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Inflation and persisting housing supply shortages may change the way you buy—and how much you pay for—your next home. In April 2022, 58.8% of homes sold for more than the asking price, according to Redfin. Adding tens of thousands of dollars to a home's asking price may be necessary in a competitive housing market—but the challenge is knowing how much to bid.
The truth is there's no magic number that'll tell you how far above a home's asking price you should go. A seller might ignore a bid that's too low, but offering too much has its own risks. The amount you bid over asking should be based on comparable recent sale prices, market conditions, housing demand and the amount you suspect the property will be appraised for. When taken together, this information can help you craft a competitive bid.
Factors That Can Help Guide Your Offer
Comparable Properties
Comparable recent sale prices (or "comps") can be a good way to gauge your local market. An experienced real estate agent who's familiar with the area will likely prove valuable here. When you look at similar properties that have recently sold nearby, how much did they go for? Chances are the seller of the home you're looking at is using this kind of information to determine their listing price. If they're asking for an amount that's in line with local comps, it could be a good jumping-off point for the offer you make.
Current Market Conditions
Your local housing market can majorly influence your offer. Nationwide, 87% of homes sold in March 2022 were on the market for less than a month, according to the National Association of Realtors. When homes are selling fast, it suggests that demand is high. This puts the seller at an advantage. Depending on how much interest their property is getting, the seller may have the luxury of choosing between multiple bids over the home's asking price. Revving up your offer can help you stand out in a bidding war,
Just be sure you can ultimately afford what you're offering. After accounting for your monthly mortgage payment, property taxes and insurance, it's wise to cap your housing costs at 28% of your gross monthly income.
The Home's Expected Appraisal Amount
Most mortgage lenders will require a home appraisal before greenlighting your application. If the appraisal comes in lower than your offer and the seller isn't willing to lower the sale price, you'll have to either cover the difference or walk away from the deal. The lender won't approve a loan for more than the home is worth.
Having an appraisal contingency in your purchase contract will allow you to walk away from the deal if the home is appraised for less than your offer amount. In hot housing markets, however, it's common to waive this contingency. Before making an offer, make sure you're comfortable with the risks—especially if you've waived your appraisal contingency.
Since appraisals can vary from home to home, it's wise not to take a one-size-fits-all approach to overbidding. Offering, say, $5,000 above the asking price of one property could have a very different outcome than over-bidding the same amount on another home. This is all to say that your offer should be carefully tailored to each property.
Risks of Bidding Too Much Over the Asking Price
- You may have to make up for an appraisal gap, which could translate to a significant upfront cost or force you to back out of the deal.
- Depending on your timing and contingencies, having to back out of a deal you overbid on could result in the loss of your earnest money deposit.
- Your mortgage lender could deny your loan or approve you for an amount that doesn't cover your offer. (Having a financing contingency in your contract allows you to abandon the deal if you're unable to secure financing.)
- If all goes well with financing, you might still end up paying too much for a home. This could create a financial burden.
Risks of Underbidding
- Your offer could be outright rejected by a seller.
- Other interested buyers may outbid you.
- You could miss out on other houses if you're only submitting one offer at a time.
What if You Can't Bid Above the Asking Price?
If your budget prevents you from bidding too much over the asking price or you're not comfortable with the risk, you can look for other ways to sweeten the deal for the seller. This might include:
- Cutting some contingencies: Doing away with a home inspection contingency or appraisal contingency, for example, could make you a more attractive buyer because it sets the stage for a quicker transaction. Just remember that contingencies are meant to protect you as a buyer. Eliminating them could come back to bite you.
- Accelerating your financing: Perhaps the most effective way to do this is to get preapproved for a mortgage. This involves submitting key financial information to a lender, such as your income, debts, assets, credit history, employment information and more. If you're preapproved, you'll receive a letter that lays out your expected loan amount in black and white. It can help legitimize your offer. You'll still have to complete a mortgage application when the time comes, but preapproval tends to speed up the homebuying process. Some sellers won't even look at an offer unless the buyer is preapproved.
- Granting the seller certain courtesies: This will all depend on the seller, but look for ways to make their life a little easier. Maybe that means letting them continue to live in the home for a few weeks after closing. It may give them some breathing room and reduce the stress of moving—and they might appreciate that.
The Bottom Line
Bidding above the asking price of a home may be necessary in a hot housing market. Getting a handle on surrounding comps and market conditions can help you craft the best offer. The home's appraisal amount often plays an important role as well.
Buying a house usually requires a lot of financial preparations. Long before making an offer, you'll want to be sure your credit is as strong as it can be when seeking preapproval. It's something that can improve your odds of getting approved for a mortgage. Just know that lenders rely on certain FICO® Score☉ versions when considering home loan applications. An Experian CreditWorks℠ Premium membership will give you access to them, plus other resources for improving your credit.