Why Buyers Pay More Than List Price for a Home
Benefits may exist, but beware of sellers using manipulative tactics
For many buyers, paying more than 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.
Reasons You May Want to Pay More Than List Price
If you’re buying in a seller's market, you may want to pay more than a home’s listing price. Seller’s markets—also called “hot” markets—have high demand but low supply. As a result, home prices jump, and competition is stiff. You could find yourself up against bidding wars, and a higher offer may be the only way to stand out and secure the home.
Here are a few other reasons you may want to bid more than list price:
- You love the home and want to make sure you get it
- You know there’s a bidding war or lots of competition for the property
- The house is undervalued (comparable sales can help you judge this)
- There are cash bids on the table
If you know the seller isn’t exactly motivated to sell—maybe they’re testing the market, or it’s a second or third home they’re selling—then extra cash may be the motivator they need to accept your offer.
Know What You Can Afford
Considering your finances is also important. No matter how much you want a home, don’t offer over the listing price if you can’t afford it (or you’re not approved for a mortgage loan of that size).
Be Cautious About Overbidding
If you are relying on financing to close your deal, then highball offers may get you into trouble.
To get a mortgage—and to determine the size of that loan—you will need to get 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 will only offer you the home’s appraised value.
In this case, you have a few options:
- You can appeal the appraisal and get another one
- You can ask the seller to accept the appraised value of the home
- You can negotiate with the seller to reduce the price slightly, and then make up the rest of the difference out of pocket
- You can pay the full difference between your offer and the appraised value out of pocket
- You can pull out of the deal entirely
Canceling the Sale
As long as you’ve included an appraisal contingency in your sales contract, you should be able to back out of the deal unscathed. If you try to do so without a contingency in place, you will forfeit your earnest money deposit.
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. Sometimes the seller cannot decide between the offers. The proposals could be similar to each other, so the seller might elect to ask each of the buyers to submit their highest and best price. It's sort of like a runoff in an election.
Many buyers might see this as a second chance to get the home. Among agents, the practice is known as "bidding against yourself." You are asked to increase your bid without knowing how much the other offers—or if your offer is already the highest. Proceed with caution here, and remember: sellers can always counteroffer if they feel the home is worth more. You don’t have to increase your bid without more information about what they’re looking for in your proposal.
Reduce Your Risk With 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 increases her bid incrementally to beat out other buyers. For example, the clause could say she will pay $1,000 above the highest competing offer up to a maximum price of $220,000.
A Word of Caution
Some buyers think this is a clever strategy, but few real estate agents agree. Below are some of the problems.
- You don't 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.
- It could cause appraisal issues if the price goes too high.
- Because no solid sales price is named, an escalation clause could also make the contract invalid.
Offering a Higher Bid
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 the 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.
If you do decide to offer more than listing price, make sure to run the numbers by your agent or, at the very least, study up on comparable sales to make sure the price makes sense. Appraisal problems aside, you also want to be sure you’re making a smart investment of your dollars and that you’ll see a return on your investment when it comes time to sell.