If you’ve ever been in a bidding war to purchase a home, you may have contemplated offering more than the asking amount. But when should you consider this a viable choice, and how much more should you offer above asking? In this article, we’ll go over all you need to know about this home-buying strategy in order to be successful in a competitive housing market.
Why Offer Over Asking Price?
The asking price of a home is the amount the seller wants the buyer to pay to purchase the property. Although it is possible to buy a home at or below the asking price, offering over the asking price is rather frequent, since it is not uncommon for real estate brokers to purposefully market the property at a slightly lower price than the home value in order to attract more potential buyers.
In a seller’s market, there are fewer properties available than there are buyers wanting to buy. This phenomenon encourages buyers to spend more money than they would otherwise as a result of a simple economic law of supply and demand. This is why a housing shortage in a seller’s market may frequently result in bidding wars.
How Much Should You Offer?
Because every listing situation is unique, there is no standard answer for how much you should offer above the asking price. However, it’s a good idea to be prepared because the bidding process can frequently be very quick, which means buyers must be prepared with a figure in mind when they submit an offer.
To make your offer competitive, a general rule of thumb is to offer 1% to 3% above the asking price, while others recommend offering a few thousand dollars more than the current highest bid.
5 Things to Remember When Offering Over The Asking Price
Because each situation is different, there is no definite answer for how much to offer for any specific property. Instead, consider following these steps to prepare before submitting an offer that is higher than the asking price.
1. Do a Research on the Housing Market
Before you start looking for a home, you should study the present state of the real estate market. This is because the challenges you might face change significantly between a buyer’s and a seller’s market.
During the research phase, buyers should talk with their real estate agent about local market conditions. Real estate agents may give information that would be difficult to obtain otherwise, such as real estate comparisons, which provide an analytical perspective on similar houses in the neighborhood and how much they sold for.
2. Stick To Your Budget
It may seem obvious, but staying within your budget is critical for a number of reasons. Your financial future may depend on your capacity to make mortgage payments, and depending on the state of your finances, maxing out your finances for a higher down payment may not be a wise choice. This means that one of the first tasks in your search should be to create a reasonable budget. Consider all of the must-have and nice-to-have features in your ideal home, then figure out how much house you can afford.
During a bidding battle, buyers should always keep their budget in mind. Remember that once you make an offer, you’re obligated to follow through if it’s accepted, so overbidding may put you in a less-than-ideal financial situation.
3. Get a Preapproval For A Mortgage
Having a pre-approval for a mortgage gives home buyers an advantage during a bidding war. The mortgage lender assesses your finances, including your income, assets, and credit score, to determine which loans you could be qualified for, how much money you can borrow, and an estimate of your interest rates.
Aside from determining what you can afford, preapproval shows the seller that you’re serious about purchasing a house. In fact, some sellers may request a letter of authorization before allowing interested purchasers to visit the property. You should also keep in mind that most preapproval letters have expiration dates, so you should have a house in mind before proceeding with your lender’s approved procedure.
4. Make Your Offer Unique
One of the most successful strategies to win a bidding war is to include additional seller benefits that will help your offer stand out from the competitors. A bigger good faith deposit can indicate to the seller how serious you are about the deal and provide you an advantage.
Waiving contingencies is another method used by some buyers in a bidding war, but it’s crucial to remember that not all contingencies can or should be waived. This is because most contingencies are in place to protect the buyer. For example, the home inspection contingency indicates that if major problems in the house’s condition are discovered, the buyer has the option to pull out of the deal without losing their earnest money deposit or to discuss who would pay for the repairs with the seller.
Other contingencies such as the appraisal contingency, are not necessary for an offer letter. Waiving this contingency may set your offer apart from others in the bidding war if you’ve located your dream house and are ready to risk a lower appraisal.
5. Consider Making a Cash Offer
For buyers who don’t need a mortgage to purchase a home, cash offers are one of the most effective options out there, and they may even help the buyer avoid offering over the asking price entirely. Cash offers tend to be the seller’s preferred method of closing a deal quickly and efficiently. Buyers can swiftly transfer funds in days or weeks, not months, facilitating quicker new ventures.
Should I Offer More Than the Asking Price?
With all of this information in mind, you may be wondering if offering above the asking price is worthwhile. The choice will ultimately depend on the specific home, your financial flexibility, and real estate market conditions – but there are a few advantages and drawbacks to consider.
For example, offering more than the asking price may result in winning a bidding war quickly. On the other hand, it is possible that you will spend more on a property than its actual value. This may be worth it if it’s your ideal home, but most importantly, buyers should always check their capacity to fulfill their offer before putting in a bid.
In a seller’s market, especially, carefully and intentionally planning your offer ahead of time might be the difference between winning and losing a bidding war. You may distinguish yourself from other possible buyers by researching the property market, waiving contingencies, and perhaps offering over the asking price.
Remember that getting preapproved for a mortgage is always important, it is more vital in a competitive housing market.
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