What are the risks of buying over appraised value?

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Run the numbers. Here is what I see:1 - If you are buying under ARV, then you can't get it financed for the difference plus the DP (assume 20% here). These are both out of pocket...as in cash. 2 - If the ARV is $35k low, and you need 20% of the ARV (20% of 380 = $72k, you'll need a total of $107k...in cash...plus any other misc OOP costs.3 - Let's just leave it at $107k needed in cash. If you are getting $1000/month in CF...$12k/year (if all goes perfect????), this means it will take you almost 9 years just to break even.4 - Question #1: Where's the deal?5 - Question #2: Isn't there a better use for your funds?6 - Question #3: Would you be interested in some land just south of Detroit, and North of Windsor (assuming the answer to Q #2 is "No")?Now before you say something about appreciation, I will say "I don't care". You're still wasting money that could be actually making money...more than any future appreciation would....and you're starting $107k behind.

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OK. That means you would be out of pocket around $52k at the start...and it will take you over 4 years to break even...if all goes perfect. So for about 4 years, and 4 months, you are paying your tenants to live there. Still not a good deal.Money/cash is a verb, not a noun...and it should be your verb, not someone else's. For 4 + years, your money is moving in reverse, and what's worse, the potential for profit from those "wrong way funds" is also moving in reverse...exponentially.

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@Andrew Chan @Vinay H.It doesn't matter if he's getting $3500/month in rent (and that sounds about right for this size of a deal), and his numbers are right. He's still over $100k behind, out of pocket at the start, and the cash flow would take him almost 9 years to recover his OoP cash.You want another way to see that? For those 9 years, he's paying his tenants to live in his property.

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@Victor Steffen waiting on the seller to finish the renovations they promised (3 weeks left), then will do the appraisal.We have 5% down payment locked in with our lender and the property rents out for $4,400/month. I think the appraisal will come in at $390k, but we will see.

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Any update on this @Graham Smith? Are you waiting on an official appraisal to come back?

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Graham, You should only buy over appraised value if there is a solid business reason for doing so. Examples include advantageous financing terms (0 down, below market rates, extended non-callable terms) or you have absolute knowledge that you can make a profit somewhere (sell to a developer, rezone for higher use, sell on financing terms that net you more money ). I would also put personal things in there as well like moving next door to take care of a family member. Absent any legitimate business or compelling personal reason it's not a good idea to pay over market price. This includes "appreciation", mostly because everyone's appreciation crystal ball is in the shop being repaired.Right now, as it's put out there you're only compelling reason is cash flow. You haven't looked at what happens if the market goes down, only stable or increasing. If the market tanks, your rent will drop and then your payback period lengthens. You are then stuck with an unsaleable property, and you're extra cash is tied up, leaving you unable to take advantage of better deals. Same is true in a stable market as pointed out by several posters. Overall, you haven't made a good business case for paying over market in this situation, so I wouldn't buy it. Good luck, Jim

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@Graham Smith you are getting an investor loan for 5% down? I have not seen a loan for 5% down that does not require owner occupancy. Can you break down your numbers? You would have:Purchase price: $415kRent: $3500?HOA: $350?Maintenance: $?PITI: ?Vacancy: $245Capex: $?Management: $350I would guess your cash flow after proper reserves is going to be negative. Run all the numbers, not just Rent - Payment or you will end up in the red.

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Appreciation, no matter how good, isn't a "Fix" for negative cash flow...or a long period of "playing catch up" to a cash cost up front. It's just a rationalization for a bad deal...and "rationalization" is the most expensive word a REI can use.

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I'm no expert as to whether or not this is a good deal or not, but in my area just about every house sells for more than $100k over the appraised value and local banks approve financing for just about all of them if the fair market value rent makes sense. Perhaps it's safe to say it depends on the area you are investing and not completely on the appraisal? If your lender sees the value in the rent and the numbers make sense I don't see why they wouldn't finance you especially if you have pre-approval financing for $415 with 5% down. If the cash flow is $1000/month and you've accounted for all expenses including the HOA fees, taxes, etc....I can't see how this is a bad deal... Hopefully someone in the Chicago area can give you some more I sight on the deal.

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Are you using financing because if the bank orders an appraisal and the property does come back lower the bank will only finance what the appraisal comes back at. So the deal will than need you to fill in the gap.The only reason you might want to do this is IF you think there is huge appreciation in that area that will fill in the gap. It's a very sort after area, condos don't frequently come up for sale. OR you need the loses in your portfolio