High listing prices
If you are shopping for a home today, you’ll notice that the listing prices seem high–that’s because they are. Understand why. It’s the simplest reason: supply and demand. Why the supply is so limited and the demand is so high is beyond the scope of this post but to read more on that, click here as well as here. For statistics on this market, click here.
Should I expect to pay list price?
In most markets, most of the time, sellers list their homes and expect to receive offers slightly below their asking price. Today, unless a property is not attractive to buyers (regardless of the price), that scenario is exceptionally rare. Now, almost every desirable property is purchased at a much higher price. One article suggested that you look at the list price like an auction reserve price: the lowest the seller will go, but not what he expects to get. How high should you go? Click here.
What else besides offer price matters?
In low supply markets today (which is most of the country), the offers sellers are choosing are not only often the highest purchase price, but the ones with the fewest contingencies. People are waiving inspection contingencies. Be aware that choosing to waive inspections may mean that you discover problems once you own the house that require expensive repairs. Many winning offers are also waiving appraisal contingencies.
Why the appraisal is so important
Remember that your lender will only lend a percentage of appraised value. When a property appraises for less than the purchase price, the loan amount decreases. That situation leaves a gap between the amount you were planning to spend as a down payment (for example, 20% of purchase price) and the amount you’ll have to add in to make up for the reduced amount of mortgage money.
While the agreement of sale provides the right for buyers to terminate in the event of a low appraisal (to avoid this potential unpredictable out-of-pocket expense), sellers these days are looking for, and getting, offers that waive this appraisal contingency.
The non-obvious negative of a high offer
Obviously, if you agree to pay above the asking price, you are spending more on your down payment and more on your mortgage than you would have at list price. However, there are significant financial implications beyond that one. Beware the appraisal trap.
Recognize that the appraisal trap issue should be resolved in another few months once properties that are selling now at inflated numbers settle and are recorded. Then those properties will raise the bar as far as appraisal values on new properties. Once the appraisals catch up, there shouldn’t be such a gap between purchase prices and appraised values which means the additional out of pocket cash expense will decrease.
Structure your offer carefully
List prices in many markets are up to 10% higher than they were a year ago, and are selling for higher than list in many cases. If you are considering making an offer on a property at this volatile time, do so from an educated position. If you understand why the prices have increased so steeply (reduced supply and increased demand), you can better predict what kind of offers are winning these properties and use that information to decide upon your own offer strategy.
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