Newsflash: The housing market is hot, red hot. Or even white hot because it’s even hotter than that.
While this is awesome for existing homeowners, it’s having the exact opposite effect for prospective buyers, who are still attempting to get IN and finally stop renting.
The market has become so competitive lately that bidding wars are now the norm, as is “paying over asking” for a property.
Not just over asking, but way over asking. And even then, it’s often not enough to get a call back from the listing agent, let alone win the thing.
Should I Offer Over Asking Price?
- Determine if you can’t live without the property you’re looking at
- If it’s a must buy and there aren’t viable alternatives you can consider an offer over asking
- Next you’ll need to determine how much over asking you should bid to be successful
- Speak to your agent, look at comparable sales, and try to get input from the listing agent
First off, you have to determine if you should even offer over asking price, then you can figure out how much you’ll need to offer in order to be successful.
Before you even think about offering more than the listing price, you’ve got to be really sold on the property.
Think of the home purchase just like any other purchase. Would you pay extra for that haircut, for that dinner, for that car?
You maybe would if you really, really liked it, and thought you’d miss out on the opportunity to get it.
Of course, a property can be a little different if it’s one-of-a-kind and there’s nothing else like it.
But often times there are alternatives out there if you continue looking, or are simply patient during the home buying process.
It shouldn’t be a quick decision to begin with, so do make sure you’re putting in adequate time given the gravity of the purchase.
Anyway, once you’ve decided it’s the one, you’ll need to figure out what the right number is to win the thing.
This is where your seasoned real estate agent will come in handy. They should be able to guide you, based on market factors and also conversations with the listing agent.
Keep in mind that this number will also need to be tempered somewhat based on how the property appraises.
You can’t just offer any old number unless you’re paying with cash, or have ample funds available to increase your down payment if the appraisal comes in low.
Your Maximum Bid May Be Dictated by Mortgage Financing Needs
- If you require a mortgage, definitely take the time to get a pre-approval first
- That way you’ll know the maximum purchase amount you can actually offer
- This will dictate your highest bid, regardless of what others are offering
- Also beware of appraisal issues if coming in above asking and ensure you have extra funds to cover a shortfall
If you’re an all-cash buyer, you can skip this section. But if you’re like most out there, you’ll need a home loan to get the deal done.
This means the property will need to appraise at a certain value, which could fall below your above-asking price offer.
For example, if a home is listed for $300,000 and you offer $350,000 to beat out the competition, there’s a decent chance it could appraise for less.
This is one of the many pitfalls associated with bidding high on a property that may not be worth that amount just yet.
While it hopefully won’t come in at $300,000, there’s a possibility an independent appraiser values it at say $325,000.
If this is the case, and you’ve only got 3-5% set aside for down payment, you could run into mortgage-related problems.
The maximum loan-to-value (LTV) ratio would be based on the lower of the sales price and appraised value, so in our example $325,000.
If you were expecting to borrow $332,500 at 95% LTV, you’d now be limited to a loan amount of $308,750 based on that lower appraised value.
The difference would have to come out of your own pocket to work, unless you were able to borrow even more than 95% of the appraised value. Or if the sellers agree to budge.
So your required down payment would jump up from $17,500 to $41,250. If you don’t have those additional funds, you might run into trouble.
This is why an appraisal contingency (or financing contingency) can be helpful, though in a bidding war it might need to be waived to even have a chance.
Look at Homes Below Your Max Purchase Price So You Can Negotiate Higher
- If you know homes are selling above asking you need to adjust your filters
- Look at lower-priced homes so you can bid more and stay within budget
- Simply adjust these maximum purchase price fields on Redfin, Zillow, etc.
- Then you’ll be able to manage a bidding war more effectively and avoid disappointment
Here’s a solution to that pesky appraisal issue mentioned above.
If you’re worried you’ll get into a bidding war and you don’t have extra funds for a larger down payment and/or room for a higher DTI ratio, simply look at cheaper homes.
For example, if you’ve been pre-approved for a home purchase up to $350,000, adjust your filters on Redfin/Zillow to a max listing price of $300,000 instead.
Then if you come across a property you like, you can outbid others who didn’t take the time to do that and might be stretched thin.
Not only will you be more comfortable offering more than the next buyer, but you’ll actually have room to offer more without running into qualification issues.
This can put you in a stronger position, especially if the listing agent knows you’ve got the finances to back up the over-asking bid.
Tip: You can also make a high offer then ask for seller concessions for needed repairs, assuming there’s an inspection contingency.
Consider a Fixer Upper Instead of a Turnkey Property
- Avoid the really popular homes everyone is looking at if you want to be successful
- The turnkey homes will undoubtedly sell quickly and for a premium
- A fixer upper can be acquired more easily with a lower chance of a bidding war
- You might also be able to negotiate more with the seller and get your repair requests approved
Speaking of repairs, in a hot real estate market it could be worth your while to look at fixer-upper properties that don’t garner as much attention.
While even these properties might get traction in a seller’s market, and even become so-called hot homes, the idea is they’ll receive less bids than their turnkey counterparts.
If that’s the case, you may not need to offer above asking, or even the asking price. You might be able to offer below asking and face little to no competition.
Ultimately, even the turnkey properties will require work, and likely won’t have all the exact amenities you want, or stylistic stuff. This is why one should take caution if considering buying a flip house.
For these reasons, it could be worth your while to look at the properties that are need of some TLC. Just be sure the house has good bones and isn’t a money pit.
There’s a fine line between a fixer upper and an absolute dump. Also know your limitations when it comes to home renovation before you dive in.
And ensure you have funds to pay for necessary repairs once you close escrow, assuming you aren’t going to do-it-yourself.
Go Into the Home Purchase Without a Buyer’s Agent for an Added Edge
- If you want to get really aggressive you can go into a home purchase sans agent
- These days many steps in the process can be done on your own thanks to the internet and technology
- This may give you an edge over other buyers if the listing agent (or their brokerage) represents you and the seller
- Just be sure you aren’t paying too much for the property and that they have your best interests in mind as well
One last strategy if you’re struggling to find a home in your price range, and don’t want to get too carried away offering way above asking.
Simply go it alone. That’s right, don’t use a buyer’s agent. Instead, peruse listings and go on tours on your own, and if you find something you like, get in touch with the listing agent directly.
Let them know you aren’t represented, and they’ll likely offer to represent you or have a colleague at their brokerage do so.
Not only will they provide you with insider information regarding a successful bidding price, your offer will likely make its way to the top of the pile, assuming it’s similar to other offers.
Just be sure to advocate for yourself, and ensure you aren’t getting ripped off or paying too much for the property.
Again, if you’re in one of these situations to begin with, you should be really certain that you want to purchase the home.
If you’re not really into, it’s probably best not to offer even more than what the seller is asking.
Buyer’s remorse is all too common these days, even when paying at or below list.