Usually this is mitigated by the appraisal. Lenders generally aren't willing lending more than a home is appraised for because of the increased risk. I'm sure this varies from state to state but I think this holds mostly true in general. That being said, the appraisals themselves are quite subjective and only based off a few similar properties sold recently, so I still agree it's a difficult problem.
Appraisals magically come in at the exact offer price unless the offer is just completely off the charts insane. Appraisals are often times BS or, at best, just whatever you need them to be within some rather large margin (+/- 10%? 20%?).
Sadly, my appraisal came in "magically" at list price, so I had to put down a lot more at close. It was 3 years ago so we've done well regardless. I think you are right, I'm pretty sure the appraisal is just a guess. Most people I know had the appraisal come in way high, so maybe I got the one honest person.
When I sold my last house I had no idea what it was worth (the market was going crazy at the time) so I called an appraiser to see if he would give me a good starting point.
The first question he asked was what I was listing it for. He also made it clear that he would not physically inspect the house or do anything more than a cursory comp search.
Real estate sales are just loaded down with parasites looking to skim off of every transaction. IMHO it is an industry badly in need of disruption, but sadly a lot of the middlemen have their positions enshrined in laws, regulations, and corporate policy. Another good example: why do we pay Realtors a percentage of the sale price instead of a fixed rate? They're basically glorified babysitters that are just there to make sure you aren't stealing everything from the homes.
