So when you're looking at shopping for homes, you might be seeing homes that let's say it's listed at $200,000, but it's a competitive market. A lot of people are bidding on that same home, and you want to offer a little bit more to make your offer more attractive. Is that a good decision?
So first of all, what this does is it's going to help you. It's going to help you win an offer, or at least stand out among other offers.
So the problem with buying a home, I guess not the problem, but the downside to buying a home is it's not like you can go, like when you go to Walmart and you go pick out something off the shelf, a home is in a market, meaning that there are several people who want the same house that you do, and you're all competing for that same home.
So what this can help you do when you offer more than the seller is asking for, this can help your offer stand out a little bit more. Because if we think about the seller's mind, they want to walk away with the most amount of money possible.
That's the main thing that they want. So by offering more money, your offer becomes a little bit more attractive. Now, this really is only needed in a seller's market.
If you're in a buyer's market, that means there are a lot of homes available and there's less competition for these homes. So you probably don't need to do this. In a buyer's market, you have some leverage to be able to maybe ask or offer less than the listing price.
However, in a seller's market, there are fewer homes and a lot more buyers. So the sellers have the advantage and you're going to be competing against other sellers for instance, in this market right now, some homes are being put on the MLS or Multiple Listing Services and then they're getting like 10 to 15 offers placed on them. So it's really competitive.
So you going to want to do this when you're in a moment where you kind of has like your back against the wall. So if there are a lot of options available to you, then I would say, Hey, maybe we don't bid over the listing price because you don't want to overpay for this home if there are five other homes or three other homes or two other homes that are going to be good fits for you.
You really only want to bid over the asking price when you feel like "we don't have any other option". There's not a lot available out there and we really need to put in our best offer here for this home.
So a quick thing, this is a little bit new, but I'm going to introduce what I'm going to call a #CalmMoment, where we kind of shift from the facts of a video and into how this affects us emotionally.
So it can be really difficult when you're in a seller's market because it feels like everything is speeding by you super quickly. It can feel really defeating. I know people who are putting in 10 to 15 offers on homes and they still can't find what they're looking for.
If that's you just know that it's okay to feel discouraged and it's okay to talk with other people about that and let your realtor know, let your lender know. Hey, I'm just feeling really bummed about this. See if they have any strategies on ways that you can move forward with that, but it's okay to feel frustrated and it's okay. Just take a step back as well, because it feels like everything is kind of closing in because of the way that the market is moving. And just to know, it's okay to say, you know what? I think I'm going to take it from this madness for a little bit, recollect my thoughts regain some energy. And then come back in maybe in a few months. It's completely okay to do.
So let's really quickly talk about the benefits of overpaying. Why in the world, what do you want to overpay for a house?
Number one is to possibly cover closing costs. So let's say that a home is $200,000 and your closing costs are, let's say maybe $5,000 and you want credit from the seller to pay those closing costs. Well, you could offer $205,000 and ask for a $5,000 credit back. Basically what you did is you financed your closing costs into the purchase price of the home.
Also, this is going to help you compete against cash offers or offers with better financing. So again, think about a seller. What they want is they want the best the most money possible and they want the easiest process.
So if you come in with a loan that's complex, in a seller's mind, a complex loan is an FHA loan, a VA loan, or USDA loan. They're not really complex loans, but to a seller, they might require a little bit more time than they're not looking for. So if you're competing against a cash offer, but you have FHA, if they're both the same price, the seller might not accept it.
But often if you have, let's say a home that's listed for $200,000 and there's a cash offer for, let's say $195,000 and you come in with an FHA offer for $205,000. A lot of times the seller is going to accept the financing offer because they were already prepared to maybe wait 30 days for financing and they might go with the option to make more money even though you have a less attractive financing option.
What the strategy is for it's for people who are going to be in the home mid to long term. So if you're going to be in the home for a short period of time, maybe don't over bid. But you want to find kind of a break even period of you overbidding for a home, and then being able to recapture that money, that way you don't overpay and lose out if you sell it in the short term.
So what we need to be careful though, is when you offer on a home, that's not the end of the story, because if you're offering with financing, a lender has to do an appraisal to back up the value of the home. So again, if you have a $200,000 house and you say, Hey, we're going to pay $210,000 for it, that's our offer. The lender has to have an appraisal and the appraisal needs to say $210,000 is the value of the home. If the appraisal comes back and the appraisal says, Hey, it's actually only worth $200,000. The lender is not going to give you the extra $10,000 for that property, because then they're in a risky situation.
The lender themselves would be kind of quote-unquote underwater on the mortgage and that's too risky for them. So you're not going to be able to borrow more than the appraisal value of the home with most types of loans. So you need to have a plan for if you have a short appraisal. So, if you do have a short appraisal, you're either going to bring money to the closing table to make up the difference, or you'll have to negotiate with the seller to come down on their sales price, which can be difficult.
So make sure you're prepared and you understand how that's working. Talk with a real estate agent about some plans that you have with that. Also, understand how your mortgage payment is going to change. When you increase the purchase price, your monthly payment is going to increase as well.
It's not going to be huge because you're probably only overbidding by maybe a few thousand dollars. But if that spread is pretty large, your housing payment is going to change a little bit. If you're really tight on what your numbers look like, that might be really important for you. So talk with your lender about some of those scenarios. Hey, if we offered this much more, how much would that change our monthly payment?
So, before we get into kind of these three steps. What I first want to talk about is a chart here. But this chart is kind of demonstrates how this would work and what your break-even period looks like if you're overbidding on a home.
So first, the shaded purple is the history of these prices. So, we can see the last sale was in 2018 for about $200,000. Then in 2019, we can see that value came up to about $220,000, and then we can see today. So in the chart, the shaded purple is our overpayment and above the bid.
So in 2021, we overpaid. Compared to the value, the estimated value is in 2021. So if we sold the house in 2021, so we sold it in one year, we would have lost money. We would have bid too much money to be able to earn back that in appreciation. But what you'll see is over a period of time, the home value increases through appreciation.
What you're trying to do is have your appreciation catch up to how much you over bid. So what you can do is you can go to Zillow, and that's going to help you look at the forecasted appreciation for the area that you're in.
We can also see a dotted line that shows that in 2022, we actually are able to recoup that money. So that's what you need to be careful of. Not all of them are going to break even in one year, they might break even over a period of three years or five years. You just need to be very careful about making sure that the forecasted appreciation is going to match how much you're overbidding so that you know how long you can stay in the property before you're making that money back.
So three quick steps here to kind of get an idea of how much you're willing to overpay and talk through this with your realtor as well, as your lender. You don't have to do this alone, get their advice and opinions on things as well because they have a lot of history and experience with this.
So if you go on something like Zillow, or you can even look on your auditor's website, your county auditor's website, it's going to tell you. How, when the home was sold last, and how much it sold for. So that's going to give you an idea of historical price and how the historical price has trended over a period of time.
Has it seen huge increases, has it seen slow increases, has been sold several times? That's going to give you an idea of the sale price of the property over the past few years.
You can go to Zillow. That's going to give you a good idea of appreciation moving forward so you can see how quickly experts are estimating that the value would increase over a period of time.
Again, is it kind of slow? Is it pretty steep? Is it a growing market? That's going to help you figure out, Hey, maybe if this is a growing market and we see forecasted appreciation pretty high, we might be a little bit more comfortable overbidding for this home, But if things are kind of trailing off a little bit or worse they're declining, then maybe I don't want to overbid for this home because what the data is showing me is that the values are declining or they're not increasing as fast as I'd like to regain the money that I overspent for this home.
Then finally kind of get an estimate of how long you're going to be in the property. I know it can be really difficult to tell. The average for most people is 10 years to be in a home, but your situation might be different depending on your job and your family situation. So try to get an estimate.
If you're going to be in the property for maybe three years, maybe be more conservative on how much you're bidding for the home. If you're going to be in the home for five years or greater, then maybe you can start to be a little bit more aggressive with how much you're overbidding for the house because you have a longer period of time, a longer time horizon to get that appreciation.