So my partner came up with a creative way around an appraisal issue and I'm wondering what you all think!  

- Buyers are prequalified based on debt/income for 300k debt.

- Buyer submits offer to buy house at 250k

- House appraisal comes in at 230k

Now this is where it gets interesting...

- Seller offers to owner finance the deficit in the appraisal of 20k.

- Seller does this by offering terms of a loan and is willing to take second position behind primary loan.  

Anyone done anything like this?  It holds people accountable to these high offers we are experiencing in todays market.  If they are willing to purchase the house for 250k,  this provides everyone a wayto be happy.  

Thoughts?  

Why would a buyer want to pay above apprised value ? Off memory, but I want to say lot of my highest and best offers were contingent upon the appraisal value meeting or exceeding.

Matt K, it seems that a lot of appraisers lately haven't quite kept up with how fast the market in many areas is rising. I have a townhouse that I plan on listing at 150k(and will sell quick for that) that only appraised for 130k...But it appraised for 129k 3 years ago. I don't know if because of lack of inventory or other factors but buyers will pay what they want to pay. 

In terms of a 2nd loan, what would the proposed length of term be for the buyer?

@Matt - If the house is worth more than the appraised value to the buyer, this provides a way to make it happen.  

@Joseph - I have offered 5% interest amortized over 5 years.

Their lender will have to approve it of course.

All the money is really made in the front end of the sale so What am I missing here ? Only a moron would pay 20k more than it’s worth ! This is investing ..your trying to make money , not lose it !

@Michael Ramsay

In theory, this would work, I think you two biggest risks are. 

1. This has to be disclosed to the lender which would change their debt to income ratio as they have a second mortgage on the home. So they may no longer qualify. Getting the underwriter to approve is also a risk.

2. Your loan for the 2nd would have to be in the 2nd position so if they buyer closed and never made a payment forclosing would be much harder. 

What is really happening in the market are buyers are offering higher expecting the home not to appraise then expecting the seller to drop the price because as mentioned above buyers don't want to pay above appraisal price. I would never advise a buyer client to do that as you can pull an appraiser who might just hit value.

I push comparables when I list a home to make my sellers more money but I know I have to sell it to the appraiser too. Really how the value is determined is what you will sell it for as a seller, what a buyer will pay and what a bank will lend they all have to balance. 

@dennis - the value of anything is determined by how much someone is willing to pay.  Also this is a beneficial SELLERS solution.

@becca - thank you for a very good response!