The simple answer is probably not. But the truth in today’s market is that you may have to in order to get that dream home. Let’s run through this blow by blow:
What is an appraisal? An appraisal is an unbiased professional opinion of the value of a home that lenders use to determine what amount they will loan on a property. They aren’t always 100% correct but, it’s the ‘north star’ that a lender uses so, they matter. A lot. 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.
Once you have an appraisal, you may find that in today’s market, the appraisal is lower than the contracted sale price. If you’re a buyer, your options are to:
1) Renegotiate the sale price and buyer bring more money above the appraised value.
2) Seller to bring purchase price down to the apprised value or
3) Buyer walks away from the deal.
Now, obviously as a buyer you’d choose option 2 or 3 but, you’re already in love with the house so, lets discuss option 1 - paying more than the appraised value.
Essentially, paying more than the appraised value means that you’re paying more than the house is worth. You’re losing money right out of the gate. Given that home prices may halt or dip before they trend back up, why would you willingly lose money on day one?
In the hot sellers market of 2020 (and creeping into 2021) you may even be urged to put the amount you’re willing to bring in extra cash in the OFFER and not even wait for the appraisal. In other words, add a clause to your offer that says you’ll bring $X above appraised value in cash at closing. This is a risky way to go and will cost you more but, it may be what sets your offer apart from the 15 others the seller has.
The bottom like is this: If you pay more than the appraised value for your home, be prepared to ride out the market until your home surpasses the price you paid for it if you want to gain equity. You really need to crunch the numbers on what that means for your specific situation. How long will you have to live there to break even if the market halts? Do you feel confident in your job for that amount of time? Will your family outgrow this area or home too quickly?
And evaluate all other options of your offer before resorting to this tactic. Are there other ways to make your offer stand out that don’t involve bring more cash to the table than you ‘d intended?
It’s a jungle out there. It’s like Hunger Games but for houses. As agents we joke about it but, it’s a stressful time for buyers and, having a good agent who understands the market and is there for you at every turn is key. Creativity and tips may make the difference between getting your dream home and not.
Written by Sarah Whitely for Sarah Whitely Homes
303.246.1667
