For the most part, properties are priced at an amount slightly to moderately higher than the true value of the home. This is because most real estate agents and homeowners expect buyers to make a bid that is less than the “true” value of the home, allowing there to be some room for negotiation. It also increases the likelihood of someone paying the asking price, which results in higher profitability for the homeowner.
In rare cases, a homebuyer may be interested in putting in an offer that’s even higher than the listed asking price. But when is this an appropriate move? And is it worth the extra money?
Conditions That Warrant Higher Bids
These are some of the conditions that could motivate you to put in a bid higher than the seller’s asking price:
- A hot seller’s market. A seller’s market is active when there are more buyers interested in housing than there are available houses to sell. In the case of an extreme seller’s market, there will be many aggressive buyers, hoping to purchase new properties as soon as they become available. This will push prices higher, making it common for sellers to receive bids at or above asking price. Informed sellers will know that they’re in the midst of a hot seller’s market, and may have higher expectations for bids—along with more competitive bids to entertain. Bidding exceptionally high in this scenario can give you a competitive edge.
- Direct competition. If you know for a fact that there are already competitors bidding on the home, you may be incentivized to make a more aggressive bid. This is especially true if you know the competing bids are at or above asking price, or if there are special perks that make the bids more attractive, such as being an all-cash offer. You won’t always have this information, however, so you may have to make an educated guess about whether this property will be hotly contested.
- Obvious underpricing. There are also some telltale signals that a home is underpriced for the market. If a home is worth $250,000 in a seller’s market, but it’s being priced at $225,000, that should trigger your curiosity; there may be something wrong with this property, or more commonly, the seller is motivated to sell the property as quickly as possible. If this is the case, other buyers in the market will notice it, and will certainly bid the asking price. If you want a chance of your offer being considered, you’ll need to bid higher than that. There are always buyers available, especially for underpriced properties.
- A patient seller. Look at the number of days a property has been on the market. If the price of the property is attractive, and the property looks like it’s in perfect condition, but it’s been on the market for longer than a month, it’s a sign that this seller is patient, or possibly stubborn about the offers they’re willing to consider. If you want a chance of persuading this type of seller to accept your offer, you’ll need to go above and beyond the offers they’re used to receiving, which means bidding over the asking price, or including something extra, like offering to pay all in cash.
- Your personal attachment. Last but not least, you’ll need to think about the level of personal attachment you feel to this home. Is this a “pretty good” house that you could see yourself enjoying, or is this your vision of a dream house? If the house has everything you’ve ever wanted, and you don’t think you’ll find a house like this again, there’s no reason not to up your bid above asking price. But if you’re merely content with the state of the home and you’re not rushed to find a new place to live, you might want to place a lower offer.
Budget Considerations
Obviously, you’ll need to consider your budget when evaluating whether to make a bid over the asking price of the home. If the asking price is already stretching your budget to its limit, bidding more could put you in a bad financial position—especially if market prices are overinflated. However, if the asking price is $100,000 lower than your maximum reasonable purchase price, you’ll have much more flexibility in submitting a high offer for a dream home.
Escalation Clauses
If you’re very interested in a property, but still want to bid the lowest possible price, you could consider using an escalation clause instead of directly making a higher bid. With an escalation clause, you’ll pledge to bid a certain amount of money over the highest bid, up to a certain amount of money. For example, if the house is being sold for $250,000, you could make an offer to bid $2,000 more than the highest bid, up to $275,000. Most real estate agents will tell you this is a bad idea, because a dishonest seller could fabricate a competing bid, and you could end up paying much more than you would in a straightforward process of negotiation.
Appraisal Issues
Most homebuyers will need to acquire financing via a mortgage to pay for the home, but banks tend to require a formal appraisal of the property first; this way, they can ensure the deal is “fair” enough, and that you aren’t borrowing an excessive amount of money for a property of low value. If you bid an amount that’s much higher than the appraisal of the home would allow, it can cause issues with the purchase of the home. For this reason, some home sellers will be skeptical of bids that are too high, and you may struggle to come up with the financing necessary to close the transaction.
If you’re currently looking for a home to buy in the Katy, Texas area but you need some expert guidance to make the right decision, you need to hire a buying agent. Contact Green Residential today to learn more about how we can help you find (and buy) the best possible home for your goals.
Michael is Green Residential’s Vice President. He helps to keep the team organized and running smoothly. Prior to joining Green Residential, he spent 12 years working at Cadence Bank in the mortgage loan servicing department, where he specialized in loan audits, modifications, and bankruptcy-related issues for the mortgage portfolio.
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