We remind readers often that no matter how high a purchase appraisal comes in over contract price, lenders always have to correlate to the price on the contract for financing purposes.
If a purchase contract indicates the price is $500,000 and the borrower is putting down $100,000 (20%), the loan to value ratio will remain at 80% even if the appraisal comes in at $1 million.
Exceptionally high appraisals can actually create issues too, as they sometimes indicate that there are undisclosed issues.
We had a $600,000 purchase come our way a few months ago but all the comparable sales indicated that the value should have been closer to $1 million. There were clearly undisclosed issues. In this case, it appeared that a sophisticated buyer was taking advantage of a naive, elderly seller – so the appraiser refused to appraise the property and we of course could not do the financing.
The other concern about such deals is the risk of undisclosed condition issues, such as a major foundation repair (another situation we actually had in the past).
I should add finally that exceptionally high appraisals are not always deal-killers. They are associated with legitimate transactions too of course and are allowed with an explanation letter, e.g. the house is extremely outdated but structurally sound, or the sale is intra-family and intentionally a “good deal.”
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 01524255, NMLS# 310167