First of all, I fully support it if it's a house within my own neighborhood. :)
Joking aside, the real answer depends on the situation. How long do you plan on staying in the home, how many other offers are you competing against, what is the real value of the house, etc. So, when is it ok or not ok to overpay for a house?
In today’s world of low inventory, buyers are finding it harder and harder to get a house. Most houses are selling within hours of hitting the market with multiple offers and for over asking price.
It can be gut wrenching writing an offer for $315,000 when the house is only listed for $300,000. It would be like going to the Cadillac Dealership and looking at a car with a sticker price of $30,000 and telling the sales person, I know this car is for sale for $30,000 but I would like to pay you $35,000… What kind of crazy person would do that?
Sometimes what a house is listed for isn’t always what the house is worth. Joe Reardon, with Keller Williams says, “Writing an offer over asking can be ok, provided you are working with a good real estate agent who can look at prices and help you make a reasonable, value based decision. For instance, we are currently working with a buyer on a home with a list price of $600,000. We ended up going under contract at $651,000. From looking at the comps we felt the home was under valued at $600,000. The appraisal actually came in at $655,000! Having somebody who can interpret the data matters.
” In some cases, we have even seen a strategy where listing agents are under listing the house to garner more attention and instigate a bidding war to raise the price.
Another thing to consider is what is the real value of an object or a house? The value is what someone is willing to pay, and not necessarily what the seller is asking. One of my clients wrote an offer last week on a town-home. There was a total of 24 offers made on this town-home, all of the offers came in higher than the list price. If there are 24 other people willing to pay more for the town-home, is the value the list price?
Being a buyer in today’s market is difficult. To me, it feels like a war zone
. It can be tough writing offer after offer and not getting accepted. Some of my clients have felt so discouraged they told their agent “write the offer for whatever you have to do to get us under contract. If the appraisal comes in lower, we will just try to negotiate later.” We have seen other situations where the buyers are waiving the appraisal contingency altogether and agreeing to buy the house no matter what the appraisal comes in at.
Let’s look at it from a different perspective. Maybe, it is not overpaying for a house, but future paying.
Here is a real example for one of my clients. She fell in love with a house in Riverton listed at $450,000. We did the research and learned the seller paid $280,000 for this house in 2013. This house has appreciated $170,000 in the last 7 years! This seems like a crazy amount, but it is actually only 8.6% per year.
Let’s pretend you were the client and really loved this house. Knowing that there are multiple offers, how much is ok to overpay, or future pay for this house? See the chart below
. If we were to bid $9,000 over asking price the value should exceed the bid over, ask in January of 2021 which is only 5 months away. This is based on an average of 4.3% appreciation. With this rate the house is forecasted to appreciate $93,000 over the next 5 years.
Let’s also not forget that terms are just as important as price. It is often not the price of the house that is most important, but the price of the monthly payment. With today’s record low interest rates, you can lock in 30-year fixed rate below 3%.
Justin Udy with Century 21 Real Estate says, “It makes sense for a buyer to pay over asking if the home is of more value to the buyer than the asking price. The list price and perceived price are two different things. Ex. It may be in the exact school district they want, walking distance to work, same neighborhood as family, have all the amenities they want, the condition and quality surpasses the competition, etc... In the end, real estate is the price where a buyer and seller meet. Asking price is a request or suggested price not necessarily the value of the home.
While it still feels crazy to me to walk into a Cadillac Dealership and offer $35,000 for a $30,000 Car maybe it’s not so bad if it’s the exact car I want, there are no other Cadillac’s available for sale, and there is a line of people out the door all wanting to buy the same car.
In today’s market you may have no other choice then to make an offer above list price, but I do not think that should deter you from buying now. Even in today’s market I still believe wholeheartedly in one of my favorite quotes, “Don’t wait to buy real estate. Buy real estate and wait.”