Your budget is $300,000. You see a house you love, and it’s listed at $300,000. Perfect match, right?
Not so fast.
If you’re looking to buy in 2021, then you already know that the market is white-hot. Home sales have skyrocketed, and home inventory is historically low. That means it’s a prime seller’s market — and a potentially tough go for hopeful buyers.
Many would-be buyers around the country can expect to offer above asking price on a home in order to be serious contenders. And that means that buyer with a firm $300,000 budget may in fact be priced out of a home at the exact list price… one that’s destined to get 12 contingency-free offers and sell for $325,000.
Real estate is a highly local game, but these scenarios are playing out all over the country. What might a buyer expect to pay over asking?
“There are so many variables, but if they’re jumping into a beautiful, polished home with all the finishes in a hot market right now, they could expect 5% to 10% over asking price all day long,” explains James Strum, a Richmond-based agent who works with 86% more single-family homes and sells properties 16% faster than the average agent in the Richmond, Virginia area.
A hot market also means that homes go fast — and that’s a lot of pressure for buyers who know they’re racing against the clock when coming up with a competitive offer that also makes sense as an investment.
So how can you be prepared to pounce with the right offer over asking price when you see that dream home hit the market? Our expert-backed guide is here to help.
How much should I offer over the asking price?
The answer to this question rests on many variables.
“It all depends on the pricing of the home and if it’s already appropriately priced or overpriced,” Strum says. “The second part is the buyer, who ends up determining how much they want to overpay for the property in this crazy elevated seller’s market.”
So while there’s no uniformly applicable answer to this question (sorry!), you must do your homework on both the market and your personal financials. All of that intel will guide you to the right offer. Here are 7 tips for getting there.
1. Know your budget backward and forward
When home shopping in a hot market, you have to do your legwork to be competitive. Know your budget — not just the ballpark, but the actual top end of your total possible spend, given your savings and other resources.
2. Get preapproved for a mortgage
In a hot market, a seller is unlikely to really consider your offer if you aren’t already preapproved for a loan.
A step up from pre-qualification, preapproval often means the lender gives conditional approval, stating the size of the mortgage you’ve been preapproved for (though what constitutes a “preapproval” can vary from lender to lender). Since sellers always want to choose the strongest offer possible, they want to feel confident the deal won’t fall through if the buyer can’t secure appropriate financing. (This is why sellers love to see all-cash offers.)
Strum says he’s actually working with buyers to get fully underwritten before even looking at homes.
“Therefore we’re giving them a leg up where they could compete against all-cash offers or the average agent that’s just getting the basic pre-qualification,” he says. “It propels them in contract negotiations” because the financial underwriting is complete. (If you’re looking for a lender that does pre-underwriting as part of the approval process, then we should inform you: HomeLight Home Loans is one of them!)
3. Talk to your agent about the market
Ask your agent about comparable recently sold homes (comps) that can be used to benchmark against the house that looks like a good fit for you.
Ask your agent specifically about list-to-sales-price for those comps — how much the house was listed for and how much it actually sold for in the end. All of this data will help point you to the right offer amount.
Again, real estate is a highly local enterprise. You’ll want to find an agent who’s highly experienced and well-versed in the specifics of your local market.
“We have more agents than we’ve ever seen in the marketplace — there are a lot of brand-new agents who will incorrectly coach their clients in this very tricky market,” Strum says.
“It’s very important in this market to have a seasoned agent who has local expertise and the experience to walk the client through everything, from top to bottom.”
He adds, “Any seasoned veteran agent would tell their clients when it’s time to stop pushing the envelope any further. The question that we pose to all of our buyers is: How much are you willing to overpay in this market?”
4. Shop under your maximum comfortable mortgage amount
Let’s go back to that example of the buyer with a $300,000 budget eyeing a home listed at $300,000.
If offers come in above the asking price for this home, then the buyer won’t have a chance to keep up.
That’s why you should shop for homes listed under your maximum comfortable mortgage amount. This strategy will ensure that if you do need to offer over the asking price, you’ll at least be preapproved for the full amount (though your lender still might balk after the appraisal — more on that later).
5. Consider what else might sway a seller besides price
Yes, money is important. (Very important!) But it’s not the only factor that will set your offer apart.
Think about what else a seller might want as a way to sweeten the deal. Your agent can help you figure this out.
For instance, when sellers sell their home quickly, they might need a place to stay to bridge the time before finding a new place to live. If this is the case, you can offer a rent-back arrangement, allowing the seller to stay in the home as a renter for a specified timeframe after closing.
Beyond that, think about how much you can put down. Can you offer a larger down payment? Can you offer more earnest money — a good-faith deposit to show you’re a serious buyer — as a way to entice the seller? Can you even pay in cash?
Can you eliminate contingencies? These days, “the winning offers that we’re seeing in this market are doing an inspection for informational purposes only,” Strum says.
Remember, if you’re financing the purchase, you might not be able to eliminate some contingencies. At the very least, your lender will require an appraisal or financing contingency written into the purchase agreement.
6. Work with your agent to determine your offer price
With all this in mind, you’re ready to work with your agent to write your offer.
In some cases, you can set yourself up for success with an escalation clause. This means your offer price will automatically escalate higher than any competing offers, typically in pre-specified increments, up to a limit that you decide. While this can be a good tool in a hot market, it won’t always apply, Strum says.
“An escalation clause says, ‘I’m prepared to give you X number of dollars but you need to show me that next-highest offer in order for me to go that high,’” he explains.
“About 50% of the time, we’re seeing sellers who won’t allow escalation clauses. People are just going so far above the asking price, and it’s an emotional time. When agents specify, ‘no escalation clauses,’ it really gets that buyer thinking — and oftentimes, they’re offering higher than they probably would have if they were allowed an escalation clause.”
7. Be prepared for a possible low appraisal
An appraisal contingency is commonly found in real estate contracts. It allows the buyer to back out of the deal if the home doesn’t appraise at the purchase price. But in a particularly hot market, it may make sense to waive the appraisal contingency in an effort to get your offer accepted.
If you and your agent decide together to go this route, prepare yourself for a possible low appraisal — because it could mean you’ll have to pay more out of pocket to close the deal.
“Now you’re going to be bringing that much more to the table as far as cash to bridge the difference on the shortfall of the appraiser,” Strum says.
He cites this example: Let’s say you’re offering $550,000 for a house listed at $500,000. Your down payment is $110,000. If you waive the appraisal contingency, and the house appraises at $510,000, then you’ll most likely have to pay the $40,000 difference yourself. If you decide to divert some of your down payment money toward paying the appraisal gap, you could end up increasing your loan-to-value ratio. (That’s the ratio between the amount of your home loan and the property’s total value, typically expressed as a percentage.) The higher that percentage is, the higher the assumed risk by the lender — which means the conditions of your mortgage loan could change.
In this example, you might use some of the money you set aside for a 20% down payment to help you bridge that $40,000 difference, which means that your down payment is now $70,000, or 13.7% of the property value. Your loan-to-value ratio has increased, from 80% to 86.3%. As a result of the smaller down payment and higher loan-to-value ratio, you’ll now be paying mortgage insurance on the loan, and you may have to pay a higher rate while you’re at it.
If all of this sounds daunting… well, it is. Buying in a hot housing market can certainly be nerve-racking. But if you’ve done all of your homework and come in fully prepared to write a standout offer, you’re well on your way to scoring that home and building your personal wealth.
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