Should You Buy a House Over List Price?

Understanding what goes into a house’s list price is crucial if you are looking to buy

A Nice House on the Curb

By

Kyle Reyes

on

Jan 21, 2021

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When looking for a house, it is common for your final offer to be slightly above or below the list price. Buying a house above list price is risky, but it can be worthwhile. There are valid reasons to buy a house over list price, but before you do it is important to understand the dangers of it and research the area to make sure you are purchasing the house for a fair price. 

This article will cover the differences between a buyer’s market and a seller’s market, as well as reasons why to make an offer over list price and the dangers of doing just that. 

Buyers Market Versus Sellers Market

A couple making a deal on a house
Knowing the current market affects your strategy in purchasing your new home. Image courtesy of Rocket Mortgage

It is common to pay a little over or under the list price on your home. While it is preferable to pay less, there are conditions where it may be worthwhile buying a house above list price. The housing market in your area plays a big role in the value of the houses. Real estate markets are either buyer’s markets, seller’s markets, or neutral markets. When you are looking for a home, understanding the state of your real estate market is crucial to making a fair deal on your home. 

Buyer’s Market 

A buyer’s market is where the supply of homes exceeds the demand of buyers. There are a lot of houses on the market and they are not selling very quickly. This is a good market for buying a house, as it means buyers are able to leverage lower prices due to a lack of competition. 

Real estate prices decrease and homes stay on the market longer during a buyers market, so there becomes a competition between the sellers to attract buyers. They may lower their asking prices or be more likely to negotiate. A buyer’s market is the best time to buy a house. Prices are lower, and it is less likely to run into competing buyers. 

Here are some tips for making sure you get the best deal on your favorite house in a buyer’s market.

  • Don’t rush. There is less competition, and more time for you to get all the information on your house, other houses in the area, and the seller. 
  • Research the area. Visit other properties before making your offer. Seeing what other houses are in the area ensures you pick your favorite house and helps you negotiate the price. 
  • Analyze other properties. By comparing prices on competitive properties you can negotiate the price of the home you are interested in. In a buyers market, sellers are more concerned about other homes in the area. You can use the information you’ve gathered to your advantage in negotiations. 
  • How long has the home been on the market? The longer a home’s been on the market, the easier it is to negotiate. With your additional leverage, you can ask for a lower price, contingency, concessions, and repairs. 

Seller’s Market

A seller’s market is just the opposite of a buyer’s market — the supply of homes is less than the demand of buyers. In a seller’s market, the seller is in a much better position. There is much more competition surrounding each house in a seller’s market. Homes are selling faster, and often with multiple parties interested in each home. 

In this market, sellers can raise their asking prices and buyers have little power to negotiate. The increased competition amongst buyers can lead to bidding wars. In a bidding war, multiple people are bidding on the same house. Bidding wars are dangerous. Sometimes sellers will even list their home under market price to incentivize a bidding war. They can lead to buyers paying much more than the asking price to secure the house, and buying a house over the list price is risky. If you are a buyer in a seller’s market, there are a few tips to keep in mind:

Be patient 

Looking for houses in a seller’s market is frustrating and discouraging. You may find yourself losing out on many homes you are interested in, but that is to be expected in this competitive market. Frustrated, you may be inclined to go further in a bidding war to secure the house, which often leads to you either offering more money than the home is worth or than you feel comfortable spending in order to secure the home you want. That is never a good reason to buy a home.

Don’t settle

Don’t lower your standards and make an offer on a home you aren’t that interested in. Buying a home is a huge investment and commitment, and it is worth the extra frustration to get a home that is perfect for you.

Understand you’re at a disadvantage

With competition amongst buyers, it is not the time to try and negotiate. Think about your priorities when looking for a house. What are your deal breakers? What price is the upper limit, no matter how much you like the house? Knowing these in advance is a good way to make sure you don’t make an offer that you regret.

How to Distinguish Between the Two

There are a variety of ways to determine whether a market is a buyer’s or a seller’s market. Another thing to keep in mind is that it is a spectrum. Even if you’ve determined that the situation is a buyer’s market, doing some research is still important to see what it is specifically. 

A good place to start is reviewing the homes currently up for sale. The more there are, the more likely it is a buyer’s market and vice versa.  To take it a step further, divide the number of available homes by the number of homes that sold in the last month. If your result is under five it is a seller’s market. If it is over seven it is a buyer’s market, and anything in between is a neutral market. 

Look at the price history of the houses in your area. If the prices of homes have gone down recently, it is an indication that it’s a buyer’s market. Though keep in mind some sellers will value their home above or below the listed value independently of the market. Look for a trend, not just a single example.

There are tools to track if the home prices have risen or fallen over recent history, and that trend is a very good way to determine what kind of market it is. 

Buying a House Over List Price

A happy family moving in to their new home
If you find your dream house — buying over list price may be worth it! Image courtesy of Bankrate

Buying a house below or at a list price is not always in your options. If you are looking in a seller’s market, you may need to make a deal on a house soon, not wait it out. And if you are looking, you might find a house you absolutely love and know that it is worth paying that extra few percent to secure it. 

There is a time to buy a house over list price, but if you do there are some things you should do, some things you should not do--and making sure you go about it correctly is the best way to ensure you do not regret your decision down the line. 

Home Appraisal and Mortgage

To get a mortgage, you must get the home appraised. The appraisal value will influence the size of your mortgage loan from the bank. A home appraisal determines the fair market value of a home. One danger of buying a home over list price is visible here. If you make an offer on a home for $305,000 and the appraisal comes back at $300,000, your bank only needs to give you a $300,000 mortgage. That means you have to pay the difference out of pocket on top of the down payment. In this instance, it is an additional $5,000. 

We recommend an appraisal contingency in the sales contract. It means you can walk away from a home purchase if the appraisal comes in below the agreed-upon price. 

Get preapproved for your mortgage

Before you start house hunting, it is important to get preapproved for a mortgage. Getting preapproved is a very important step. A preapproval means the bank trusts your finances and is willing to loan you up to a certain amount of money on your mortgage. Your preapproval ensures you can make an offer right when you find a good home. In fact, many sellers will not accept offers if you are not preapproved.

Your preapproval also narrows down your price range. If your mortgage preapproval is $200,000, you know that is the upper limit of your budget. In this instance, however, they are not required to give you all $200,000. If your home is appraised at $150,000, that is the mortgage loan you will receive. 

Overbidding FYIs

A great house in a seller's market
There are so many factors when it comes to buying a house, and paying over list price can be your best option. 

When you are buying a house in a seller’s market it is common to pay over list price. Competition is fierce, and sellers can leverage that to their advantage. Buying a house over list price is always risky, but there are times where it makes sense. Understanding when to do it and when to back out is important.

The Dangers of Overbidding

Buying a house is an incredible investment and commitment, and finding a place you can afford and one you can call home, while a big challenge, is worth the difficulty.  If you are in a seller’s market, or in any position where you have to offer over list price, here are a few ideas to keep in mind. 

Bidding wars

Bidding wars are when multiple buyers are competing to get the same house. Most of the time the highest bid wins. For a seller, this is perfect, as a bidding war will always drive up the price of a property. Bidding wars are dangerous. Being in a bidding war is a big stressor in an already stressful situation. 

Bidding against yourself

In a close bidding war, it is common for a seller to ask each buyer to submit their best proposal. The caveat is you have to submit it blindly. Amongst agents, this practice is referred to as bidding against yourself. This tactic is dangerous for you, the buyer, for a number of reasons. 

Without knowing what the highest bid is you may vastly overestimate and end up paying much more. Your offer may already be the highest one and you do not know it. If you are in this situation, you can always keep your offer the same or just back out of the deal. 

The Pros of Overbidding

Although it is risky, there are times where bidding over the list price is worth it. For one, it increases your chance of getting a house. If you see a house that you really love — making a move to secure it within your preapproval range and your budget is a valid reason to make a high offer. In a competitive environment, approaching a seller with a high offer makes you look more appealing, as well. 

Offering a Higher Bid

When you are making a bid on a house there are loads of factors that go into it. Researching the market and seeing whether it is a buyer’s market or a seller’s market is a great place to start. Researching the area, figuring out your budget, and how you feel about a particular property all have a say in your bid on the house. 

There is absolutely a time and place to make a bid on a house over list price. It is risky, but if you avoid the pitfalls of making an offer you cannot afford or one that exceeds the house’s appraisal, it may be the deciding factor as to whether or not you end up with the house. Remember, your emotions are a big part of the housing search, too. Buying a house is a long-term purchase, and finding a place you are comfortable living in is worth a bid over the list price. 

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October 1, 2021
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