Last Updated on January 24, 2024 by CREW Editorial
Experts advise giving at least 1% to 3% more than the asking price to win a bidding war in a competitive market. However, there may be less competition for today’s homebuyers. Of course, every market and every house is unique, so many purchasers still have to fork over more money than the asking price.
Each situation merits a different response. To determine how much you can afford to offer and when to walk away, it is best to set your expectations and budget in advance. Negotiations will be simpler as a result.
Keep reading to find information on how much you should offer over asking price for a house, as well as general details on how to effectively budget for a home purchase.
How to Determine Your Maximum Home-Buying Budget?
It’s important to set a monthly budget and keep in mind the upfront costs, including the closing cost for the home. The mortgage payments, down payment, and property taxes are only some of the expenses that you will be facing — there are also maintenance costs and other unexpected expenses.
For instance, anything more than a $1,500 monthly mortgage would be outside of your comfort range. You can calculate your maximum offer using this affordability information and your known interest rate.
Keep in mind that your mortgage should only consume 30% to 40% of your gross monthly income when determining your ability to purchase a home.
How to Avoid Overpaying for a House?
Sometimes you must initially offer a higher price than the one you planned. It’s often best to minimize regret and consider carefully in order to make the best possible decision. For you to avoid paying more than what the property is worth, you should consult a professional who can provide you with comparable recently sold properties.
The house selling at more than the asking price doesn’t necessarily mean the purchase price is logical. Your agents can and should check current properties for active listings to compare features and ensure you don’t spend too much.
That being said, a house is only worth what a buyer is willing to pay. At the end of the day, any home is worth whatever someone will pay for it, which can sometimes be a very large sum. If you get over difficulties like the gap between value and offer, the home is worth whatever price you or somebody else find agreeable.
You May Need to Broaden Your Horizons
It’s recommended to expand your search to include more affordable homes. Never hesitate to look at homes you might have seen that are a little outdated — some may need some updating before becoming your dream home.
It can be tough to get a decent price on a place in an area with lots of competition. Shopping outside a more desirable neighborhood can provide the most budget-friendly homes for buyers.
When looking for more affordable home values, it might be helpful to look outside of your local market’s trendiest neighbourhoods, especially if you’re a first-time home buyer who can only pay a minimum down payment.
Ask Questions and Define Deal Breakers
It is also wise to ask many questions to determine how much the property is worth. These questions can make a big difference in defining your goals strategically. As an initial start, you should ask yourself: how much am I actually willing to spend to get this house?
Just because the market is competitive doesn’t mean there won’t be numerous multiple offer cases — and not every single seller will need more than the asking price. There are always going to be conditions and prices that are deal breakers.
It’s usually wise to look elsewhere if you find structural or environmental issues during the appraisal that would be expensive to rectify.
Furthermore, you might be forced to back out if the lender refuses to finance your acquisition because the appraisal comes in drastically below the purchase price.
Today’s Home Buyers Face a Less Competitive Housing Market
Buying homes in early 2022 will look different than in recent years where the sellers were essentially able to choose prices. In 2023, the hot housing market is expected to cool down, increasing real estate inventory.
That being said, people will have access to very low but still increasing home mortgage prices as the Bank of Canada continues regular rate hikes. Buyers should be willing to pay the asking price for a home they truly desire, even if they avoid an open bidding war, as long as it is still within their budget.
How Low to Lowball on a Real Estate Offer?
The thing about lowball offers is that you want to communicate that you feel a lower price is appropriate without insulting the seller. You also want to make sure that your competition is of a similar mind — if they’re willing to go higher, you’re shooting yourself in the foot when it comes to a bidding war.
A solid rule of thumb is to never reduce the price by more than 25% from what is listed. The sellers are already busy considering fees, commissions, and sentimental value associated with their homes. If you offer them less than what they expect, they might completely reject you.
What’s the Difference Between a Buyer’s Market and a Seller’s Market?
Whether or not your bid should be lower depends greatly on the current market conditions. Ideally, before buying real estate, you should know how active and valuable the market is in your target area. Traditional buyers’ markets have high price stability, as the stock availability is large and houses generally remain on the market longer.
In a seller’s market, on the other hand, buyers can become desperate, and a bidding war can drive up closing prices on a shrinking stock of available homes. You can talk to your real estate agent to get a feel for market conditions in order to come up with a strategy.
How Much to Offer on a House in a Seller’s Market?
In a seller’s market, it becomes harder for potential buyers to gain leverage during negotiations. You can expect to encounter sellers who expect more than their asking price, and they will surely react poorly to lacklustre offers.
If you plan to buy a property, it is best to list a price and then consider going above that price as soon as possible. Some other home buyers may want to make an introductory offer or refuse inspections to speed negotiations along in their favour.
How Does the List Price Compare to Similar Homes in the Area?
Once you’ve got enough room to explore other sales areas, it’s time to compare them to your chosen area. Request the agent to prepare a comparative market analysis (also known as a CMA). It will show the list price of similar home sales sold during the corresponding period.
This should help you in the purchase of a home by giving you an idea of what to expect. Your seller will be aware of how the real estate market is performing in the area, so having the same knowledge yourself can play to your advantage.
How Long Has the Real Estate Listing Been Active?
The property history can help to estimate the demand for a given home. Two days in the market? Then you might want to avoid a lowball offer. A year of sales with price cuts? Maybe you can take advantage of the low demand.
The longer a house is on the market, the greater the possibility that there is low demand. If the house is on the market long before its purchase, the owner is likely motivated to sell it as quickly as possible. This gives the buyer a bit more leverage during negotiations.
When you should and shouldn’t offer above the listing price
If you’re looking for a home, you must decide if the costs will work financially for you and your family. It’s important that if you cannot comfortably afford the costs associated with purchasing a home, you should look elsewhere and avoid going over the asking price.
It’s best to limit higher bids to homes that really fit what you’re looking for without any extra hassle. If the house has a bunch of issues that need fixing, then you will need the extra money after the deal closes.
Potential Problems When You Offer Above Asking Price
You may not qualify for a mortgage loan if the home does not appraise for the amount you are offering. This is known as an appraisal gap. It’s very important that if you want a mortgage, you get approved before applying. There are many tools available online for estimating how much you can afford to offer.
Remember that no mortgage lender will permit you to borrow more than the home’s evaluated value. You may need to come up with the difference in cash, but you can still pay more than the house is worth.
Of course, the main risk you take on when making an offer above the asking price is overpaying for a home compared to its housing market value. If you plan on selling the house later down the line, you might have to wait much longer than expected for the price to break even.
How Much Over Asking Price Is Too Much?
Experts recommend introducing an offer of 1% to 3% higher in a competitive bid battle. However, potential buyers are facing less competition these days. In June 2020, average homes were selling around 1% below their list price.
Naturally, all markets and homes vary and many sellers still need to pay over the list price. Make sure to set a budget for yourself in advance and know when to bid lower if necessary.
Other Strategies to Get Your Offer on a House Accepted
You have more tools at your disposal than your offering price. You can try putting up a bigger deposit, for example. This will show sellers that you’re a serious buyer. Before offering to buy a home.
It’s also a good idea to have a loan approval application letter that shows the real estate agent you have the ability to pay the loan back. Ask your mortgage broker if they can give your financial situation and down payment a second thought.
In general, having fewer contingencies can be very appealing to a potential seller or real estate agent. Streamlining the negotiations can make your offers more attractive without them having to be much higher than the asking price.
