However, a quarter of homes still sold above the list price in October 2022, according to a survey from the National Association of Realtors. While no one wants to overpay for a home, it can be necessary to put in a higher offer to compete with other people looking to buy the property — that's usually the case in a seller's market, which 2023 is still poised to remain.
But when home prices are high, offering to pay even a little more than the ask price can put a strain on your nerves and bank account. A competent real estate agent should be able to advise you as to how much above asking price you should offer, but you can also stand out to a seller by making a cash offer or waiving contingencies. (Orchard can help.)
When the competition for houses is steep, it can be very tempting to make an offer over asking price when you fall in love with a home. While the desire to walk away victorious in a bidding war is understandable, it’s best to pause before you make any offer — let alone one over asking price — to determine what you want to potentially pay.
How much you should offer on a house can depend on any of the following:
Unless you plan to make an all cash offer, get pre-approved for a mortgage loan before you start house hunting. That way, you know exactly how much the lender is likely willing to lend you and can get a better idea of how high of an offer you can make. If making an offer over asking price pushes you past what you can afford to pay, then you know it’s best to walk away.
In some cases you may find that even if you love a home, making an over-asking offer isn’t the right move to make financially.
When there are multiple offers on a home, you may need to make one above the list price to have a shot at winning. There’s no magical percentage to calculate how much to offer if you decide to go over asking price — a few thousand dollars or 1% to 2% above the listed price can be a good place to start.
When you start small, you're less likely to end up making an offer you can’t afford — especially if there are other interested buyers involved, which could lead to multiple rounds of bidding and eventually an even higher final price. If your ask is too small, the seller may present a counteroffer.
However, it’s also possible that another buyer will outbid you if your offer isn't big enough. In an especially hot seller’s market, when houses are scarce and competition is fierce, some potential buyers may go above and beyond the asking price by as high as 10%, as they did in February 2022 according to the NAR.
The market is continually changing though, so the best thing you can do when crafting your offer is to ask your real estate agent, who will be your trusted negotiator during the homebuying process. An experienced realtor should have information on what comparable homes in the area sold for to give you a clearer picture of what an acceptable offer looks like.
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Beyond that, here's what to ask yourself when deciding how much more you should offer on a home.
Take your time to answer these questions and you’ll eventually get a feel for how much more over asking price is too high or whether it’s worth spending extra to secure the home you really want.
Being open to paying more than a home’s list price may seem like a necessity in a competitive housing market, but doing so comes with some additional risks that potential homebuyers should consider.
When you make too high of an offer on a home, there’s a chance the appraised value won’t match the sale price. A mortgage lender is only willing to lend you what the appraiser deems the home to be worth, so if you want to secure a mortgage loan, you have to make up the difference between the sales price and the appraisal value on your own. (This is in addition to your down payment, so you may need to have a lot of cash on hand to make this work.)
When you can’t afford to make up the difference, you may lose your earnest money deposit. This all depends on the timing of when you withdraw your offer and the contingencies included in your contract. One way to avoid this is by including an appraisal contingency in your contract that allows you to back out of the sale.
When you really love a home it’s easy to say “we’ll figure it out,” but making an offer well over asking price can cause financial strain. You might end up overpaying for the home, which can put you at a disadvantage if the market takes a downturn or corrects itself.
For example, if you need to move in a few years and housing prices have dropped in your area, then you may have to sell the home at a loss or may struggle to break even.
Making an offer over asking price is one thing, but making an offer that is significantly higher than the fair market value can make it harder to sell your house in the future if you want to make a profit. (If this is your forever home you don’t have to worry too much about this as the home will likely rise in value over the decades.)
Once it’s time to make an offer on a home, only you can decide what makes sense for you and your family financially. While these guidelines can help you determine when you should and shouldn’t make an offer above the asking price, your unique personal and financial situation may guide you in a different direction.
At the end of the day, you need to have a clear budget in place before you start house hunting. There’s no need to rush into a homebuying decision. If you’re feeling too pressured to make a high offer, you can walk away.
There are other ways to make your offer on a home more competitive if you can’t afford to go above the asking price, like by not making a contingent offer or agreeing to the seller’s ideal closing timeline.
If you’re looking to stand out in a competitive market, Orchard can turn you into a cash-buyer and so you can win the bidding war on your dream home. We can guarantee the sale of your old home, so it doesn't hold you back from buying the new one. Get started with a free evaluation.
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