Paying market price for homes when sellers have priced them over market value can present a number of challenges. A buyer who agrees to pay over market value could be forced by their lender to make a larger than normal down payment. They also risk moving into the home with negative equity. Here are tips to help home buyers improve their chances of paying market price for homes in over priced real estate markets.
Before we discuss buying strategy, let’s consider the seller’s motivation for asking a higher-than-market price. The four most common motivations are:
- The seller believes they have the best house in the area and data from comparable sales don’t apply to them. This belief could be based on recent upgrades, specific location, view or other unique attributes of the property. Few sellers accept that the cost of improvements doesn’t always produce a dollar-for-dollar increase in the home’s market value. In fact, the average value increase is about 64 cents on the dollar for most home improvements. Check out this great article in Realtor.com for examples: 10 Home Renovations That Offer the Best (and Worst) Return on Investment.
- The seller may be testing the market to see how much buyers are willing to pay. They know their asking price is over market value, they just want to see how much they could get.
- Sellers may also try to “get in front of the market” by anticipating that property values will rise to their asking price just after they offer their property for sale.
- The seller may need to raise a certain amount of cash. The amount may be greater than their equity, but a sale might be the only method available to raise the amount they need.
Understanding each seller’s motivation and knowing our competitive position as buyers based on current market conditions are vital to having our market price offer accepted. Here are some do’s and don’ts to help buyers in over-priced housing markets.
- Do ask what the seller needs out of the sale in addition to money. Look for contract terms the seller may consider more valuable than money (speed of closing, rent back, etc.).
- Don’t provide comparable sales data to justify your offer. Assume the listing agent has already provided the seller with accurate market information and they know their asking price is above market value. Arguing market value merely irritates the seller and makes them less likely to consider your offer.
- Do walk away from a property if the seller is unreasonable with their asking price and will not budge.
- Don’t walk away from a property if you see value in it that others might not or the potential for a large increase in value that could be obtained with a small investment.
- Do monitor key market indicators during your home search and understand that each closed sale is a new data point used to calculate value.
I hope this explanation of seller’s motivations and the do’s and don’ts of buying in over-priced markets is helpful. Every home sale is different, so always ask questions. Have a great week! Questions about paying market price for homes or buying and selling real estate in general? Drop me a line!