the house we are buying is custom on a 1/2 acre. I just don’t think we would have any better luck with a second appraisal. So we either walk away from this deal or we continue knowing we are losing $30k right off the bat.
My gut tells me to walk, but in the back of my mind I think the appraisal is wrong. I am buying this to live in for the next 10 – 20 years, so maybe the initial pain will be worth it?
Aryn on April 23rd, 2010 1:29 pm

It is a challenge when the home you’re buying is so different from the area. That’s one thing to consider – will you have difficulty selling the house in 10-20 years because it’s so unique? Are you in an area where unique is an asset or a detriment?

You can try pulling comps yourself. Use a tool like Redfin or Cyberhomes to search for homes sold in the last six months with a square footage within 300 SF of yours and a similar lot size. Try expanding your search to 1-2 miles from the house you want to be. If you can find more appropriate comps, you can ask your agent to request an appraisal review. As it stands now, the bank will likely not approve the loan (assuming there is one) unless you come up with that extra 30K.
good points on June 6th, 2010 12:12 pm

i was thinking doing a CFD contract for deed swap house deal. Othr party initially wanted give me 180K for mine and i give him $230. Then i requested we do an appraisal of both places. Mine came back 212 and his was 210K. Now he wants me pay him 220K and give me $205k. His seems better structurally and in better shape i must say. If i sell and do get $212 i would also lose 6% realtor fees.

Any thoughts on this deal?
Aryn on June 7th, 2010 10:11 am

I really know nothing about house swaps, but I’m not clear why you would pay him more than his is worth and receive less than yours is worth.
Ken on June 16th, 2010 12:42 pm

We have looked at lakefront properties in a three-four county area of southern Michigan. Found one we love, agreed to pay $130,000 (down from the asking price, which was $139,900), were approved for a $104,000 mortgage. Then came the appraisal — at $90,000. House in good shape, well cared for, but all the recent sales were foreclosures or short sales. Because of the appraisal, the sellers have dropped the price to $120,000. Should we walk away?
Aryn on June 16th, 2010 4:57 pm

It depends. Can you find comps for non-foreclosures and non-short sales within a few miles? Do you plan to keep the property for 20 years or more if it takes that long to regain the value? And finally, if the appraisal came in at 90,000, do you have the funds to cover the difference between the appraised value and the purchase price? Most banks will not offer a loan for more than the appraised value.
Krista on July 7th, 2010 6:13 pm

I have been in my house for 3 yrs. now. Unfortunately when we purchased our home the market was high and now are wondering why we didnt wait. We purchased the home for 270000 and the house was appraised for 272000. Now my property tax is 96000 under what I purchased my home for. Is the property tax assessment and appraised home value supposed to be the same? I’m wondering if we will ever have any equity in our home because of the market we bought it in. I feel ripped off and wonder if there is anything we could do? Oh and to top it off my loan is a CDA loan which is a type of loan in the state of Maryland.
Aryn on July 8th, 2010 11:49 am

Your property tax assessment and appraised value may vary because they’re calculated differently. The assessor may come inspect once a year to see if the assessment seems accurate, but it can also be algorithmically calculated using local factors. Also, the assessor can only value based on the outside of the house, and usually only what they can see from the street, unless you specifically request a reassessment. An appraiser bases the value on the entire house’s condition, including the inside and yard, and determines the value based on similar recent home sales.

I wouldn’t necessarily worry whether the assessment is for the same value as the appraisal. In fact, you probably want a lower assessment right now because it will save you money on taxes!

Unless your loan is about to reset and you can’t afford the new payments, there’s really nothing you can do short of trying to sell your home. You based your purchase price on the factors at the time and chose your loan based on it as well. Unfortunately, markets do rise and fall.

If you plan to stay in your home a long time, the value will eventually come back. You just have to give it time.
Laura Brubaker on July 8th, 2010 7:55 pm

Hi there,

we had two different types of appraisals. One for the house – about $190,000…another for the orchards – about $65,000. However the bank won’t recognize the orchards in the appraisal. What do I do – just give ten years of orchards and hundreds of hours of work away? HELP – quick I have an offer!
Laura
Aryn on July 9th, 2010 9:39 am

Hi Laura,

I have no experience with this situation, but it sounds like the orchards are a business. Maybe the buyer needs a farm loan that would include the value of the land, or should get a business loan in addition to the home loan. You probably need to call a real estate attorney or a farm finance specialist to figure out what’s the best course of action here. I certainly wouldn’t just give away $65,000 of land/potential profit!
Lara on August 4th, 2010 8:58 am

Hello,

We are looking to buy and found a home which is owned by the bank. The house has a lot of updates and was personalized by the previous owners to a large extent. The house is priced higher than the given market conditions. We put in an offer a little higher than what we think its worth since there are multiple offers. The bank has counter offered with the condition that we finance with them and that contract will not to be contingent on the appraised price. Which mean, I will have to pay higher than the appraised price if the appraisal is lower (which I am sure it will be). My question is, are banks allowed to do such things? I know I can walk away from the house but I am curious to know if such practises are allowed and legal especially how things are in the housing market.

I am in the middle of the offer and you insight is greatly appreciated.

Thank you!
Aryn on August 4th, 2010 10:46 am

The bank can require that the purchase not be contingent on the appraisal (although then you wouldn’t be able to get the loan conditions you stipulated, so you could get out of it that way.) When we bought our house, the bank added that stipulation. We were fairly confident the house would appraise, but if it hadn’t, we were prepared to say that the price no longer met the terms of our loan and we would walk away.

In most states, it’s illegal to require you use a specific bank for your mortgage. They can require you to be pre-approved by them to make an offer, but they can’t force you to use them for your mortgage. To me, this sounds like the bank knows its price is too high and is hoping it can push through a mortgage from itself in hopes of getting it to close.
Carolyn Rodgers on August 4th, 2010 8:26 pm

In general, yes – I am in whole hearted agreement on this subject – absolutely not… paying over the appraised value is crazy. But, I think each case can be different and certainly an appraisal cannot measure specific personal desires when looking at a property.

My husband and I are VERY picky buyers. We have search high and low for a property that meets our specific wants/needs. We want a beautiful QUIET mountain view lot. We want our home to be 4000+ square feet and have a 4 car garage. Oh and ideally to live with a break between houses so that we only have 1 neighbor on either side of our home. Eliminating the 1/2 the odds for barking dogs from neighbors.

We found the home we have been searching for in a golf community and when the comps came in our home was discounted $40,000 off the golf course lots in the appraisal. Even though the view of the mountain on this lot is just as nice or nicer than pretty much any golf course lot in the entire community.

To us, we felt the discount in the appraisal, although technically fair, did not represent the spectacular view of this lot evenly to the golf course lots. And in an appraisal it clearly won’t. There is nothing subjective about the appraisal.

So… what do you do? Walk or anti-up? We decided to anti-up. After much negotiation we decided to not let this property get away. It is exactly what we want and and after searching many years for this very special property (at least special to us) we weren’t going to let it go over $35,000.

Crazy? Maybe, but I don’t think we will be sorry – not one little bit
Mike on August 19th, 2010 1:10 pm

Howdy,

We are currently looking to sell our home and we know that we will be asking roughly 20% more than the anticipated appraisal.

With that being said, we have an extremely unique property. We have a very well updated and maintained 2000 sq ft main home and a 640 sq ft completely separate mother-in-law suite. Generally, I understand that mother-in-law suites are discounted based on the price per sq ft of the main dwelling. But to get something similar (if at all) in our area is rare. A buyer would actually have to look in a much more expensive part of town and probably be priced out anyway.

We are in a good situation where we are just looking to “move up” so the sale of our home is not a must for us. We just feel if the right buyer (with an aging parent, boomerang kids, divorced daughter or son, etc) comes along, they may consider paying quite the premium. Are we out of our minds? The few Realtors I have discussed it with say it never hurts to try. I also understand that the buyer would have to have quite a bit of cash to cover the down payment plus the difference in the appraisal, but again, shouldn’t the market set the price?

Any input?
Thanks
Mike
Aryn on August 19th, 2010 5:17 pm

The problem is that the market set the price before the housing crash and home prices spiraled upward to unsupportable levels. During that same period, many people spent a lot of money remodeling with the assumption that they’d make it back in sale. Unfortunately, that isn’t necessarily happening. So, you can ask whatever you want, but that doesn’t mean someone will accept your price. A home up the street from me listed for 32% more than the price of my home, and it’s only 400 square feet bigger (15% more based on price per square foot). It didn’t sell because buyers weren’t willing to pay an inflated price, and banks wouldn’t lend for it.

Also, consider this: if a buyer has enough cash to cover the down payment plus the difference between purchase price and appraisal, they may very well be able to afford a home in a more expensive area. Are you sure there are buyers for your type of property in your area?

It also doesn’t matter whether you think the market should set the price, because that’s simply not how it works anymore. That’s how it worked two years ago. Banks have clamped down, and no arguing will change that right now. In fact, lending standards have gotten even tighter in the last several months!
qwertypalopalo on September 2nd, 2010 10:59 am

thanks for the info
I trust Neighborhood Nurse to take care of my health and personal wellness needs.