- What is Home Appraisal and How Does it Work?
- Why Appraised Values and Sale Prices May Differ
- Implications of Selling Above Appraised Value
- Strategies for Sellers
- Guidance for Buyers
- Real-world Scenario and Outcome
- Bridging the Appraisal Gap with FastExpert
- Frequently Asked Questions
Can You Sell a House Above the Appraised Value?
Few things can be as polarizing or perplexing as discovering a difference between a property’s appraised value and its sale price. This discrepancy often sparks a slew of questions, concerns, and strategic decisions for both buyers and sellers alike.
The impact extends beyond numbers and costs—it can impact future negotiations or financing options and can even influence long-term investment returns. But why does such a gap exist in the first place? And what are its implications for all parties involved?
Wondering if you can sell your home for more than appraisal value? Connect with real estate experts on Fastexpert who can guide you on negotiating a sale price above appraisal. Get your questions answered for free.
What is Home Appraisal and How Does it Work?
A home appraisal is an evaluation of a property’s market value conducted by a licensed appraiser. Appraisals are typically required when purchasing, refinancing, or selling a home with a mortgage loan involved.
The lender will order the appraisal to ensure the home is worth at least the borrowed or purchased amount. Appraisal fees generally range from $300-$450 and are paid by the borrower.
During an appraisal, the appraiser will inspect the home’s interior and exterior, noting details like square footage, floor plan, condition, and amenities. Recent sales of comparable properties can then be analyzed to determine value.
The appraiser provides an objective, expert opinion on the property’s fair market value in an appraisal report. The bank uses the appraisal to justify and protect its investment.
When getting financing, whether on a new purchase or refinance, the home must appraise high enough to support the new loan amount, or the loan will not be approved. The home appraisal gives all parties involved an independent, professional assessment of the home’s true market value during the transaction.
Why Appraised Values and Sale Prices May Differ
Appraisals can diverge from actual listing and sale prices for several vital reasons. The appraiser is tasked with conservative risk reduction for the mortgage lender, meaning that they need to be objective and not consider factors like a hot market.
But real estate transactions also incorporate more dynamic factors that impact value. Several key factors lead to a gap between a property’s appraised value and its actual listing or sale price.
Appraisals look at recent comparable sales to estimate value. In a shifting market, rapid home price appreciation may outpace the comparable sales an appraiser uses, resulting in a value lower than current market prices.
On the other hand, in a declining market, it’s possible for a home to appraise higher than the sale price.
Unique Home Features
Appraisers focus on objective factors like square footage. The appraisal may not fully capture custom finishes, rare lot attributes, or recent luxury upgrades that impact a home’s value.
For example, if a home has a uniquely high-end kitchen, tennis court, or other stand-out feature that surpasses comparable properties, it may be difficult for an appraiser to substantiate appropriate value for these features.
Buyers bid up prices beyond typical appraised values when the housing supply is extremely tight.
With few similar homes for sale, appraisals have limited data to derive an accurate value, making financing in these markets challenging.
Unlike appraisers, home buyers often consider subjective factors like a home’s aesthetic appeal or how well it fits their needs. This emotional component can motivate buyers to pay more than the objective appraisal to win a home.
Some buyers are willing to exceed the appraised value if they see upside potential from renovations, development opportunities, or strong market growth in the area. Appraisers take a more conservative view.
The appraiser’s primary role is risk reduction for lenders. Buyers may prioritize different factors, leading to sales prices that legitimately surpass appraised worth. Understanding these diverging motivations helps explain valuation gaps.
Appraised Value vs. Market Value (Sale Price)
The terms “appraised value” and “market value” are often used interchangeably, but they are not synonymous. While both aim to establish the worth of a property, they do so through different methods, for different purposes, and often at different times.
The appraised value is the unbiased estimate of a property’s worth conducted by a certified professional known as an appraiser. This valuation is primarily used for lending purposes to ensure that a financial institution does not lend more than the asset’s worth.
The appraiser employs a standard set of criteria, including comparable sales data, the property’s physical condition, and its location, among other factors. It’s imperative to note that this value is ascertained at a specific point in time and is highly regulated to mitigate risks for lenders.
Contrastingly, market value is a more fluid concept that encapsulates what a property could potentially command in the current market based on buyer and seller interactions. It is subject to fluctuations in supply and demand, economic conditions, and even sociopolitical factors. Unlike appraised value, which tends to be more static and retrospective, market value is highly dynamic, reflecting real-time data and sentiments.
To simplify, think of the market value as “what a buyer will pay” and the appraised value as “what a bank thinks the asset is worth.” Banks want to ensure they are not lending more money than the property is worth.
Implications of Selling Above Appraised Value
When a property is listed or sold for a price exceeding its appraised value, it introduces a new set of variables that both sellers and buyers must conscientiously evaluate.
Selling above the appraised value may offer higher profits but poses risks, such as more days on the market, negotiation complications, and a higher chance that the deal will fall apart. Buyers purchasing above the appraised value face their own set of challenges, such as issues with financing or the potential of overpaying.
Conversely, buyers eyeing properties priced above appraised value face challenges in financing risk overpayment and must consider emotional factors associated with acquiring a dream home.
For the Seller
When a property is under contract above appraised value, sellers find themselves with the immediate prospect of higher profits, but other potential circumstances that could impact the sale, including:
- Potential Longer Time on the Market: The advantage of higher profits can be counterbalanced by an extended close date. Buyers may require additional time for financing or may request a secondary appraisal, adding extra weeks or even months to the process.
- Risk of Deal Falling Through: The risk of the deal falling apart increases when the sale price is higher than the appraisal. A lender will not provide a mortgage for an amount exceeding the appraised value, so the buyer may be unable to secure the necessary financing, which could lead to the dissolution of the deal.
- Possibility of Scaring Off Potential Buyers: Lastly, having your property under contract for an amount above the appraised value could deter other potential buyers from making backup offers. In a volatile market, backup offers can provide a safety net, but they may be scarce if the sale price is perceived as inflated.
For the Buyer
Being a buyer in a situation where the contracted sale price exceeds the appraised value presents its own unique set of challenges and considerations. Here are some of the key aspects to be mindful of:
- Financing Challenges
When the agreed-upon price surpasses the appraised value, it can be hard to secure adequate financing. Most mortgage lenders grant loans based on the lower of the sale price or appraised value, which means buyers may need to cover the shortfall out-of-pocket. This can be a significant financial strain and may even jeopardize the transaction if adequate funds aren’t available.
- Potential Overpaying
Paying above the appraised value raises the concern of overpaying for the property. While market conditions and personal valuation can justify a higher price, buyers should be aware of the risks. Overpayment can impact the buyer’s equity in the property and may make future reselling more challenging.
- Long-term Resale Considerations
When you pay above appraised value, it could set a higher baseline for future resale values, but there’s no guarantee the market will support this. Economic conditions change, and paying a premium today does not necessarily translate into a higher selling price down the line, potentially affecting long-term investment returns.
- Emotional Aspects of Securing a Dream Home
The emotional weight of securing what could be a “dream home” adds a final layer of complexity. While the sentimental value is hard to quantify, it can sometimes lead to impulsive decisions, including agreeing to a sale price above the appraised value. Although fulfilling a dream is important, it’s equally crucial to balance emotional factors with financial pragmatism.
Buying a house for more than the appraised value can be a result of emotional drive, market conditions, or simply a low valuation that needs to be redone.
However, no matter the cause, both buyers and sellers need to be aware of the implications of selling above the appraised amount.
Strategies for Sellers
What can sellers do to help a deal proceed when they are selling above the appraised value?
Situations under which you might sell a property above the appraised value can be if:
- It is a seller’s market, and home prices are increasing rapidly.
- The home has unique features or updates that exceed local comparables.
- Housing inventory levels are low, and there have been few recent comparable sales.
- There is unique investment potential for the property.
But in order to achieve a price above the appraised value, sellers need to implement strategies to communicate value and foster the deal’s close.
Justifying the Price
If you are selling above the appraised value, it’s important that you communicate the property’s value to buyers and their representatives.
To justify your pricing, you can:
- Explain special features that add value, like recent high-end renovations, rare lot sizes, or custom builds.
- Reference comparable sales that support your price point.
Provide evidence of favorable market trends that indicate rising values. If there are few truly comparable homes, emphasize your home’s uniqueness.
Every seller wants to get the best possible price for their home. However, with the appraisal coming in below the list price, there is a gap between your asking price and the appraised value.
As a seller, there are some strategies that can help you negotiate creatively to bridge that gap.
Consider offering closing cost credits or helping to buy down the interest rate. This allows the buyer to pay your total listing price while receiving financial concessions to offset the low appraisal. You can also explore adding value via home warranties or upgrades. With savvy negotiations, you can find a middle ground that satisfies both parties. Strategic concessions help professionally seal the deal at your ideal price point.
Targeting the Right Buyers
When facing a likely low appraisal, market your home to buyers who recognize value beyond the appraisal. This often happens in the luxury home market or investment market. Under these circumstances, target those with ample budgets who want the property for personal reasons.
Cash buyers can move quickly, while investors may see untapped potential. Reach out to buyers looking for rare attributes like a corner lot, custom build, or value potential. Emphasize aspects like location and family appeal.
The right buyer is out there who will pay above the appraisal for reasons the appraiser missed or cannot use. With strategic marketing tailored to buyers who appreciate the home’s unique intangibles, you can still achieve your asking price despite the low valuation.
Guidance for Buyers
Buyers get into a deal where they pay above the appraised fair market value for a myriad of reasons. When this happens, they need to assess whether they want to proceed with the deal or re-enter negotiations.
If they have an appraisal contingency, they usually have the right to walk away from the deal. If proceeding with the deal, they need to understand their financing options and the long-term implications of purchasing a property for more than its valuation.
Buyers have some negotiating power when facing an appraisal below the agreed purchase price.
- Compare the appraisal to recent comparable sales to justify a lower price.
- Ask the seller to provide credits for repairs or closing costs.
- Offer to meet in the middle between the appraised value and purchase price.
- Hire an independent appraiser for a second opinion.
Being reasonable but firm with negotiations can lower the sale price to align with the appraisal.
Exploring Alternative Financing
If negotiations fail, buyers have financing options to cover an appraisal gap.
- Request that the seller lower the price to the appraised amount
- Request a seller-financed second mortgage for the difference.
- Leverage cash reserves above the required down payment.
- Work with a mortgage broker to find another lender.
While not ideal, paying out of pocket above the appraised value may be worth it for the right home.
Understanding the Long-term Implications of Paying Above Appraisal
Paying above appraisal can affect long-term equity and investment returns. The home may take some time for its appraisal value to appreciate to its purchase price. If the market turns, buyers may even owe more than market value for years (meaning that the property is “underwater”), limiting financing and sale options.
However, unique property attributes and locations may justify overpaying. As a homebuyer, thoroughly weigh personal value versus strict financial return before finalizing a deal above appraisal.
Real-world Scenario and Outcome
Appraisal gaps are tricky in real estate transactions, but achieving your real estate goals is possible with careful strategy and understanding. Let’s consider some real-world scenarios.
An appraisal was conducted for a suburban residence at 123 Maple Street to establish its market worth after a contract is signed for a purchase price of $410,000. Factors contributing to its market value included its coveted location in a family-friendly neighborhood, a generous living space comprising four bedrooms and three bathrooms, a two-car garage, and impressive maintenance, including recent modern enhancements.
The appraiser also examined the recent transaction prices of similar properties in the vicinity, which ranged from $400,000 to $410,000. After evaluating all these elements, the house at 123 Maple Street was valued at $415,000.
In this situation, the appraisal justifies the purchase price and shouldn’t hinder the property transaction.
An appraisal was conducted for a suburban residence at 125 Oak Street to establish its market worth after a contract is signed for a purchase price of $410,000. Factors considered included its location in a neighborhood with an uptick in crime, living space consisting of four bedrooms and three bathrooms, a two-car garage, an updated kitchen, and a new roof.
The appraiser also examined the recent transaction prices of similar properties in the vicinity, which ranged from $370,000 to $385,000. After evaluating all these elements, the house at 123 Maple Street was valued at $390,000 as it was the nicest property compared to the comparables.
In this situation, the appraisal does not justify the agreed-upon purchase price of $410,000, which puts the buyer in a precarious position. The buyer has several options to navigate this discrepancy:
- Seek Another Appraisal – While the first appraisal was unfavorable, there may be room for another appraiser to evaluate the property differently, leading to a valuation closer to the purchase price.
- Alternative Financing – Since most lenders will only finance up to the appraised value, the buyer could consider taking out a personal loan to cover the difference, although this would likely come at a higher interest rate.
- Seller Concessions – The buyer could negotiate with the seller to cover part of the closing costs or provide other incentives that effectively lower the purchase price.
- Negotiate a Lower Purchase Price – Given the appraisal, the buyer has a strong case to renegotiate the purchase price to align it more closely with the appraised value.
- Use Cash Reserves -If the buyer has enough cash on hand, they can use it to cover the difference between the appraised value and the purchase price.
If you’re navigating a low appraisal, it’s best to work with your real estate agent to help you decide the best path for you and your personal finances.
Bridging the Appraisal Gap with FastExpert
When a property’s sale price exceeds its appraisal, sellers and buyers may wonder, “Can you sell a house for more than appraised value?” The answer is yes, through strategic navigation of this gap.
Appraisals aim for an objective valuation. But real estate transactions also factor in competition, emotions, and property uniqueness that appraisers don’t consider.
Bridging this appraisal gap requires understanding all perspectives, exploring creative financing, and negotiating win-win solutions. Sellers must justify elevated pricing, while buyers need to find alternative financing options.
Experienced real estate agents are invaluable for guiding both parties through these situations. If you are facing a home appraisal process dilemma, leverage the experts at FastExpert to get matched with a knowledgeable local agent. A trusted real estate agent makes all the difference in achieving your real estate goals despite appraisal challenges.
Frequently Asked Questions
Do homes sell for more than their appraised value?
Yes, homes can and do sometimes sell for more than their appraised value. This happens more frequently when inventory is low, or the market is competitive.
Can a second appraisal yield a different result?
Yes, a second appraisal could come in higher, as appraisals involve some subjectivity. However, there’s no guarantee a second appraisal will be higher.
What’s the impact of selling above appraised value on future property taxes?
Generally minimal impact. Property taxes are based on the assessed value rather than the sale price. Assessments may slowly increase but are not directly tied to the sale price.