Why Buyers Pay Over List Price for a Home
While not always a bad idea, beware of sellers' manipulative tactics
For many buyers, paying over list price for a home goes against the grain—or more specifically, the sense they're always supposed to negotiate in real estate transactions. Still, sometimes paying more than list price might be warranted. Say it's a seller's market: You've got more buyers than there are homes to buy, a situation known in real estate lingo as limited or falling inventory. Whenever you have a big demand for a product in small supply, the price for that product goes up.
Using an Escalation Clause
In highly competitive markets, some buyers might employ an escalation clause in their purchase offer. An escalation clause works like this: A seller is asking $200,000 for his house. The potential buyer would write an offer that says she will pay a certain amount above the highest competing offer up to a certain point: say, $1,000 over a competitor's bid, up to a final price of $220,000.
Some buyers think this is a clever strategy, but few real estate agents agree. Here are some of the problems:
- You don't really know if there is another higher offer, but an unscrupulous seller could pretend there is.
- You might pay a lot more than you would pay in a normal negotiation.
- Because there is no solid sales price named, it could make the contract invalid.
Bidding Against Yourself
In a multiple-offer situation, the final price often exceeds the list price. Say that 10 buyers have made an offer to buy a home. If the seller cannot decide between the offers, or if the offers are similar to each other, the seller might elect to ask each of the buyers to submit their highest and best price for the property. It's sort of like a runoff in an election.
Many buyers might see this as being given a second chance to get the home by changing the offer price. Still, the practice is known as bidding against yourself, because you are being asked to increase your bid without knowing how much the other offers are or even if your offer is already the highest offer.
Appraisal Problems With Over-List-Price Bids
Another wrinkle with highball bids comes into play if you are relying on financing to close the transaction.
To get a mortgage—and to determine the size of that loan—you will need to obtain an appraisal of the property for the bank. The appraiser's opinion of the home's worth will be based largely on comparable sales. If there are no comparable sales to support your offer price, the home will not appraise, which means that the bank won't loan you the full amount of your offer; instead, it'll base any mortgage on the appraisal value.
Smart sellers often do not accept an offer that seems too high to appraise—unless the buyer can give assurance that he will absorb the difference between what he's offering and what he can borrow. The bid is not contingent on financing; he can come up with more cash, in other words, and complete the transaction, regardless of the appraisal. Even so, many sellers are suspicious that a buyer who'll willingly waive the appraisal might be relying on other contingencies to get out of the deal or renegotiate prior to closing.
Quite simply, generalizing about when you should and shouldn't make a highball offer is impossible. On the plus side, if you pay over list price, that move often nets you a home, while not paying over list price for a home could mean you are missing out on a chance for the property you want. Remember that in highly competitive markets, you should always be aware of the potential for manipulative tactics by sellers.
At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.