When bidding on a home, is it worth it to offer more than a house is worth?

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DENVER (KDVR) — Offering to pay thousands of dollars over a home’s asking price, even if a formal appraisal determines it’s worth less, can make a buyer more competitive in this housing market. But it also comes with risks.

It’s a practice that Matt Leprino, a spokesperson for the Colorado Association of Realtors, said he does not recommend — even as a significant amount of Denver homes sell over asking price.

“I’ve never been one to advocate for paying more than a house is worth. I still, to this day, would not be an advocate of it,” Leprino said.

“Our clients know the risks when we’re going into it,” he said.

What is an appraisal gap or waiver?

Leprino, who’s a realtor and the CEO for real-estate agency Remingo, said the practice of offering an “appraisal gap” or an “appraisal waiver” can be a challenge.

In such offers, a buyer agrees to pay a certain amount over a seller’s asking price, even if the home does not appraise for that value during a formal appraisal.

“It’s risky, but you know, maybe a little less risky than it used to be,” Leprino said.

Often, lenders will not cover the financial difference between the appraised value and the buyer’s offer above that value.

“When you put in an appraisal gap or a waiver, you lose the ability to back out if it doesn’t appraise,” Leprino said.

As a result, the buyer may have to pay the difference out of pocket.

For example, if a seller were asking $300,000 for their home, a buyer might choose to bid $330,000, regardless of how the home officially appraises. That means even if an appraiser were to determine the home’s actual worth to be $300,000, the buyer would be on the hook to pay $330,000.

“If you want that house, and that’s ‘The One,’ unfortunately, you do have to figure out a way to be the most competitive offer, and sometimes that’s the case,” Leprino said.

Appraisal gaps are nice for sellers

When Ray Varela and his ex-wife put their Parker home up for sale after their divorce, Varela never dreamed the house would bring in so many interested buyers.

“It went for way more than I had imagined it would go, and that was pretty nice,” Varela said.

He told the Problem Solvers they listed the home for $549,900 and received 13-15 offers. At least one person promised to pay $70,000 over the asking price regardless of how it officially appraised.

Varela said he was most intrigued by that offer, because it meant the money was guaranteed even if the home didn’t appraise for that amount.

Some buyers using loans have contingencies written into their purchase agreements that allow them to back out of an offer if a home doesn’t appraise for what they offered.

But Varela said the buyers who eliminated those contingencies from their offers appealed most to him.

“Obviously, I wanted to make as much money as possible,” Varela said. “We didn’t take the highest offer. We took the next highest offer, which had a better appraisal gap.”

Varela said he was amazed to find out that his home actually appraised for what was offered.

Either way, he and his ex-wife were guaranteed the massive payment above what they were asking.

Appraisal gaps don’t always work for buyers

Varela thought the appraisal gap idea seemed like a good one when he went to buy a new home after selling his own. He knew it would make him look more competitive, and he really wanted to find a house.

“So, I put an offer on this place,” he said, “and I did an appraisal gap – just like all the ones I’ve seen.

Varela said the home was listed at $299,000, but he offered to pay $330,000, regardless of how the home would officially appraise.

He assumed the home would appraise for $330,000, but it only appraised for $315,000. His lender was not going to cover the difference, so he had to pay it out of pocket.

“There’s this extra $15,000 that I promised on my offer that I just had to get my wallet out and just give,” he told the Problem Solvers.  “I would’ve liked to use that $15,000 another way.”

Are official appraisals accurate?

Jeff Engelstad, a business professor at University of Denver, said it’s possible that official appraisers are lagging behind the pace of the housing market.

“They’re chasing it,” Engelstad said, “and that makes sense, because they’re using historical data….If you’ve got five people willing to buy the property for more than it will appraise for, doesn’t that mean the market value is more than it will appraise for? I would think so.”

Leprino, with the Colorado Association of Realtors, said this process can be intimidating to buyers.

“The prospect of being under water on day one is a very scary and very daunting task. But if you’re buying a house for $500,000, (and) you’re paying $550,000, you’ve got that risk of $50,000,” Leprino said. “But once that closes, and you’re the newest comparable in the neighborhood, and the next day, your neighbor sells for $555,000 or $560,000. Now, all of a sudden, your negative equity that you started with on day one vanishes. And that’s scary, right? Because we don’t know when that’s going to end.”

What happens to the neighborhood

When homes sell for higher prices, that may have a beneficial effect on the neighborhood, Leprino said.

“If you’re a seller, you’re very, very excited when the house next door was listed for $500,000, and now it sells for $600,000, right? If your next-door neighbor did that, now your house is worth $600,000. Yesterday, it was $500,000,” Leprino said.

However, some sellers have complained that homes with skyrocketing values will also have increased property taxes.

“That’s a legitimate concern,” he said, “especially if you’re on a fixed income, and you can’t afford those types of 20 percent increases in a year.”

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