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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  • Joe S.Pro Member
    Investor · San Antonio · Member since 2020 · 3k+ posts · 3k+ votes
    2y

    From the limited information that I read that you wrote here’s how I see it.
    1. The agent suggested the price based upon the sellers wish price.

    2. The agent then brought the property/deal to you. And with some steering and price suggestions the offer was made.

    3. Your friendly agent was also working on the sellers behalf.

    4.It could be argued that you was double teamed. 

    5. You could use the appraisal/ appraiser as a way of leveling the plan field..

    P.S  
    Keep in mind you got to keep your cards close to your chest because the agent is working for the seller.

    1Reply
  • Jay Lutz
    Member since 2024 · 18 posts · 5 votes
    2y

    Could there be something you don't know about the property that will soon change the income you're projecting? A friend was going to offer on a property until she learned that a warehouse was going to be built on the rural land across the street.... not quite the neighbors she had in mind for her target tenants.

    You can typically get better cash flow (because the property is cheaper) in areas that don't really appreciate over time (the "bad" parts of town). You may have other non-financial costs associated with this type of property that compensate for the greater cash flow (e.g. additional risk, needy tenants, tenants whose priorities do not leave room for taking care of your property, etc.).

    It may make sense to "overpay" for a property that won't cash flow initially if you know that the value of that property will skyrocket in a couple years (say, because Amazon is building its new headquarters a bus stop away, or you're a geologist who knows there's probably oil under that grass). If you know you won't make money this year, but you can sell the property for an extra 30% next year, that's a great ROI.

    0Reply
  • 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
  • Bonnie Griffin KaakePro Member
    Real Estate Consultant · Denver, CO · Member since 2021 · 661 posts · 389 votes
    2y

    @Alec Jacobs You said "My agent gave me first dibs". If you don't have a contract with that real estate agent, the agent works for the home seller, not you. This is especially true if the agent who represents the seller is at the same real estate agency as the agent you are working with. Yes, it can be an advantage to know when a new property comes on the market in a buyer's market. You are most likely paying that $20K extra because both agents work for the same company and have that early information. 

    [email protected]303-475-4459
    0Reply
  • Mike K.
    Member since 2024 · 84 posts · 106 votes
    2y
    Quote from @Alec Jacobs:

    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!


     I've been an appraiser for 20 years and I review other appraiser's work for a living. I think I'm qualified to address your question. Remember that an appraisal is just an OPINION of value.  Buyers and sellers in the marketplace set the actual market value. I have seen some pretty poor appraisals with value opinions that are not well supported or credible. Take a look at the comparable sales used in the appraisal.  Are they from the same neighborhood or market area? Are they truly comparable homes?  Are they recent, or dated over 6 months old?  The answer to these questions will determine whether or not the appraiser's opinion is credible.

    1Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    2y
    Quote from @Mike K.:
    Quote from @Alec Jacobs:

    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!


     I've been an appraiser for 20 years and I review other appraiser's work for a living. I think I'm qualified to address your question. Remember that an appraisal is just an OPINION of value.  Buyers and sellers in the marketplace set the actual market value. I have seen some pretty poor appraisals with value opinions that are not well supported or credible. Take a look at the comparable sales used in the appraisal.  Are they from the same neighborhood or market area? Are they truly comparable homes?  Are they recent, or dated over 6 months old?  The answer to these questions will determine whether or not the appraiser's opinion is credible.

    Unless you are getting bank financing, then the appraisal is nothing short than the word of God.
    0Reply
  • Mike K.
    Member since 2024 · 84 posts · 106 votes
    2y
    Quote from @Joe Villeneuve:
    Quote from @Mike K.:
    Quote from @Alec Jacobs:

    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!


     I've been an appraiser for 20 years and I review other appraiser's work for a living. I think I'm qualified to address your question. Remember that an appraisal is just an OPINION of value.  Buyers and sellers in the marketplace set the actual market value. I have seen some pretty poor appraisals with value opinions that are not well supported or credible. Take a look at the comparable sales used in the appraisal.  Are they from the same neighborhood or market area? Are they truly comparable homes?  Are they recent, or dated over 6 months old?  The answer to these questions will determine whether or not the appraiser's opinion is credible.

    Unless you are getting bank financing, then the appraisal is nothing short than the word of God.

     Not true.  I get borrowers challenging appraisals all the time. In some cases the borrower complaint has merit and a 2nd appraisal is ordered.  If the lender discovers "a deficiency" in the appraisal that is not resolved by the appraiser, then the lender can order a 2nd valuation. The lender cannot order a 2nd valuation simply because the borrower thinks the appraised value is too low. 

    1Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    2y
    Quote from @Mike K.:
    Quote from @Joe Villeneuve:
    Quote from @Mike K.:
    Quote from @Alec Jacobs:

    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!


     I've been an appraiser for 20 years and I review other appraiser's work for a living. I think I'm qualified to address your question. Remember that an appraisal is just an OPINION of value.  Buyers and sellers in the marketplace set the actual market value. I have seen some pretty poor appraisals with value opinions that are not well supported or credible. Take a look at the comparable sales used in the appraisal.  Are they from the same neighborhood or market area? Are they truly comparable homes?  Are they recent, or dated over 6 months old?  The answer to these questions will determine whether or not the appraiser's opinion is credible.

    Unless you are getting bank financing, then the appraisal is nothing short than the word of God.

     Not true.  I get borrowers challenging appraisals all the time. In some cases the borrower complaint has merit and a 2nd appraisal is ordered.  If the lender discovers "a deficiency" in the appraisal that is not resolved by the appraiser, then the lender can order a 2nd valuation. The lender cannot order a 2nd valuation simply because the borrower thinks the appraised value is too low. 

    You just made my point.
    0Reply
  • Gary Swank
    Real Estate Agent · Pittsburgh, PA · Member since 2014 · 821 posts · 255 votes
    2y

    Hi Alec, Let me give you this scenario. Let's say you buy this property but for some reason have to resell it soon thereafter. You're already $20k in the deficit.  Are you prepared to deal with that? Feel free to reach out if you would like to talk further.

    0Reply
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