Bidding on a House That is Overpriced
By Emily Southey | 9 minute read
In a competitive housing market, it’s all too common for buyers to overpay for their homes. The reasons for this vary. Perhaps they don’t realize they’ve paid too much or are simply the victims of a hot market. However, any time a buyer overpays for a property, it presents a new set of challenges. Buying and financing a home is complicated enough, but when you purchase an overpriced home, you could be stuck with a high-interest mortgage that has serious financial ramifications for years to come. Luckily, the experts at Wahi are here to help ensure you never overpay for a home again. To avoid getting taken advantage of, we’ve put together a list of tips to ensure you stay within your budget when bidding on an overpriced home. Check them out below.
What Is a Bidding War?
Bidding wars involve two or more prospective homebuyers competing to purchase the same home by submitting incrementally increasing bids. Bidding wars are more likely to occur in hot housing markets when home inventory is low and demand is high.
Multiple Offers versus Bidding Wars
It’s important to note that bidding wars and multiple offers are not the same. A “multiple offer” situation is when two or more buyers submit an offer on a home, whereas a bidding war involves negotiations between the seller and each of the buyers (or their realtors), with the purpose of enticing the buyers to outbid each other to win the home. A home with multiple offers could escalate into a bidding war, depending on the seller and the market conditions.
Determining if a Home Is Overpriced
Before you make an offer on a home and find yourself in a bidding war, it’s crucial to determine whether the home is overpriced. Knowing if the home is overpriced can help you determine your offer strategy. Below is a list of key indicators that a home’s asking price is too high.
The listing price is considerably higher than that of other homes in the neighbourhood
One of the quickest ways to determine if a home is overpriced is to study the comps (the purchase prices of comparable homes that recently sold in the area). If you’re buying a home without a realtor, then you will need to conduct a comparative market analysis yourself. Otherwise, your realtor will likely do it for you. Regardless, it’s crucial to ensure that the analysis looks at homes in the same neighbourhood as the listed property. The homes should also have comparable floor plans, including square footage and the number of bedrooms, and should also be of a similar age and condition. From there, you can compare the listing price of the property you’re interested in against the purchase prices of these homes. If you notice major discrepancies, the home could be overpriced.
If other homes in the area sold much faster, indicating the property is priced above market value
A second way to determine if a home is overpriced is if other homes in the same neighbourhood sold much faster. The longer a home sits on the market, especially if it’s a hot housing market, the more likely it is that something is wrong. And if your comparative market analysis revealed that the home is priced above market value, then the fact that it’s overpriced could be the main reason it’s been on the market longer than others.
“Conduct a comparative market analysis to find out at what price and how quickly other homes in the neighbourhood sold. You can also use Wahi’s Bestimator tool to get an estimate of the value of the home you are looking to buy. This should give you an idea of whether a home is overpriced or not.”
If the home hasn’t received any offers
Finally, if the home hasn’t received any offers, this could be yet another indication that it’s overpriced. Have your realtors check if any other offers have been made on the property. If the home has been sitting on the market for quite some time and has yet to receive a single offer, chances are it’s overpriced.
Eight Tips on How to Bid on an Overpriced House
Now that you have the tools to determine whether a house is overpriced, it’s time to learn how to bid on an overpriced home. Follow the eight tips below to avoid overpaying for a home.
1. Hire an experienced realtor
One of the most effective ways to avoid overpaying for a home is to choose an experienced realtor. The more knowledgeable and experienced your realtor, the better they will be at negotiating. They can help you determine if a home is overpriced and come up with a strategy to avoid overpaying. When interviewing prospective realtors, remember to ask about their background with overpriced homes.
2. Determine if the home is really overpriced
Before you submit a lowball offer, do your best to determine if the home is really overpriced. After all, if you submit an offer below asking only to discover the house isn’t overpriced, you risk insulting the seller and having your offer rejected. For this reason, we recommend conducting a comparative market analysis to find out at what price and how quickly other homes in the neighbourhood sold. You can also use Wahi’s Bestimator tool to get an estimate of the value of the home. This should give you an idea of whether a home is overpriced or not.
3. Prove to the seller that the home is overpriced
Being rude or condescending will get you nowhere. Even if you’ve determined the home is overpriced, you should always be respectful. When making an offer on an overpriced home, include the reasoning behind your offer price (which is likely to be below asking). For example, you could include the findings of the comparable market analysis you or your realtor prepared in the previous step.
4. Understand the seller’s motivations
Ascertaining the seller’s motivations can help you determine their priorities, which in turn, may help you avoid overpaying for a home. For example, some sellers may be solely influenced by the money and are willing to wait for the highest bidders. But others may be in a rush to sell their home and would be open to a lower purchase price if it leads to a faster home sale.
5. Offer to buy the home with cash
There are few things more attractive to a seller than an all-cash offer. If you find yourself in the middle of a bidding war and can afford to buy a home with cash, you should consider doing so. All-cash offers that aren’t conditional on financing are one of the most effective strategies for bidding on an overpriced home. Some sellers may even be willing to lower the sale price in exchange for the convenience and speed that cash home sales offer.
6. Remove all conditions
Just as all-cash offers are attractive to sellers, so too are clean offers without conditions. Offer conditions protect the buyer but they are often a burden to the seller. They slow down the homebuying process and put the transaction at risk if one of the contingencies is not met. Therefore, if you want to win a bidding war or make a lowball offer on an overpriced home more attractive, try to remove as many conditions as possible.
7. Promise a healthy earnest money deposit
An earnest money deposit is an out-of-pocket expense that buyers pay when purchasing a home. A deposit is a sign of good faith but there are no specific requirements for earnest money deposits as there are for down payments. Generally, earnest money deposits range between 3% and 5% of the purchase price. However, the larger your deposit, the more attractive your offer becomes. So if you find yourself in a bidding war, we recommend offering a healthy earnest money deposit between 5% and 10% of the purchase price. It’s important to note that the earnest money deposit isn’t delivered until after the offer is accepted and the purchase agreement is signed. Therefore, when you submit your original offer, you should include a note stating that you are willing to make a higher deposit if your offer is accepted.
8. Add an escalation clause to your offer
One final tip for bidding on an overpriced home is to add an escalation clause to your offer. If the home is overpriced, then ideally you don’t want to offer more money. But if you’ve already made your offer terms as lenient as possible (for example, you’ve removed all conditions), then including an escalation clause might be your best bet for winning a bidding war. An escalation clause can be an effective way of winning a bidding war without overpaying for the home.
An escalation clause is an article added to an offer letter that allows the buyer to increase their offer price up to a set amount if a bidding war occurs. In essence, the escalation clause stipulates that the buyer will pay a certain amount of money for the home. However, if the seller receives another offer of a higher value, the buyer will increase their initial offer by a certain amount. It’s important to note that sellers do not have to accept offers with escalation clauses, and could request this clause be removed as part of their counteroffer.
Escalation clauses are useful tools when bidding on an overpriced home. Since they allow buyers to submit a competing offer without constantly worrying about being outbid, they alleviate some of the stress of bidding wars. They also allow buyers to determine the maximum amount of money they are comfortable spending on the home ahead of time, helping avoid any rash decisions.
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Frequently Asked Questions
How do bidding wars work?
Bidding wars often begin as multiple offers (when multiple buyers submit an offer on the same home). While the seller can simply accept one buyer’s offer and reject the others, they may also try to escalate the situation in an attempt to drive the sale price up. The way to escalate the situation is by starting a bidding war, where the seller or their realtor encourages prospective buyers to compete against one another to “win” the home. The seller usually accepts the offer from the buyer who submits the highest bid.
In a bidding war, buyers are goaded into an auction-like scenario, in which they attempt to outbid each other with incrementally higher bids. Typically, bidding wars are initiated by the seller’s realtor who encourages the buyers’ realtors to raise their offer prices after receiving an initial series of offers.
Like an auction, bidding wars move at a fast pace, which means buyers need to make quick decisions if they want to win the home of their dreams. The speed at which bidding wars move can be stressful, leading some buyers to make emotional or rash decisions.
How can I know if a house is overpriced?
To determine if a house is overpriced, conduct a comparative market analysis that involves researching how much comparable homes in the same neighbourhood have recently sold for.
How much over the asking price is too much?
In a hot housing market, experts recommend offering between 1% and 3% over asking. However, if a bidding war commences, the winner could end up paying far more than 3% above the listing price. Determining how much over asking is too much largely depends on the local real estate market as well as your personal budget. You can also use Wahi’s Bestimator tool to get an estimate of the value of the home.
Do overpriced homes take longer to sell?
Yes, overpriced homes often take longer to sell.