Over the last few months, I have had several buyers get very frustrated.  Why?  Well, other than the obvious of loosing out on a home they loved, they do not understand the appraisal process.  When they are willing to offer well above asking price, and I caution that we have to consider an appraisal I have a few times heard something similar to the following:  "If I am willing to go $20,000 over the asking price and I am approved at that amount then why does the bank care what the value of the home is?" 

I understand the frustration, and I understand the logic.  If you are approved for a loan at $250,000, and the home cost $225,000 then you can clearly make the down payment and monthly payments at $250,000.  The banks getting more money, so why do they care?

The bank cares because they are always looking ahead and assuming the worst.  If an appraiser says the home is worth $225,000, and a buyer has taken out a mortgage more than the home is worth it becomes an unsafe investment for the bank.  Banks don't like loosing money down the road, so if the housing market declines, and a buyer defaults they have lost money on there investment. 

It is important to understand that an appraisal is not done for the buyer.  An appraisal is done for the bank/mortgage lender to ensure that their investment is a good one.  So the appraiser does not work for the buyer, they are hired by the bank. Now, I can hear buyer's asking, "Then why are we paying for it?" The bank's logic; they would not need to do the appraisal if you were not buying the home.

So even if you are willing to offer above the asking price, if an appraiser tells the bank it is not worth that much.  The bank is going to hesitate to give you that loan. 

We have to consider this when making an offer, but there are a few things we can do.  However, in order to do it you must have cash on hand.

1.  You could offer to go just a little over the asking price, but then offer to pay for some of the seller's transfer tax, and even commission at closing. Obviously, this will increase your cost out of pocket at closing but will increase the value of your offer, and makes a property not appraising not as likely.

2. Appraisal Gap Coverage:  You could offer that if a the home doesn't appraise at your offer you will make up some, (or even all) of the difference.  So for example:  The home is $225,000, you have offered $240,000.  We could write in your offer that you will cover some of the gap with cash at closing.  Let's say you offer to give $5,000 of gap coverage at closing, and the home appraises at $232,000.  You are telling the seller you will still pay $237,000.  This $5,000 cannot be added to the loan.  You must pay with cash at closing.

3.  Put down a large down payment.  30%, 40%, or more, SOME banks, and I stress SOME banks, will then say,  "If you are willing to put that much "skin in the game,"  we will forgo the appraisal."

All of these carry some risk/reward, but they are ways of overcoming the appraisal if you are offering over the asking price.