Making the right offer is crucial

Home sales have skyrocketed in recent years. At the same time, inventory has declined. That means there’s a strong sellers’ market in many parts of the country, with more buyers than homes available.

The result is that home buyers often have to pay more than the list price if they want to beat out the competition.

This can be a tricky situation to navigate.

It’s hard to know how much over asking price is ‘reasonable’ â€” especially when you’re under pressure to make an offer quickly.

You should set your budget and expectations ahead of time, so you know what you can offer and when to walk away. We’ll help you figure that out

How much should you offer over the asking price?

While every listing and situation is different, paying above asking price is very common. So buyers should be ready to consider it if they’re making an offer.

“Sometimes listing agents intentionally price a home below market value to make it a more compelling offer,†says Philip Kranefuss, head of Real Estate in Colorado with Homie.

“This results in a buyer feeding frenzy. And it’s not unheard of in these situations to see the winning bid come in thousands over list price.â€

He says offers typically need to exceed at least 1 to 3 percent over list price when there are multiple competing buyers.

Offers typically need to exceed at least 1 to 3 percent over list price when there are multiple competing buyers.

For example, if a home is priced at $350,000, a winning offer might be as much as $3,500 to $10,500 above that.

Dustin Singer, a Realtor and investor, agrees with this theory.

“Most buyers try to offer a few thousand over the next highest competing bid to make their offer stand out and have the sellers be more interested in accepting,†he says.

But before blindly increasing your offer, do a little homework.

“Get your agent to ask the seller or the seller’s agent what prices have been rejected,†suggests Suzanne Hollander, a real estate attorney, broker, and professor of real estate at Florida International University.

“Another idea is to get the seller to agree to write into the purchase and sale contract that the buyer will offer a certain stated amount over the highest offer to date, if this type of clause is allowed by law in your jurisdiction,†she says.

Low appraisal: the danger of offering too much for a house

Making too high of an offer can come back to haunt you.

“You may not qualify for your mortgage loan, because the loan won’t appraise for the amount you offer,†warns Hollander.

If the home doesn’t appraise for the full purchase price, you have to come up with the difference in cash.

For instance, the home is offered at $300,000, but there are multiple bids. To win, you offer $320,000.

But the appraiser searches the area for comparable homes and finds that the highest justifiable price is $310,000. You have to come up with $10,000 cash above and beyond the down payment.

Most home buyers don’t have this kind of money to throw around.

Even if you do, you could lack the funds to make the upgrades you desire after moving in. You may deplete your rainy day emergency funds, too.

“And, if you have to sell the property for any reason, including a job loss, you might have to accept less than the amount you paid,†Hollander adds.

Today’s home buyers should expect competition

“In the current market, where there is more demand than supply of homes, a buyer often needs to make an offer above asking price to sweeten their deal,†says Kranefuss.

“That’s especially true when there are multiple competing offers or a bidding war.â€

Hollander agrees, saying, “Low interest rates combined with increased working from home have dramatically driven demand upward for single-family homes in many areas and reduced inventory.â€

“This increased demand and scarce supply situation give sellers the luxury to choose the best offer they receive,†she says.

In short, buyers in today’s market should expect competition. And they should be prepared to pay above the ticket price for a home they really want — as long as it’s still within budget.

How to determine your max budget

To help determine the max price you should pay, estimate your maximum budget.

“Your max budget for a home should always come down to what you can afford,†says Tyler Forte, CEO of Felix Homes.

“Set a monthly budget and make sure you are accounting for upfront costs like lender points, closing costs, and a budget for repairs and maintenance once you’ve moved in.â€

It may help to work backward and evaluate a monthly payment you’re comfortable with.

“For example, if you can just barely afford a $1,500 monthly mortgage, anything beyond that is out of your comfort zone. With that affordability insight and your known interest rate, you’ll be able to determine your max offer,†recommends Hollander.

You can use this mortgage payment calculator to estimate how large of a mortgage payment you can afford on your monthly budget.

When calculating your home buying power, remember that your mortgage should only account for 30 to 40 percent of your monthly take-home pay, Forte advises.Find out how much home you can afford (Nov 5th, 2020)

Ask questions and define deal breakers

It’s also a good idea to ask plenty of questions that can help you decide if the house — and the higher price — are worth it.

“Being strategic about what you want is critical,†says Kranefuss. As a starting point, he recommends asking yourself:

• Is the location right for you?
• Is the size of the home sufficient?
• Is it a good school district?
• Are there things you are willing to give up if they are not at your price point?

Overall, examine if the price you’d need to pay to get the home exceeds its desirability and functionality.

“Just because the market is competitive and there are many multiple offer situations doesn’t necessarily mean you should pay over the asking price,†Singer says.

He suggests finding out:

• Is there another home for around the same amount of money that offers better upgrades?
• Can you purchase a home for slightly less that needs updating and then have those renovations made?

Of course, there will always be some clear dealbreakers.

“If there are structural or environmental problems you discover during the appraisal that would be costly to fix, it’s probably best to look elsewhere,†Hollander says.

“And if the lender won’t finance your purchase because the appraisal comes in significantly below the purchase price, you may not have a choice but to back out.â€

How to avoid overpaying for a house

Sometimes it’s unavoidable: You may have to initially offer a price higher than you had anticipated or counteroffer with a higher dollar amount.

But you want to avoid making a regrettable mistake, too.

To ensure that you don’t overpay beyond a home’s true value, your agent should research recently sold comparable properties.

“Just because a house sold for over the asking price, that doesn’t necessarily mean it was a justifiable price,†Singer cautions.

“Your agent should check the market for other active properties currently listed to make sure you don’t pay over and beyond what the characteristics of the home are.â€

Consider broadening your horizons, as well.

“It’s often advisable to expand your search to include homes in more affordable places where your dollar can go farther,†Kranefuss recommends.

Don’t be afraid to look at homes that may be a bit outdated or require an update or two.

“These properties won’t stir up as much competition, and you are more likely to have your offer accepted at list price or less,†says Singer.

Other strategies to get your offer on a house accepted

Getting a seller to accept your offer doesn’t always require a higher price.

“Instead, try making a larger good faith deposit. Sometimes this shows sellers that you have skin in the game and are a more serious buyer,†notes Hollander.

Before you can make an offer, you also need to get a mortgage preapproval letter showing you can afford to finance the purchase.

Better yet, “ask your lender to call the seller’s agent and vouch for your financial health,†advises Forte.

“The lender should explain that they’ve reviewed your employment history and financials and have extreme confidence in your financial strength as a borrower.â€

If you have the cash, you could try making a cash offer on the home. Cash buyers often have an advantage over buyers using a mortgage.

“A seller may feel more comfortable that a buyer will definitely close if it’s a cash purchase not subject to a financing contingency,†Hollander notes.

But there are drawbacks to consider when you buy with cash as well — so make this decision carefully.

You might also try giving the seller a personalized letter along with your offer explaining why you love the home, Forte adds. In some cases, knowing the home will be going to a person or family who will cherish it can be enough to sway a sentimental seller.

Lastly, avoid putting contingencies in the offer if at all possible. This can make your offer stand out above the competition.

How to maximize your homebuying budget

Need a bigger budget to afford a higher-priced home? There are a few things you can do to improve matters.

“First, save up for as big of a down payment as you can afford so that you don’t have to borrow as much money and you can avoid having to pay private mortgage insurance,†Singer recommends.

Also, aim to improve your credit score and lower your debt-to-income ratio.

“Work to pay off any outstanding debts, pay your debts on time, and avoid opening new credit accounts. Also, check your free credit reports and clean up any errors, negative accounts, or missed payments you see on those reports,†adds Singer.

Something else to keep in mind is that today’s mortgage rates are helping home buyers maximize their budgets.

When rates are low, it reduces the amount you have to pay in mortgage interest each month. This means you can afford a larger mortgage payment and thus, a more expensive home price.

Reprinted from The Mortgage Reports November 3, 2020

Disclaimer: Professor Real Estate® written materials apply generally to real estate subjects and are not intended to apply to specific legal issues. 

Copyright 2020 ~ All rights reserved. ~ Professor Real Estate® Suzanne Hollander

Suzanne Hollander is a real estate attorney, speaker, professor, broker and voice for property rights, real estate.  The U.S. Department of State appointed Suzanne to its Fulbright Specialist Roster as an Expert in Real Estate. In 2019, Suzanne was awarded U.S. Federal Funds to travel to Latin America to investigate Chinese Investment in Real Estate and Infrastructure.  Suzanne teaches real estate law at Florida International University Hollo School of Real Estate where she has taught thousands of students over 10 years.

Fluent in Spanish and English, Suzanne is an invited attorney expert delivering speeches and moderating panels on how the the building blocks of (1) private property and (2) transparency of property title and transaction data, create efficient real estate markets and property values that  attract domestic and global allocation of wealth and promote democratic ideals.

Commercial Real Estate Women Network awarded Suzanne its Global Impact Award for Career Advancement for Women in 2018 and Globestreet recognized Suzanne as a Woman of Influence in Commercial Real Estate – Mentor Category 2019.  Suzanne is appointed to the National Diversity and Inclusion Task Force of Commercial Real Estate Women.  In Miami, Suzanne is a Board Member of CREW Miami and 100 Women in Finance.  She was Vice Chair of the Affordable Housing Advisory Board of the City of Miami Beach for 4 years.

Suzanne is a frequent speaker on real estate and her comments appear in Spanish and English media, including Wall St. Journal Money Watch, YahooFinance!, The Mortgage Reports, Miami Herald, El Nuevo Herald, The Dallas Morning News, The Palm Beach Post,  Wallethub, The Real Deal, Bankrate, Mercado De Dinero USA, GlobeStreet, Scotsman Guide Commercial Real Estate edition, El Monterero, Peru and InfoMoney, Brazil.