Should I pay $20k over the appraisal value

Pittsburgh, Pennsylvania
General Real Estate Investing
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Should I pay $20k over the appraisal value

Alec Jacobs
New to Real Estate · Industry, PA · Member since 2023 · 65 posts · 52 votes

Hello everyone, I have a weird scenario that I have been really wrestling with lately.

I am in the middle of buying a home and the appraisal came back $40k under my offer. The seller said they would come down $20k and initially I was pretty happy. The deal penciled in at my initial offer and now it pencils even better. But just because it pencils in $20k above its value doesn't mean I should buy it that high right? 

I know people pay over the appraisal in competitive markets but my situation is not ordinary. My agent gave me first dibs with this property since she works with the seller so I wasn't bidding against anyone else. I am new as well so I don't know how competitive the market is but I doubt that anyone would pay that much over appraisal. But, regardless of speculation, I believe there is no reason to overpay $20k on a property's appraised value unless it's absolutely necessary. The market I am in is Beaver County, specifically Ambridge, and again I am new and do not know the market well and maybe homes are being bought for more than they're worth but from what I've seen I don't think so.

I have been going back and forth with this for a while and I should've posted sooner but any insight would be awesome. I know there is probably not a 100% right choice but paying $20k over without having to seems illogical in general and I would like to know everyone's thoughts.

Thank you so much!

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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
2y

Your first problem, and mistake, is you don't know your market.  NEVER buy in any market until you know it.  Knowing it, is based on numbers with $$$ in front, not %%% behind. 

Knowing it means understanding what the potential (real) cash flow will be, based on what you are looking to pay.  Actually, that's backwards.  You need to start with what cash flow you need, then work backwards until you find out the maximum you can pay to maintain that cash flow...and DON'T pay more than that.

Knowing it means you need to know what the value of that home is, based on the immediate area (micro-market) and the size of that property.  Don't include properties outside of a 1 mile radius, or properties that are not within 10% higher or lower of the size of the property in question.  The market sets the value based on all the properties in that micro-market that are the same.  Don't include properties that are too large or small.  they mean nothing, but they are usually included in the Agents analysis to make the property look like it needs to.

Include the most recent sales, and work backwards from there towards the older ones.  There may be a trend of sales going up, down, or stabilizing.  The upwards trend MAY allow you to over bid, but not always.  A downward one usually means you should bid lower.  In all cases, you NEVER bid more than what your analysis tells you is your maximum, which is starts with your needs for profit and/or cash flow.

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  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    2y

    Talk to the agent and find out why they priced it as high as they did-ie what are the comps.  did the appraiser mess up and go too low or did the realtor list it too high?

    1Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    2y

    Switch lenders, get a new appraisal. I think youll be surprised when the 2nd one doesnt come in low.

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    2y

    Your first problem, and mistake, is you don't know your market.  NEVER buy in any market until you know it.  Knowing it, is based on numbers with $$$ in front, not %%% behind. 

    Knowing it means understanding what the potential (real) cash flow will be, based on what you are looking to pay.  Actually, that's backwards.  You need to start with what cash flow you need, then work backwards until you find out the maximum you can pay to maintain that cash flow...and DON'T pay more than that.

    Knowing it means you need to know what the value of that home is, based on the immediate area (micro-market) and the size of that property.  Don't include properties outside of a 1 mile radius, or properties that are not within 10% higher or lower of the size of the property in question.  The market sets the value based on all the properties in that micro-market that are the same.  Don't include properties that are too large or small.  they mean nothing, but they are usually included in the Agents analysis to make the property look like it needs to.

    Include the most recent sales, and work backwards from there towards the older ones.  There may be a trend of sales going up, down, or stabilizing.  The upwards trend MAY allow you to over bid, but not always.  A downward one usually means you should bid lower.  In all cases, you NEVER bid more than what your analysis tells you is your maximum, which is starts with your needs for profit and/or cash flow.

    7Reply
  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    2y

    You have gotten gotten good advice from the above. I have a couple of thoughts - #1- how do you know your real estate agent is working for you? And why would you ever think of trusting her? #2- have you done a deep dive on your research? What is that house really worth in your estimation, not anyone else's?

    The other thing is, there are two types of appraisals IMO  - a bank appraisal and a private appraisal. The bank appraisals, in my experience, always come in low. You could hire an appraiser on your own and tell him you want to know what the property is worth, not whether or not it will cover the loan. But you're wasting your time until you know what that property is worth in your view and compared to the real market.

    3Reply
  • Jeremy TaggartBusiness Member
    Real Estate Agent · Pittsburgh, PA · Member since 2014 · 850 posts · 646 votes
    2y

    @Alec Jacobs if you want to post the details on the property or DM them to me I can let you know if it's worth buying or not. I own quite a few units in Ambridge and know the town like the back of my hand.

    ARV's aren't super high there though so 20k over appraisal I am likely to say that's not worth pursuing for a multitude of reasons but I can elaborate more knowing the actual details of the property itself.

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  • Rashid Khalil
    Member since 2022 · 88 posts · 29 votes
    2y
    Quote from @Joe Villeneuve:

    Your first problem, and mistake, is you don't know your market.  NEVER buy in any market until you know it.  Knowing it, is based on numbers with $$$ in front, not %%% behind. 

    Knowing it means understanding what the potential (real) cash flow will be, based on what you are looking to pay.  Actually, that's backwards.  You need to start with what cash flow you need, then work backwards until you find out the maximum you can pay to maintain that cash flow...and DON'T pay more than that.

    Knowing it means you need to know what the value of that home is, based on the immediate area (micro-market) and the size of that property.  Don't include properties outside of a 1 mile radius, or properties that are not within 10% higher or lower of the size of the property in question.  The market sets the value based on all the properties in that micro-market that are the same.  Don't include properties that are too large or small.  they mean nothing, but they are usually included in the Agents analysis to make the property look like it needs to.

    Include the most recent sales, and work backwards from there towards the older ones.  There may be a trend of sales going up, down, or stabilizing.  The upwards trend MAY allow you to over bid, but not always.  A downward one usually means you should bid lower.  In all cases, you NEVER bid more than what your analysis tells you is your maximum, which is starts with your needs for profit and/or cash flow.


     great advice, thanks

    0Reply
  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    2y

    1) why did she give YOU first dibs over her “other/better/experienced” clients?

    2) I believe she is legally obligated to look out for the seller’s interests over yours. 

    Neither of these is a reason not to buy if you have the spare $20k and the deal still works for you. Very few BP members regret any property they bought because of price. Many regret the properties they didn’t buy because of the price. They are just reasons to be wary. 

    Ps. Is this $20k over on a $200k property (10%) or a $400k property (5%), that too makes a difference. Is there anything else you can get thrown in? How about some closing help? You were interested when it was $20k more either this is now a good deal or you really need to go back to the drawing board and learn what properties are worth. Is this a neighborhood full of nearly identical properties you can use at comps to determine the value? If you’re excited and it pencils you’ll make up the overpayment bs not getting started. If you’re not excited. Ask for $5k in closing help, just to help with the extra $20k you have to put down. 

    Pps. Does your lender have any local experience? Ask them if they think the appraisal came in low. Look at the houses the appraiser used for comps. Are they good comps base on location and time of sale? (Is it a low inventory area where they used comps miles away 6 months ago?) is the appraiser local to know the market? Good luck. 

    2Reply
  • Alec Jacobs
    OP
    New to Real Estate · Industry, PA · Member since 2023 · 65 posts · 52 votes
    2y

    @Bruce Woodruff

    Thank you for your input! For context the appraisal took longer than it was supposed to. From what I heard the initial guy they sent out had a hard time coming up with an appraisal and they sent out a very experienced (17 years) appraiser who came up with the value. My agent and lender were trying to see if anything was wrong with the appraisal but as I said the appraiser knew what he was talking about. I have comped it myself and it falls in line with what it is appraised for.

    0Reply
  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    2y
    Quote from @Alec Jacobs:

    @Bruce Woodruff

    Thank you for your input! For context the appraisal took longer than it was supposed to. From what I heard the initial guy they sent out had a hard time coming up with an appraisal and they sent out a very experienced (17 years) appraiser who came up with the value. My agent and lender were trying to see if anything was wrong with the appraisal but as I said the appraiser knew what he was talking about. I have comped it myself and it falls in line with what it is appraised for.


     Then in my opinion, the game on for you is to decide if you appreciation potential is worth it. I would rather buy a property for appreciation anyway. But remember bank appraisals are still typically low, so you probably have some wiggle room there.

    Can you add more equity into the property by fixing it up, or adding amenities that it does not already have?

    0Reply
  • Nicholas L.Pro Member
    Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
    2y

    @Alec Jacobs

    i have questions!

    is this for a primary residence, or an investment?  what's the purchase price?  what kind of financing are you using?  what do you think of the street / neighborhood?  what does it mean that your agent gave you "first dibs"?  is the agent representing you and the seller?

    1Reply
  • Christie Gahan
    Investor · Hillsboro, OR · Member since 2016 · 304 posts · 153 votes
    2y

    What price point are you at?  $20k on 1,000,000 is nothing.  $20k on $100k is a problem.

    Getting a comp or appraisal on a suburban development is easy.  They only build like 4 floor plans so you have an easier time getting a comp.  Is there something unusual about this house or lot that makes it hard to find a comp.?  For example, I looked at a house on an acre lot but all of the other big lots had already been split and developed.  There is an issue there.  A residential appraiser will not put as much value on the land as a commercial appraiser or builder might.  But, as it is a personal residence, the bank will want a residential appraiser.  

    No shame in backing out of a deal.  Happens all the time.  Do what is best for you.

    0Reply
  • Alec Jacobs
    OP
    New to Real Estate · Industry, PA · Member since 2023 · 65 posts · 52 votes
    2y

    @Bruce Woodruff

    It is basically fully renovated. It would be hard for me to add equity unless I would dd square footage

    0Reply
  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    2y
    Quote from @Alec Jacobs:

    @Bruce Woodruff

    It is basically fully renovated. It would be hard for me to add equity unless I would dd square footage

    Then you either need to make really sure that it's going to appreciate a lot over the next few years, or just pass on it.
    1Reply
  • Jessie Dillon
    Investor · Hopedale, MA · Member since 2021 · 321 posts · 212 votes
    2y

    if the deal still pencils with multiple strategies & you're planning to hold it long term, 20k over (in a higher cost market especially) will probably be chump change down the line. in general, it's good to not miss out on a deal just because you want a homerun deal. taking base hits get us further than waiting around for home runs. just keep in mind that if you have to come to the table with an extra 20k down (which you probably will bc the bank will only lend on the appraised value or PP whichever is lower), and you have to sell for some reason soon, you're probably losing that 20k. a risk you may be down to take if you really know your numbers, have multiple backup plans, and are in it for the long haul!

    0Reply
  • Justin Summers
    Member since 2020 · 61 posts · 17 votes
    2y

    Just so many questions and variables.. most of which have been addressed. I'll Add.

    1. The appraisal is not the value. It's someone's opinion of value and it's usually wrong.. I can be higher or lower than the actual value. The value is what a buyer will pay on the open market. 

    2. $20,000 off a million is different than $20k off a $100,000 purchase price. You should think in percentages not dollars.

    3. You don't know the market pricing. That is a huge problem.. Most likely the realtor you a trusting is working for the best interest of the seller not your best interest. 

    Honestly, and I rarely say this.. You don't know enough to be buying this property. You probably should find a realtor that knows the market inside and out and pay them to give you advice. Don't have to be a full commision just get professional advice.
      

    4Reply
  • Justin Summers
    Member since 2020 · 61 posts · 17 votes
    2y
    Quote from @Jeremy Taggart:

    @Alec Jacobs if you want to post the details on the property or DM them to me I can let you know if it's worth buying or not. I own quite a few units in Ambridge and know the town like the back of my hand.

    ARV's aren't super high there though so 20k over appraisal I am likely to say that's not worth pursuing for a multitude of reasons but I can elaborate more knowing the actual details of the property itself.


     Take this guy up on this offer.. This is like your golden ticket!

    0Reply
  • V.G JasonPro Member
    Investor · Member since 2022 · 3k+ posts · 3k+ votes
    2y

    This is why BP is a golden resource. You have multiple very intelligent Pittsburgh-specific folks that can vet you this answer.

    Instead of trusting that other agent--shady or not-- get multiple sources on it after your analysis. Which appears you have already done.

    3Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    2y
    Quote from @Justin Summers:

    Just so many questions and variables.. most of which have been addressed. I'll Add.

    1. The appraisal is not the value. It's someone's opinion of value and it's usually wrong.. I can be higher or lower than the actual value. The value is what a buyer will pay on the open market. 

    2. $20,000 off a million is different than $20k off a $100,000 purchase price. You should think in percentages not dollars.

    3. You don't know the market pricing. That is a huge problem.. Most likely the realtor you a trusting is working for the best interest of the seller not your best interest. 

    Honestly, and I rarely say this.. You don't know enough to be buying this property. You probably should find a realtor that knows the market inside and out and pay them to give you advice. Don't have to be a full commision just get professional advice.
      

    Point by point:
    1 The appraisal impacts your financing.  It is the final word.  True, both parties don't have to agree.  That means if the asking price is over the appraisal by $20k, the buyer needs to bring $20K more in cash to buy it.  That's a $20k increase in cost to the buyer.  You make money by paying less for the property.  Cash out of pocket is the only cost to the buyer.  The tenant pays the rest, as long as the property has positive CF.
    2 - NEVER make a decision based on percentages.  Whether the property is a $1M deal or $100k deal, the cost is still $20k over to the buyer.
    3 - Two Parts here:  1 - Correct.  If you don't know the market pricing, don't buy it: 2- If the agent is the seller's agent, even if you hire them as your agent to buy, their first responsibility is to the seller
    3Reply
  • Alec Jacobs
    OP
    New to Real Estate · Industry, PA · Member since 2023 · 65 posts · 52 votes
    2y

    This is amazing stuff. Thank you everyone. Again I am new at this and I really do appreciate all of your time and concern. 

    1Reply
  • Ryan KellyBusiness Member
    Real Estate Broker · Austin, TX · Member since 2018 · 1k+ posts · 1k+ votes
    2y

    @Alec Jacobs you are going to get 1,000 opinions with this question. I would keep it simple. If you like the property, buy it. If you aren’t happy, renegotiate and terminate if needed.

    If you are keeping the property for decades, the appraisal won’t matter much.

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  • Mark LawsonPro Member
    Member since 2023 · 1 post · 0 votes
    2y
    0Reply
  • David Krulac
    Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
    2y

    I agree with much already posted especially by @Joe Villeneuve.  I am not familiar with Industry, so can't speak to specifics.  But in general, an appraisal is somebody's opinion of value.  Often times I have disagreed with the appraisal values. Knowing values is a very important component of your investment arsenal of knowledge.  You need to know value, be able to see value both present and future value. We have bought hundreds of properties at auctions almost always without an appraisal, relying on our own judgement as to the value. After buying and selling over 1,000 properties, I'm pretty comfortable with my own judgement for value in the areas that I'm usually buying.  But I never have bought anything in Industry, so have no idea on values there.  I would look for comps of similar properties sold in the last 6 months, as similar as possible to the subject, and as close proximity to the subject as possible.  So besides penciling income/expenses and profit/loss, I would also be looking for comparable sales to justify your purchase price.

     David Krulac Bigger Poclets Podcast #82

    3Reply
  • Rick Lee
    Member since 2024 · 4 posts · 2 votes
    2y

    Hello, I am new to this forum, but have been involved with real estate for 25 years. My team and I purchase raw land, entitle, add-value, and subdivide lots for residential projects to resell to national home builders or other developers. 

    When I make an offer to purchase raw land, sometimes it can be very difficult for me to give a fixed purchase price until we complete our due diligence on the property. We also rely on our own experience, market data comps and appraisals to determine the fair market value. 

    In your case, if the seller is not willing to sell it to you at the appraised value, then you should first express to the agent that you are willing to walk away on from the deal if there is a deadlock on the fair market value price. Once they realize that you are firm and willing to walk away, then you control the deal by giving the buyer the opportunity for them to purchase their own appraisal. 

    Below I have included a few clauses that we use in our contracts, should you decided to continue your negotiations with the seller. 

    "The Fair Market Value can be determined on the basis of the average of the two appraisals.
    In all cases, each appraiser selected by a party, must be an “MAI” qualified and licensed appraiser or must otherwise be a member in good standing of the local AIREA, and must not be affiliated with either party. Each party will pay the cost of its own appraiser."

    Hope this helps. Keep learning the art of negotiating deals and you will do well. 

    1Reply
  • Steve K.
    Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes
    2y

    Good advice here. I would just add that you should probably do a deeper dive into your underwriting. You say it pencils out, but are your inputs and assumptions correct? For example a mistake that I see a lot of beginners making is using a percentage of rent like 10% for maintenance, repairs, capex. What is that actual number going to cover capex issues and is it enough to maintain the property over time (at least $300-500/month as a rule of thumb)? Are you prepared for vacancy loss, taxes and insurance to go up next year, etc? Take a look at all the actual numbers because my suspicion is your underwriting may not be accurate, just from knowing how hard it is to find properties that pencil out these days in general, and from seeing how many beginners are underwriting their deals...

     Paying a bit over appraised value wouldn't be a hard no for me in every circumstance, but of course I much prefer to capture some equity on purchase, so I'd have to be 100% confident in my underwriting and strategy for the property. 

    1Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    2y
    Quote from @Ryan Kelly:

    @Alec Jacobs you are going to get 1,000 opinions with this question. I would keep it simple. If you like the property, buy it. If you aren’t happy, renegotiate and terminate if needed.

    If you are keeping the property for decades, the appraisal won’t matter much.

    Like meaning what?  The color of the walls?  The sway the grass is kept?  The (fill any of many descriptions you would find on a REA listing here)?
    This is a REI, not a property.  Investment means money only.  If you mean "like it" because you will be able to flip it, or cash flow it, then I agree.  Other than that, "like it" is an emotional issue, and has no place in REI.
    If you are keeping the property for decades, and it will take decades for it to be profitable, you are losing money.  It's as mathematical certainty.
    1Reply
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