Is It OK to Pay Over List Price for a Home?

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Question: Is it OK to Pay Over List Price for a Home?

A reader asks: "Every home we have been interested in looking at lately is sold from under us. Sometimes, the home sells before we even get to look at it. Our REALTOR® is telling us we have to a) be faster and b) pay over list price. I guess we could act a little faster but why should we have to pay more than list price, more than what the seller is asking? That sounds like our REALTOR® just wants to make more money from us. What gives? Is it OK to pay over list price for a home? Would anybody ever do it?"

Answer: First, let's address the issue of whether your agent will push a higher price on you so the agent can get paid more. That's most likely untrue. It's unethical. Moreover, if you figure that agents get paid a small percentage of the sales price, the amount they would receive for a $10,000 price increase, for example, hardly amounts to enough to pay for a dinner for two at a nice restaurant.

On the other hand, it is completely understandable how a home buyer might be reluctant to pay over list price for a home. After all, if you go into a grocery store to buy a loaf of bread, you don't expect the grocery clerk to ring up a higher price for that loaf of bread than the amount shown on the sticker. Why should you pay more for a loaf of bread?

Now, imagine there has been a terrible flood. All of the roads into town are washed out. Nobody can get in or out for days. The grocery store aisles are pretty much bare, yet there remains one loaf of bread sitting on the shelf all by itself.

There is a line of shoppers waiting outside the door for the store to open. All eyes are on that one loaf of bread. Now how much would you pay for it? This is exactly what happens in a seller's market and why you might have to pay over list price for a home.

Why Buyers Pay Over List Price in a Seller's Market

For many buyers, paying over list price for a home goes against the grain.

It goes against everything they have ever known about real estate, which is to say they think you're supposed to negotiate. How can a buyer negotiate if the seller wants more money way over the asking price? How high do you go?

The problem is competition. You've got more buyers than there are homes to buy in a seller's market. In real estate lingo, it's known as limited or falling inventory. Whenever you have a big demand for a product in small supply, the price for that product goes up. In a multiple-offer situation, the final price often exceeds the list price.

Using an Escalation Clause to Pay Over List Price

In highly competitive markets, some buyers try to get creative because they are desperate to buy a home. They might employ an escalation clause in their purchase offer. An escalation clause works like this. I want to buy your home, and you are asking $200,000. I would write an offer that says I will pay X amount, let's say $1,000 more than your highest competing offer up to X amount, say, $220,000.

There are buyers who think this is a very clever strategy but few real estate agents agree. I do not use escalation clauses in my real estate practice. Here are a few of the problems:

  • For starters, you don't really know if there is another higher offer.
  • Second, you might pay a lot more than you would pay in a normal negotiation process.
  • And third, there is no solid sales price named, and lawyers say it could make the contract invalid.

Bidding Against Yourself to Pay Over List Price

In certain circumstances, a seller might ask buyers to go into round two of negotiations. Say, 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.

This is known as bidding against yourself. Because you are asked to increase your offer without knowing how much the other offers are or even if your offer is already the highest offer.

Another way to look at this practice is the fact you are given a second chance to change your offer price. Maybe you were the second offer, thinking there would be only two offers. If you had known that there would be 10 offers, you might have offered more in the first place.

The Problem With Paying Over List Price for a Home

On the plus side, if you pay over list price for a home, you might buy a home. Whereas, not paying over list price for a home in a multiple offer situation would mean you are not buying a home at all. However, you run the risk that the home might not appraise. If you are relying on financing to close the transaction, you will need to obtain an appraisal for the bank.

Appraisals are simply a matter of professional opinion and professionals can differ from each other in opinions. The appraisal will be based on comparable sales. If there are no comparable sales to support your offer price, the home will not appraise. This means you will most likely be asked to pay the difference or to cancel the transaction.

Smart sellers do not accept an offer from a buyer that is too high to appraise. Not unless the buyer has given the seller assurance that the buyer will absorb the difference and close, regardless of appraisal. Bear in mind that a buyer who says the appraisal is waived might be relying on other contingencies by which the buyer could cancel. An appraisal contingency waiver is not always a guarantee that the buyer will close.

At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.