First - and only - thing - are you willing to pay seller's price for the house???

If you are not (and it sounds like it), walk away from the deal or negotiate with seller for lower price.

It doesn't matter whether bank/valuer/agent says this house worth $$$, if your parents/grandparents/brother/sister stays next door wouldn't you pay extra $$$ for the property?

As always, buying a house is a willing buyer/seller agreement - both agree on a price. It doesn't matter that the house next street is selling above or below what you've agreed on - it all depends on whether you are WILLING to pay that amount for that property.