Despite the uncertainty surrounding the real estate market's recovery, popular price points in some cities are experiencing bidding wars. Multiple offer situations have been reported in the San Francisco Bay Area, Los Angeles, Austin, South Florida and other cities. If you find yourself in competition when you're ready to make an offer on a home, here's how to avoid overpaying.
SEE: 5 Tips For Recession House Hunters
Take Your Cues from the Comps
Any time you buy a home, you want to offer a purchase amount that makes sense for the home's location, condition, size and amenities. This rule stands firm even in the case of a bidding war.
How do you know what price makes sense? You look at "comps," or comparable properties that have recently sold. A comp should be as similar as possible to the home you're buying. If you're buying in an area where many homes were built by the same developer at the same time, finding comps is usually a snap.
If no similar properties have sold recently or if the home you want to buy is unique, you'll have to use your judgment to determine the value of differences in square footage, lot size, upgrades and other features. A good real estate agent will provide you with all the data and analysis you need to compare properties and arrive at a reasonable purchase price for your home.
Make sure you're not overpaying for the neighborhood. If you overpay, you're setting yourself up to lose money when you sell. Worse, you could get stuck in the home because you can't sell it for enough money to pay off the mortgage.
Consider Your Post-Closing Expenses
Is the home in turn-key condition, or are there repairs you'll need to make right away? If so, how much will these repairs cost? Are they major, like foundation cracks or water damage? Or are they minor, like painting the walls? If the comps you examined were move-in ready, subtract the cost of your target property's needed repairs to get a more accurate idea of what the home is worth in its current condition.
Even if the home doesn't need any repairs, it may not come with everything you want or need. Will you have to buy appliances? Add a fence to the yard? If the sale doesn't include all the essentials, you have to leave room for them in your budget.
SEE: New Home Repair Troubleshooting
Don't Lose Sight of Your Own Bottom Line
You decided what you could afford early on in your home-shopping purchase. Now is the time to stick to that amount. The sense of victory you might feel from winning a bidding war will be short-lived compared to the long-term struggle of making monthly mortgage payments you can barely scrape together. Other bidders might be able to afford more than you. So be it.
When you think about sticking to your bottom line, make sure it's the bottom line that you established based on your own calculations of your likely income and expenses as a homeowner. Don't base your bottom line on the maximum amount that the bank has agreed to lend you. Your own personal affordability calculations are probably more accurate than the bank's, which are based on broad averages and an incomplete picture of your financial situation.
Refuse to Play Games
A bidding war is a game - each buyer is trying to guess how much the seller will accept for the house, how much other buyers are offering, and how to position their offer to be the lucky one that's accepted.
Your offer shouldn't be based on a guessing game. If there are multiple offers, write one offer. Make it your highest and best offer considering what you can afford and what the home is worth, because you may only get one shot. The buyer may come back and ask all the sellers to increase their offers, or they may not. If they do, don't change your offer. You don't know what other buyers have offered and you don't know that they'll increase their offers. You might have already submitted the winning bid.
SEE: Should You buy a House At Auction?
Keep the Appraisal in Mind
No matter what you bid on the home and no matter what the seller accepts, your lender will only let you pay as much for the home as it appraises for, and the seller won't be able to command a price that's higher than the home's appraisal value.
The bank is wary of lending more than the home is worth because if it ever gets stuck owning the home, it wants to be able to sell it and recoup as much of its value as possible. The bank is evaluating the situation from a purely rational, financial perspective - and you should be, too.
It might be tempting to think that the appraisal can act as a check on overbidding - if you end up under contract for more than the home is worth, the appraisal could help you negotiate a lower price when you already have the home under contract. However, there is no guarantee that the appraisal will come in below your bid, so you shouldn't attempt this strategy.
SEE: How To Challenge A Low Home Appraisal
The Bottom Line
No matter what circumstances you're buying a home under, it's important to stick to the fundamentals when determining how much to offer. Even when a property attracts the attention of numerous buyers, it's not worth overpaying for.