Paying Over Appraised Value


Aug 13, 2021 Homebuyer blog


With the Florida real estate market being a seller’s market, buyers are becoming more competitive by the day. A seller’s market is where the inventory is few, but there are plenty of buyers in the market. Unfortunately, this imbalance often leads to buyers becoming more willing to crush the competition by paying over the appraised value.

Paying over appraised value means that if a property is appraised at, let’s say, $380,000, the buyer agrees to pay more than that. So, for example, the buyer may decide to pay $20,000 more than the appraised value on the contract. That means the buyer has agreed to pay $20,000 on top of the appraised value, but not more than that. So the total purchase price of the home is $400,000. And this scenario has become quite common in the Florida housing market today.

Brandon Brotsky of Reach Home Loans, one of Florida’s leading mortgage lending agencies, warns homebuyers planning to pay over the appraised value. He says that before you agree to pay more than the appraised value, make sure that it won’t cause you any trouble.

Something to Keep in Mind

Homebuyers are willing to pay more in Florida today. That’s because they know that houses are selling like hotcakes, and buyers are coming in droves. Some buyers sign contracts with clauses that say they are willing to pay more than the appraised value. They probably feel that another buyer will snatch the house from them if they disagree with the terms.

“I feel there’s some level of confusion for some buyers out there who are agreeing to these types of terms. Where they do not understand that if they’re getting a mortgage on the property, a lender cannot lend on the portion of the value that’s under the appraisal.”

From a Lender’s Point of View

What most buyers don’t know is that lenders can only lend on what is the appraised value. That means the loan will not cover the amount that you agreed to pay if it’s over the appraised value. So if a buyer agreed to pay $400,000 on a property and the appraised value is $380,000, the buyer will shoulder the $20,000 difference. But the good thing is, the down payment will be based on the appraised value, not on the contract price.

“A lender can only lend on the lower of the contract price or the appraised value.”

Be Careful Before Agreeing to Terms

If the contract price is $400,000 and the appraised value is $400,000, then that’s good news. That means that the lender can lend based on $400,000. However, if that’s not the case, whatever percentage you are borrowing will be based on the appraised value. For example, the contract price is $400,000, and the appraised value is $380,000.

Then the percentage of what you’re borrowing will be based on $380,000. Hence if you’re borrowing 95%, then you’ll have to pay the remaining 5% down payment from out of your pockets. Plus, you’ll also have to pay the $20,000 shortage that you agreed to.

“Before agreeing to terms like this, make sure you’re in a financial position to be able to cover that difference. You always need to plan on worst-case scenarios, and the worst-case scenario is going to be that the property under appraises, and you have to cover the amount in this particular situation.”

Final Thoughts

Paying over the appraised value can make your offer more attractive to the seller. It will also make you more competitive in Florida’s seller’s market. However, you have to make sure that you don’t get in over your head with an offer that you can’t fulfill. It will only make your home-buying experience a lot more troublesome than it ought to be.

Do you need help making sure you don’t make a bad financial decision when buying a home? Then, Reach Home Loans is the perfect partner for you. With our years of experience guiding home buyers into their new homes, we can make it happen for you, too. Call us now at 954-703-1465 to get started!

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