Unless you’re living under a rock or you’ve ignored my posts regarding the current real estate market, you know that it’s a seller’s market. An intense seller’s market. There is an extreme demand with minimal (at best) supply. When the supply is far less than the demand, the value skyrockets. Homes, especially at the entry level price point, are selling in hours– and for over appraised value!
Before I can answer if you should pay over appraisal, the first question to ask and answer is WHY are people paying over appraised value?
There’s a very simple answer for this complex question: desperation.
Ask the average home buyer how long they’ve been searching for a home, and many will tell you their horror story. They’ve been looking for months, they’ve made multiple offers, they’ve been in bidding wars, they get beat out by cash.
Home buying is not fun right now. It’s not fun because there isn’t enough supply, so figuratively speaking, the vultures are all swarming the same property. People are becoming so exhausted and so desperate that they are willing to offer and pay over appraisal value just so they can own a home.
Another factor that is contributing to the desperation that home buyers are feeling is rising interest rates. Besides the fact that you pay MORE in interest with each rising point, it also REDUCES your buying power! For example, if the interest rates rise just 1%, you as the buyer lose approximately 10% in buying power. So what does that mean? If you were approved for $300,000 at 4.5% and then rates jumped to 5.5%, you are now only qualified to purchase $270,000.
The competition is still just as stiff, but you’ve now lost some of your power as a buyer which contributes to the feeling of desperation. I tell all my buyers that I work with: TIME IS NOT YOUR FRIEND. Interestingly enough, most don’t believe me (I mean it’s not like I do this every day of my life, right?). And then they get their initiation. And then they realize: TIME IS NOT THEIR FRIEND. And then the desperation kicks in.
So the million dollar question to ask is if you should ever pay over appraisal value for a home.
If you aren’t familiar with what an appraisal is in the home buying process, it’s a third party hired by the lender to evaluate a property and determine its value. The value of a home is not determined by the Realtor, the list price, or the home owner. The appraiser checks comps, conditions, and arrives at a number. It’s important to note, the bank relies solely on the appraiser’s opinion. For example, if you’re purchasing a home for $150,000 but the appraiser believes the value to be $135,000, the BANK WILL NOT GIVE YOU THE $150,000. The bank is only going to loan on the appraisal value of the home– which in most cases, if the appraisal is low, it kills the deal. If the appraisal is low, the seller either has to reduce the purchase price to the appraisal value or the home owner has to bring the difference in cash to the table.
When is NOT okay to pay over appraisal value?
- 99.9% of the time your rule of thumb should be to walk away if the appraisal is lower than the purchase price & the seller will not lower the price
- Definitely if you can’t swing putting 20% down, then paying over appraisal is out of the question since it will require even more down.
- Does the home still need significant repairs that will cost thousands of dollars? If you’re paying over appraisal for a home that needs thousands of dollars of work, you’re immediately upside down on the home– before you ever sink thousands more dollars.
- You’re doing it just because “I love that view out the kitchen window so much.” DON’T BUY WITH YOUR EMOTIONS.
- If the home is sitting in a large cookie cutter neighborhood, your comps are pretty set with a ceiling. Your particular property is not going to skyrocket in value over the other cookie cutter houses.
When is it okay to pay over appraisal value?
I’ve been the list agent on deals where the appraisal came back low. You know the appraiser was whacked out when doing the appraisal because the comps justify the list price. However, once you have a low appraisal, you’re stuck. And it sucks. I have never paid over appraisal, and I never will. That doesn’t mean other people haven’t– or shouldn’t.
- Does the home come with acreage? At least in our area, untouched acreage is the holy grail in real estate appreciation. As Mark Twain said “Buy land. They aren’t making it anymore.” A house sitting on 4 acres has a greater chance of large appreciation than a house in a cookie cutter neighborhood. If there’s potential to split off the acreage and sell to cover the over-paying or if there’s the opportunity to lease out some of the acreage to cash flow, then I think it’s okay to pay over appraisal in that situation.
- If the home is in the hub of a revitalizing area. For example, we have on particular historic area here that just a few years ago, you could have purchased a 900 square foot bungalow for around $75,000(ish). Today? That same bungalow hits the market at around $400,000…and needing significant updates. The revitalization in that area has been I.N.S.A.N.E. The people that bought in at $75,000 are sitting in a good place; however, this kind of appreciation and revitalization is the exception- NOT THE NORM. And again, this is the gambling part of real estate– betting on an area to be the next hub of revitalization.
- When you have money to lose and willing to buy with your emotions- not your head. This is what accounts for most cases of people buying over appraisal value– they are buying on their emotions: love, desperation, hope, etc. Is that good business? No. Can you get burned that way? Yes. Can you make money that way? Potentially. You will never, ever find me paying over appraisal for a property. It just won’t happen until snow balls fly in hell. It’s risky. It’s emotional. And it’s ill-advised. That being said, if you are willing to risk sitting in an upside down position on your home value and/or you are willing to lose money for the sake of getting the house, then proceed. If I was your Realtor, I’d advise you it wasn’t a smart choice, but it is YOUR choice.
Over on my Instagram account, I recently did a survey. I wouldn’t consider this some ground breaking, super accurate survey, but I wanted to know what my followers thought on this issue.
72% Would NOT pay over appraisal value
28% Would pay over appraisal value
I find this so interesting! I’d love to know the motivation behind those 28%. Are you one of them? Tell me your thoughts & why you would or would not pay over appraisal value!