Does the current seller’s market make you feel like you need to take a stealth approach to negotiations? When there are lots of buyers interested in a home, you may find yourself on the frontline of a bidding war.
Sometimes buyers try to offer more than the seller’s asking price to give them the best chance of winning. But how much should you offer over the asking price? And when should you deploy this tactic?
Don’t worry, read on and we’ll answer those questions and go over a few tactics that can give you an edge over other bidders in the middle of a price war.
Should I Offer Over the Asking Price?
In a seller’s market, more people are looking to buy a home than there are homes for sale. High demand and low supply will kick-start bidding wars. Everyone is fighting for the chance to buy the same limited supply of homes.
The 2021 housing market had a lot more buyers than sellers, and 2022 is looking like more of the same. And when you’re trying to buy in a competitive housing market, it’s routine to offer more money than the asking price (aka the list price).
How Much Over the Asking Price Should I Offer?
We have no magic formula to help you figure out how much money you should offer over an asking price. Every scenario is different, but be prepared to offer at least 1% – 3% over the list price.
If the bidding war is fierce, you may need to offer up to 10% over the list price to have any hope of your offer getting looked at by the seller.
Before you start throwing numbers against a wall to see what sticks, it’s a good idea to find help. A real estate agent can take a look at your situation and decide what offer is most likely to get the seller’s attention. Good real estate agents are experts at the art of negotiating the sale of a home, so an agent’s insight is invaluable.
What Should I Do Before Submitting an Offer?
To snatch up the keys to your dream home, you’ll need to prepare and plan. Generals wouldn’t rush into battle without surveying the battlefield. So you shouldn’t charge into the home sales process without:
- Getting preapproved for a mortgage: Getting preapproved for a mortgage gives you a lot of power. For the buyer, you’ll know what price range of homes you can afford and what money you’ll have left over to make an offer over the asking price. For the seller, they’ll know that a lender has examined your finances and credit history and is offering to lend you money.
- Educating yourself on current local housing market conditions: Are you house hunting in a competitive local market? Are homes in the same neighborhood selling for less than their asking price? You won’t know how much leverage you have unless you study the local market.
- Shopping slightly below your maximum mortgage budget: Let’s say you were preapproved for a $200,000 loan. Guess what? You don’t need to use the entire $200,000 to buy a home. Think about shopping for homes around $180,000 – $190,000. This will give $10,000 – $20,000 to play with in case you have to increase your offer.
- Setting a maximum budget: Don’t let yourself get caught in the heat of battle. You don’t want to bid a number you can’t follow through on. Set your price limit and stick to it. You have to be disciplined enough to walk away once you’ve hit your max.
- Asking your agent to research current offers and rejections: To help win, you’ll need to know to collect intel on the seller. Have your real estate agent communicate with the seller’s agent to see what offers have failed so you can avoid the same pitfalls.
- Including perks in your offer: Honey attracts more flies than vinegar – so find ways to sweeten the deal. Maybe you can offer a larger earnest money deposit. Maybe you can close on the seller’s preferred closing date. If you believe the house is in great shape, are there contingencies you might be willing to waive?
- Offering a cash deal (if you can): A seller won’t take your offer seriously if they don’t think you can get the financing to buy the house. With an all-cash offer, the seller knows you have the money in hand, and they can complete the deal without having to wait for a lender to approve or deny a loan.
Earnest money is money you put up during negotiations to show you’re serious about buying. The deposit is applied to closing costs or your down payment at closing.
How Do I Determine My Budget?
Making a successful offer on a house is one thing, but if you can’t afford to pay your mortgage, the deal won’t work out for you in the long run.
Sit down and figure out how much you can afford to pay every month before you look at your first house.
Pro tip: Keep your monthly mortgage payment at 30% – 40% of your gross monthly income.
If you’re wondering how much you can afford to pay on a mortgage every month, use our mortgage calculator. Plug in different prices and interest rates to figure out what a house will cost each month.
What Happens if I Offer Too Much on a House?
A seller accepting your offer doesn’t always come down to your offer being the highest. Sometimes a buyer can hurt their chances if they offer too much.
To protect themselves, buyers can add an appraisal contingency to their purchase offer. If the home’s appraisal value is lower than your purchase offer, you can walk away from the deal.
Let’s say you offered $250,000, and the seller wants to close the deal with you. The house goes through an inspection and appraisal, and the appraiser informs your agent that the house is worth $235,000. Your lender won’t finance the full value of the home because its market value is less than what they agreed to lend you. This is called an appraisal gap.
In some cases, an appraisal gap can ruin a deal. To save the deal, you’d need to make up the difference and add $15,000 in cash to your down payment.
Try to make a fair offer that has a high chance of being approved by your bank before overbidding on a home. If your heart is set on a home and you can afford to make a larger down payment, you can consider proceeding with your offer. Talk to your real estate agent and discuss the pros and cons of this strategy.
Be Different and Stand Out
Instead of offering the most money, offer the right perks. Make it easy for the seller to pick your offer out of the pile of offers they’ve received. Some strategies you can use include:
- Allowing the seller to rent the home until they move out
- Making a larger down payment
- Offering to buy the house with cash
- Making an earnest money deposit (or making a larger deposit)
Money isn’t everything. Thinking beyond the asking price might be the key that unlocks the door to your new home.