It’s a seller’s market right now, which means that while it’s a great time to sell a house, buying a house can be a struggle, especially for young or first-time homebuyers. Low inventory, combined with rising real estate prices, means that homes are selling quickly and for more than they used to. Potential homebuyers can be left floundering with more expenses than they expected, or with homes gone before they had a chance to bid. With such a hot seller’s market right now, many buyers are feeling the pressure to bid more than the listing price in an attempt to secure a home. But is overbidding always a good idea, and how much should you overbid?
Home Are Selling for More
During the start of 2022, houses were selling for an average of 1.3% more than their listing prices, and it was commonly recommended to offer between 1% and 3% more than the listing price. However, this is a general recommendation, and every situation is different. Buyers should be ready to offer an amount higher than the asking price, but they also need to be aware of when overbidding isn’t necessarily a good idea, and when they should walk away from a bidding war.
Sometimes houses will intentionally be listed lower than market value, in order to generate interest and a potential bidding war. Typically, buyers will offer an amount a few thousand above the asking price. The most important thing when determining how much you should overbid is whether or not you can afford the increased amount. Take a look at your budget and ask a professional (such as your real estate agent or loan officer) for advice.
In certain situations, escalation clauses might be used in an attempt to ensure that you have the highest bid. With an escalation clause, your offer automatically increases each time a higher bid is made by a different buyer. Escalation clauses can include limits to ensure you don’t go over a specified price. That being said, escalation clauses take away any advantage you have by showing the maximum amount you’re willing to offer to the seller. For this reason, many buyers opt to forgo an escalation clause and simply negotiate as each bid comes in.
When to Walk Away
Walking away from a particular home can be difficult, especially if it seems like your dream home. However, even in a seller’s market, there are certain instances when you should walk away.
If you overbid too much on a house, it can cause issues with your financing. You might not be able to qualify for a mortgage if the appraisal amount is less than the loan amount that you need in the event that you offer too much. While this doesn’t necessarily prevent the sale from happening, it may cause you to have to pay for the difference between the loan amount and the appraised value. For example, if a house is listed at $350,000, and in order to beat other potential buyers, you offer $370,000, but the appraisal amount comes back at just $360,000, you will need to pay for the additional $10,000 in addition to whatever down payment you have.
You can avoid paying the extra in cash if you restructure your loan to have a smaller down payment, which means that whatever amount you had originally saved for the down payment would go towards the difference in price. In instances where you had a 20% down payment saved up, this would mean that you would provide less than 20% and may need to pay for private mortgage insurance.
In either case, it would be better to avoid offering more than the appraisal amount. One way that you can guarantee this doesn’t happen is by including an appraisal contingency in your offer. This way, you will be released from the contract if the appraisal is too low for your mortgage to be approved.
Know Your Limits
It’s difficult to say exactly when and how much you should overbid, but no matter what, you need to know the absolute maximum price you can afford and ensure you don’t go above this amount. You also need to determine the highest monthly mortgage payment you can afford, and factor in other essentials that will come with homeowning, such as utilities or unexpected repairs. Coming up with a maximum home price and a maximum monthly mortgage payment will let you know exactly when you need to walk away, no matter how much you like the house. Your real estate agent or loan officer will be able to help you determine how much you can afford, and in addition, you can utilize online calculators to help you plan your budget.
Is It Worth It?
Houses are selling for more, but that doesn’t always mean that houses are worth more. If you’re working with a real estate agent, have them research recently sold properties (often called “comp properties”) to see what other similar houses are selling for.
Sometimes you need to be lenient on your home wish list – perhaps you’ll have a longer commute than you originally intended, or have to consider a home that needs a minor renovation or two. If a house has been sitting on the market for a while, it may hint at a larger problem with the property, meaning you should do your due diligence to determine why it hasn’t sold yet (is there something structurally wrong, or is it simply overpriced?). Buying a house is a big decision and it’s important to weigh the pros and cons in every situation, even in a seller’s market.
Other Ways to Entice the Sellers
Offering more money may seem like the most obvious way to get a seller to accept your bid, but it isn’t the only way. Some sellers will accept a lesser amount if it’s a cash offer, since cash transactions are often easier than those involving a loan. Writing a personal letter about why you want this house and your plans for the property can also make you seem more personable, and can sometimes sway a seller in your direction. Finally, avoid putting too many contingencies into your offer, as this makes your offer more complicated and less attractive for the seller.
Purchasing a house may be difficult right now, but if you’re looking for your next home, you can compare mortgage rates and find a rate that works for you right here on RateZip!