Today’s housing market is short on supply and high on demand, forcing buyers to go all out with their bids often resulting in paying well above the home’s appraised value. When this occurs it is referred to as an appraisal gap and may seem like a risky move as the buyer is starting with negative equity, slowing down the ability to refinance or get a home equity line of credit. But, paying above the appraised value makes sense in some instances. 

Let’s take a look at when you should back away from a property that is selling above its value and when paying more than the value is really worth it. 

What is an appraisal gap?

An appraisal gap is a discrepancy that occurs when the buyer’s offer is more than the appraised value of the property they are looking to purchase. It is a common issue that happens in competitive markets where aggressive tactics are common. Seller’s markets are also particularly susceptible to listing prices that end up higher than the appraised value.

When to Steer Clear

With a competitive market like the current one, it can be easy to get wrapped up in bidding wars for fear that you will miss out on owning a house. Continually having offers rejected might also force you to push even harder just to land something. 

The pressure this creates has led some to pursue risky tactics in order to make their offers stand out. It is critical that you consider your budget and goals carefully, so you can avoid making a huge mistake. 

Here are a few important things to consider before paying more than the value of the house:

Affordability: Be brutally honest with yourself, can you afford it? If the appraisal comes in low, you will need to make up the difference. If this drains your savings account and leaves you with no safety net, is this a wise financial decision?

Selling the Home: If you are not planning on staying in your home for at least 5 years, you might not be in it long enough to gain sufficient equity when you go to sell. 

Is this the one?: This is another question where you need to be critical of your decision. Ask yourself how much you love the house. If it is not your dream home and you are buying out of desperation, you might quickly regret your decision. 

When to Pay More

In some instances, paying above the appraised value is okay. For situations like this, you should follow a similar strategy as above and ask yourself the following questions:

  • Can you afford the monthly payments?
  • Do you have enough funds to cover the gap between the mortgage amount and the cost of the house?
  • Can you afford to sell the house if need be before equity builds?

By answering yes to all of these questions, you have ticked the boxes where experts would agree that it is okay to pay more than the appraised value in order to get you into your dream house.


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