Almost every buyer is worried that they’ll pay too much for a house. Here’s a plain and simple fact: A buyer will NOT pay more than the fair market value of the house unless they so CHOOSE. Here’s why:
In the most simplistic terms, in a capitalistic economy, the fair market value of a particular commodity is determined by the price that a buyer and seller agree upon. That’s it. And we THINK that is what happens during a real estate transaction.
But in real estate, who REALLY decides the fair market value of the house? I would argue that it is the State-licensed appraiser who is hired by the lender to determine the value of the house. After all, a lender will only lend money based on what they feel the value of the house is – not what a buyer and seller think it is worth. The appraiser will compare recent sales of homes with a similar size, style, age, and location to determine the value, and relay that information to the lender. And, when you think about it, an appraiser really PROTECTS the buyer from overpaying.
After the lender has the information from the appraisal, the buyer is notified of the appraised value. At this point, three things are possible:
- The appraised value is more than the contract price. The buyer should be happy – they’re getting a deal on the house!
- The appraised value is equal to the contract price. The buyer should still be happy – they’re getting the house for the fair market value.
- The appraised value is less than the contract price. The buyer isn’t happy, and they’re afraid that they’re going to get “ripped off” by paying too much. At this point, the buyer has three options:
- They can “walk away” from the Contract, assuming that they’re still within a prescribed time limit. If this happens, then, obviously, they’re not going to overpay for the house, since they aren’t going to buy it.
- They can negotiate with the seller to buy the house at the appraised, fair market value. If this is successful, then, again, the buyer isn’t going to overpay for the house.
- They can choose to buy the house at the Contract price or an agreed-upon price above the appraised value, which means they will have to bring the “extra money” to the closing table from their own finances (remember, the lender is only going to lend money based on the appraised value). In this case, the buyer has CHOSEN to pay more than the house is worth.
Of course, there are always exceptions, especially in real estate, but, in general, a buyer will NOT pay more than the fair market value of the house unless they CHOOSE to.