If you’d like to be effective as a seller or a buyer, you need to understand the market from the perspective of the “opponent”. If you’re a buyer and don’t understand what sellers’ expectations are, what they’re seeing at open houses, what offers they’re getting (i.e. what current market is ready to pay for their property) – you’re at a clear disadvantage. By same token, if you’re a seller and don’t understand what other options buyers are seeing and what their money can buy them, you’re at disadvantage and risk of pricing your property “out of the market”. It’s key to discuss market dynamics and inventory upfront with your Realtor and even your mortgage specialist whether you’re buying or selling. Mortgage specialists have access to information on transactions that haven’t closed yet and can provide valuable insight. Having this market insight is going to make a more confident decision maker whether you’re making or accepting an offer.
In the market with rising prices with a lot of demand, buyers may often feel scared to “overpay”. It’s a valid consideration that needs to be thought through in the context of the difference between “asking price” and “market price”.
Asking price is a guesstimate by a seller or seller’s agent for a price acceptable by current market. Market price is a price at which seller and buyer with the best offer on the table will settle. Your offer could be $20,000 over “asking price”, but may not end up representing the “market price” because someone else with a higher offer may bring that market price to a higher level.
Say your above-asking offer was the best offer on the table and it was accepted, making it effectively the current “market price”. If you get cold feet or end up not satisfied with inspection a week later and the deal falls through, seller will go back to market for more offers and you may soon find out that the new market price ended up being $10,000 higher than what you had agreed upon. You may think to yourself that “that guy” is definitely overpaying! He may be, but it really depends.
When you apply for a loan your lender will commission an appraisal as a part of your mortgage application. Appraiser will evaluate closest comparable properties in the neighborhood in the last 2-3 months and if the subject property appears overpriced, then your lender’s underwriter will reevaluate whether this loan makes sense to be approved. For example, say you’re putting 5% down and an appraisal came at $20,000 under your offer price. Your lender may come back to you after the appraisal results and suggest to:
1) Reduce the price (good grounds for renegotiation with seller for you)
2) Increase your downpayment (if that’s an option and you’re willing to)
If the seller is very confidant that they’ll be able to turn around and get at least as much if not more money for the property, they will most likely not consider renegotiating the price down and will be happy to exit the deal if you don’t wish to continue. How would you decide what to do here? If you think you can find a better value package (similar condition, size, location and better price!), then it’s a great excuse to exit the deal. If you don’t think you’ll be able to find a better value, you may consider that with prices getting higher and likely an insufficient inventory in the market, you may be better off putting more money down rather than exiting the deal. This is particularly relevant when prices are rapidly rising because appraisers come up with appraisal value based on the closed transactions, whereas there may be a solid amount of comparables supporting the price you offered that simply haven’t closed yet (i.e. their final sale prices are not known yet). It’s a judgment call and every situation will be different with market dynamics constantly in flux, so I suggest you stay as informed as possible about the market until the closing and talk through these considerations with your Realtor as often as you need to understand what’s going on and what’s the best decision for you.