Should Your Clients Bid Over Asking Price? A Look At Pros And Cons

Should Your Clients Bid Over Asking Price? A Look At Pros And Cons

In a hot seller’s market, how should agents help their clients with pricing, bidding strategies and closing successfully? Broker Jenny Usaj offers keys to setting appropriate buyer expectations from the start.

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The first few months of 2022 saw an acceleration of the extended seller’s market. A February report from found the median home list price climbed to $392,000, a new record. This price is a 12.9 percent increase from the previous year and reflects a 26.6 percent increase from February 2020, right before the world changed with the pandemic. 

Appreciation rates are valuable to sellers and buyers

For agents representing buyers, set the expectation early of needing to bid over asking price. This is most often the case in housing markets with double-digit appreciation rates.

Before any bidding begins, agents should compile data and projections to determine how competitive a bidding war may be — and what bid value is most likely to prevent a bidding war from starting. To facilitate a stress-free bidding-over-asking strategy, agents should work with experienced and creative lenders who can move quickly to get the home under contract. 

The appreciation rate is key for buyers. The rate eases buyers confronted with the realities of submitting an offer that is way over the original asking price.

To guide buyers through this process, agents can work with a trusted and experienced mortgage lender to crunch some numbers that show how soon their clients can expect a return on investment (ROI) from their homes by running a bid-over-asking analysis. 

For agents representing sellers, knowing the appreciation rate of the listed home’s neighborhood is akin to having data on past performance when picking a stock. Appreciation rates provide potential buyers with the financial justification for the listing price of the home and to conduct their own basic comparable market analysis.

In this way, they can judge whether asking listed home prices are reasonable or overpriced. As a seller, the goal is to help buyers guide their bids over the asking price.

Do the math

Nicole Rueth, senior vice president and producing branch manager at The Rueth Team with Fairway Mortgage, encourages agents to use a bid-over-asking analysis because it can quantify for buyers the ROI of bidding higher than competing buyers. Most often, the ROI will take less time than they may imagine in a market with high appreciation. 

Rueth explains that the analysis is a valuation of how long it will take to earn the money back that you may have overpaid, through appreciation. For example, for a home listed at $1.1 million, if a client pays $100,000 over asking and assumes a modest appreciation rate of 5.29 percent, they will break even after just 28 months.

The math and projections of the analysis can help support buyers’ eagerness to outbid the competition. 

In some areas of very hot competition, the asking price is meaningless. In early February, a home in Santa Clara sold for $800,000 over asking. This wasn’t a spec home with a listing-to-purchase price from $15 million to $15.8. It was originally listed at $1.7 million and sold for nearly $2.5 million. The buyers likely budgeted for this price and created a bidding strategy to secure the sale. 

Proceed with caution to avoid potential downsides

Lenders may not approve the mortgage if the selling price exceeds the appraisal value, so buyers need to exercise caution if they’re financing the home. Agents should talk to their buyers about this potential obstacle and discuss with sellers the consequences of picking a high bid that’s not going to be approved by the lender. 

This appraisal gap is very common in areas like San Diego or Denver. The appraisal gap requires over-ask buyers to cover the gap in price with cash or use appraisal gap insurance, a tool that can be implemented as part of their mortgage insurance.

Lenders can offer more education about appraisal gap insurance, which is useful for buyers who can afford monthly payments but might not have the out-of-pocket cash available to cover the price gap. 

On the seller side, agents can remind their clients that the best offers rely on the home being priced competitively and accurately when they first hit the market to create the opportunity for offers to come in over the asking price and close successfully. 

A common mistake for buyers is falling in love with a home they can’t afford. Agents should remind buyers to focus on homes within their price range.

Agents are best equipped to do this by being knowledgeable of market conditions, having honest conversations about their budget and preparing with a smart bidding strategy.

Jenny Usaj is the employing broker and owner of Usaj Realty, a Denver real estate brokerage, and a member of the Denver Metro Association of Realtors Market Trends Committee. 

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