As far as I have come to understand, a home's estimated value is based on comparisons to similar homes in terms of sq footage and acreage sold in the same area. The home we love, in our opinion (and certainly in the opinion of its owners) is in MUCH better shape than the homes that its estimate is based on - new plumbing, new roof, amazing landscaping, completely move-in ready, the best "curb appeal" of any comparable home. It is really the gem of the area. The problem is that the current owners need more than what they expect the estimate to be in order to leave. They have put a ton of work into the house in hopes of the market value increasing, but just discovered that the difference is negligible. We also agree that the house is worth more than the estimated value, nut the timing is just not working in either of our favors right now.

Is it in fact the case that a bank will not give a loan for a home over the market value (minus 20% down)?

What are your thoughts on buying a home for above its market value in general? It's obviously impossible to see the future, and although we think this area is on the up and up, we might be shooting ourselves in the foot when we try to resell in 7-10 years...

Any experiences in this realm?

Bad, bad, bad idea. You never want to own the nicest house on the block, as the other (worse) homes just bring your value down.

Sure, the market value (realistically) is just the value someone else is willing to pay for the home. However, in the real world (banks and mortgages), the market value of a home is determined by the comparable homes in the area (generally homes that sold within 1 mile and within the last 6 months).

Appraisers give adjustments for upgrades. For instance, if the subject property (the one that is being appraised) has a 3 car attached garage and all the comparables have 2 car garages, the appraiser would give the value of the subject property a positive adjustment.

So all these wonderful upgrades would be taken into account with an appraisal. Certainly not dollar for dollar, as generally bathroom/kitchen upgrades are the only ones that will even come close to dollar for dollar.

If the current homeowners owe more than the home is worth, they can work with their realtor and their lender to do a short-sale.

Sorry, forgot to answer the question.

In this situation the lender will use the LOWER of the appraised value or the purchase price to determine financing.

So if the home appraises at $100,000 and you are buying it for $120,000, then in order to put 20% down and avoid PMI, you would need to have your loan amount at 80% of $100,000 so a loan amount of $80,000 (as $100,000 is the lower of the appraised value or purchase price).

So you would need to put $40,000 down to avoid PMI.

Hope that makes sense.

The bank will look at the appraised value. The sellers can prepare for the appraiser by putting together a list of the improvements that the sellers made to the house. Their realtor can pull comparable homes and give a concise explanation of why those comps should be used and how the sellers' house is similar or how it's better. The appraiser doesn't have to use this information, but often will at least consider it.

The question is why would you want to pay more for a house than you have to? Even if you think that the house is truly worth what the sellers are asking, a low appraisal is a bargaining chip for you.

Thanks for your thoughts!

While a lower estimate is certainly a bargaining tool, a too-low estimate will simply mean (at least where we live) that sellers will have to wait out the market, and buyers like us will have very few options.

Our motivation in this particular case is that there is not another comparable house for us here. We are looking only within a very small radius, and most other homes have not been well-cared for (we do not want a fixer-upper, and most are not on the market anyway). Because we are voluntarily limiting ourselves in this way, we are willing to pay slightly more for our choice.

All in all, in order for this to work, the estimate will have to be better than anticipated by the sellers (fingers crossed!), and we both will have to compromise to some extent on the asking price. Only time will tell!

If the appraisal comes in lower than the asking, I believe the sellers can request another appraisal, which I think you can use when you're getting a loan should the figure be higher. If you have the cash, you could offer to split the difference with the seller if you really want this house and the seller won't budge.

Unfortunately the seller has no say, nor control, over the loan process for the buyer. An appraisal that is completed for the buyers loan will be what it is. Generally a purchase contract will include verbiage to allow the buyer to back out if the appraisal does not support the purchase price. The seller will not be able to request a 2nd appraisal, at least not one that would have any impact on the buyers getting a mortgage.

When I sold a house in 2009, the market was dropping and appraisers were beating homes up. The house I sold appraised $7k under the agreed upon purchase price. As the seller, I'm the one who ate it. I tried just about everything to get a few bucks out of the buyers, but to no avail. In general, it is the seller who eats the lion's share in this case. I was on a job relocation, so I didn't have much choice.

While the OP may think this is the best home for them, I would think long and hard about buying over the appraisal. This is just my opinion, the perfect house is always the next house. They come and go, be patient.

Of course some people have problems with an appraiser, but in general their job is to come up with as good an estimate as possible of the property's true market value. If they don't think the house is worth as much as you think it's worth, what makes you right and them wrong?

Targeting a very specific area and then falling in love with a particular home are two good ways to overpay.

If the appraisal comes in too low, either the seller has to lower the price, the buyer has to put more money down, or both. I don't think the lender really cares how much the house sells for, just about the loan-to-[appraised-]value ratio. To me, the upshot is that if you can't afford to put the necessary amount down to make up for the shortfall, then you can't afford to pay more than market value for a house.

Paying a lot more than appraised value seems like a bad financial idea imo.

However, it's your money, so *if* you have the money to do it...don't say we didn't warn you Remember that when you go to sell, you are very unlikely to find buyers who feel the way you do about overpaying for this house. (I agree with stannius - by 'have the money' I mean you have the cash to make a much larger down payment without having to change your financial goals or "make up" that cash in the future.)

A few random ideas:
+Consider entering a written option with the potential sellers, that if they decide to sell you get right of first refusal? That wouldn't obligate you and could keep your dream alive while you get some time to process the $ and emotional impacts. Imo do this only if the sellers are willing to do it for a token fee.

+If you are on the fence about your decision and have the $, you could hire an appraiser yourself (any bank would still hire their own, but at least you'd have a better idea). Makes the most sense if appraisal fee is a small amount relative to home value.

+There may be other ways to pay/get value to the sellers than overpaying for the house - buying some of their personal property (art, furniture etc.) or giving them a big discount on something they need & you do (say you have a woodlot & they have a wood stove). Check with a lawyer & accountant before suggesting anything to the potential sellers. This is still a financial cost to you, but perhaps not quite as out there.

My wife and I attempted to buy a Florida condo in 2009 and the appraisal was 11% lower than our offer. We really liked the place and were willing to split the difference with the seller, but she was barely willing to budge. It was an investment property for her and it didn't sell for 10 more months. The sales price was 5% below the appraisal price!

Two years later, the identical unit next store sold for 27% below our appraisal amount. Had we proceeded with our original offer or if the seller would have met us half way, we would be under water on that property. We were fortunate she was not willing to budge, and I will never again entertain buying a property that does not appraise at or above the sales price.