Should I pay $20k over the appraisal value

[Alec Jacobs]

Hello everyone, I have a weird scenario that I have been really wrestling with lately.

I am in the middle of buying a home and the appraisal came back $40k under my offer. The seller said they would come down $20k and initially I was pretty happy. The deal penciled in at my initial offer and now it pencils even better. But just because it pencils in $20k above its value doesn't mean I should buy it that high right? 

I know people pay over the appraisal in competitive markets but my situation is not ordinary. My agent gave me first dibs with this property since she works with the seller so I wasn't bidding against anyone else. I am new as well so I don't know how competitive the market is but I doubt that anyone would pay that much over appraisal. But, regardless of speculation, I believe there is no reason to overpay $20k on a property's appraised value unless it's absolutely necessary. The market I am in is Beaver County, specifically Ambridge, and again I am new and do not know the market well and maybe homes are being bought for more than they're worth but from what I've seen I don't think so.

I have been going back and forth with this for a while and I should've posted sooner but any insight would be awesome. I know there is probably not a 100% right choice but paying $20k over without having to seems illogical in general and I would like to know everyone's thoughts.

Thank you so much!

[Joe Villeneuve]

Your first problem, and mistake, is you don't know your market.  NEVER buy in any market until you know it.  Knowing it, is based on numbers with $$$ in front, not %%% behind. 

Knowing it means understanding what the potential (real) cash flow will be, based on what you are looking to pay.  Actually, that's backwards.  You need to start with what cash flow you need, then work backwards until you find out the maximum you can pay to maintain that cash flow...and DON'T pay more than that.

Knowing it means you need to know what the value of that home is, based on the immediate area (micro-market) and the size of that property.  Don't include properties outside of a 1 mile radius, or properties that are not within 10% higher or lower of the size of the property in question.  The market sets the value based on all the properties in that micro-market that are the same.  Don't include properties that are too large or small.  they mean nothing, but they are usually included in the Agents analysis to make the property look like it needs to.

Include the most recent sales, and work backwards from there towards the older ones.  There may be a trend of sales going up, down, or stabilizing.  The upwards trend MAY allow you to over bid, but not always.  A downward one usually means you should bid lower.  In all cases, you NEVER bid more than what your analysis tells you is your maximum, which is starts with your needs for profit and/or cash flow.