Nearly 20 percent of U.S. homebuyers paid more than list price in 2020 — and in the final months of last year, the share of homebuyers getting outbid nearly doubled. Most sellers in these transactions garnered 1 to 10 percent higher than their list price (in some cases it was higher).
Is it worth outbidding the competition in today’s tight real estate market? The answer is steeped in even more questions:
- Are “overbidding” and “outbidding” the same thing? “Overbidding” is being one of the first interested parties to make an above-price offer on a home. “Outbidding” is competing against another buyer’s bid that comes in around the same time. Some buyers place built-in provisions within their offers that automatically over-bid any competing offers by a specified amount. Whether or not the property is really worth this above-and-beyond offer, many buyers win their home just by including this automatic clause.
- Where are you buying? How tight is that market? Do the neighborhoods you’re browsing experience a good turnover in property sales, or is it difficult finding something? The answer lies in geographic desirability combined with home seller activity. Use this as a guide.
- What are comparable-home transaction prices in the neighborhood? Justifying a list-price offer based on “local comps” is a no-brainer. But when you’re equally comparing specific comps to the home you REALLY want (and others REALLY want), sometimes numbers and logic get eaten by competition. At the very least, rationalize a list-price offer in comparison to recent local closed sales before even considering offering more.
- What’s the propensity and capacity for competing buyers to outbid you? While it really depends on circumstances of the other buyer, historically low interest rates on mortgages have recently made it easier for the competition (or YOU) to justify outbidding the other party. The competition has gotten even hotter.
- Could the house be worth significantly more in the coming months? Don’t get short-sighted and grumpy for the wrong reasons. If you offer much higher on the home you want than originally planned, make sure you feel good about it. Sometimes a whole year later, buyers find that outbidding was completely logical as their home’s value jumped even higher due to local supply and demand. And many find they are still happy even if local home values decline.
- How much over-bidding is too much? Probably anything over 10 percent of the list price is too much, but this can vary. For example, 10 percent “over” on a $350,000 home is $385,000. Very few properties are worth 15 to 20 percent “over” their asking price. Again, it all comes down to clear thinking, reasoning and what you really want.
- Will the house be mostly maintenance free for several years? This question is usually asked to justify a list-price offer, but it’s also a good one for outbidding the competition. If the home’s roof, heating, air-conditioning, plumbing and several other utilities and essentials that have expensive one-time replacement/repair costs are new or nearly new, that helps a lot.
- Can you wait it out, or are you desperate for this home? Know in your heart whether you are or are not. Will you look back in disappointment that you outbid (and possibly overpaid)? Or will you look back in disappointment that you didn’t outbid and win the home? It can go both ways. If you’re leaning toward outbidding, you can always request certain buyer concessions that benefit you during escrow — and the seller just might agree to those.