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Does the current seller’s market make you feel like you need to take a stealth approach to negotiations? When there are lots of buyers interested in a home, you may find yourself on the frontline of a bidding war.
Sometimes buyers try to offer more than the seller’s asking price to give them the best chance of winning. But how much should you offer over the asking price? And when should you deploy this tactic?
Don’t worry, read on and we’ll answer those questions and go over a few tactics that can give you an edge over other bidders in the middle of a price war.
Should I Offer Over the Asking Price?
In a seller’s market, more people are looking to buy a home than there are homes for sale. High demand and low supply will kick-start bidding wars. Everyone is fighting for the chance to buy the same limited supply of homes.
The 2021 housing market had a lot more buyers than sellers, and 2022 is looking like more of the same. And when you’re trying to buy in a competitive housing market, it’s routine to offer more money than the asking price (aka the list price).
How Much Over the Asking Price Should I Offer?
We have no magic formula to help you figure out how much money you should offer over an asking price. Every scenario is different, but be prepared to offer at least 1% – 3% over the list price.
If the bidding war is fierce, you may need to offer up to 10% over the list price to have any hope of your offer getting looked at by the seller.
Before you start throwing numbers against a wall to see what sticks, it’s a good idea to find help. A real estate agent can take a look at your situation and decide what offer is most likely to get the seller’s attention. Good real estate agents are experts at the art of negotiating the sale of a home, so an agent’s insight is invaluable.
What Happens if I Offer Too Much on a House?
A seller accepting your offer doesn’t always come down to your offer being the highest. Sometimes a buyer might hurt their chances if they offer too much because the house hasn’t been appraised, and its value hasn’t been verified.
Lenders require an appraisal to make sure the home’s value matches the sale price of the home. A professional appraiser typically determines a home’s market value by assessing the home in person and comparing it to similar properties recently sold in the area (aka comps).
Let’s say you offered $250,000, and the seller wants to close the deal with you. The house goes through an inspection and appraisal, and the appraiser informs your agent that the house is worth $235,000. Your lender won’t finance the home’s full value because its market value is less than what they agreed to lend you. This is called an appraisal gap.
In some cases, an appraisal gap can torpedo a deal. To save the deal in this example, you’d need to make up the difference and add $15,000 in cash to your down payment.
When a deal falls through, the seller typically relists their home – which they would prefer not to do. That’s why the potential for an appraisal gap can make them skittish, at least without extra protection, like what is included in appraisal contingencies.
If a deal falls through because a home appraised lower than expected, a buyer could lose their earnest money and due diligence deposits.
To protect themselves, buyers can add an appraisal contingency to their purchase offer. If the home’s appraisal value is lower than your purchase offer, you can walk away from the deal and get your money back.
Buyers can also include an appraisal gap clause in their purchase offer, assuring the seller that you’ll make up the difference if the house doesn’t appraise for what you offered.
In a hypercompetitive market, an appraisal gap clause can carry a lot of weight. But it’s a tactic that might leave you on the hook for thousands of dollars. Your real estate agent should advise you on this strategy based on their assessment of what’s happening in the market.
Try to make a fair offer with a high chance of being approved by your lender. If your heart is set on a home and you can afford to make a larger down payment, you can consider proceeding with your offer.
Tips for Submitting an Offer Over Asking
If you’re considering putting in an offer over asking, chances are the market is seriously competitive. We have some recommendations that may help you stand out in a bidding war.
- Get preapproved for a mortgage: Getting preapproved for a mortgage gives you a lot of leverage. As the buyer, you’ll know what price range of homes you can afford and what money you’ll have left over to make an offer over asking. It can also make your offer more attractive to the seller. They’ll know that a lender has examined your finances and credit history and is offering to lend you money.
- Shop slightly below your maximum mortgage budget: Let’s say you were preapproved for a $200,000 loan. You don’t need to use the entire $200,000 to buy a home. Think about shopping for homes around $180,000 – $190,000. In case you need to make an offer over the listing price, shopping below your max will give you $10,000 – $20,000 to play with.
- Have your agent research current offers and rejections: To give you an advantage, you may need to collect intel on the seller. Have your real estate agent communicate with the seller’s agent to see what offers have failed so you can avoid the same pitfalls.
- Include perks in your purchase offer: Honey attracts more flies than vinegar – so look for ways to sweeten the deal. Maybe you can offer a larger earnest money deposit. Maybe you can close on the seller’s preferred closing date. If you believe the house is in great shape, are there contingencies you might be willing to waive?
- Offer a cash deal (if you can): A seller won’t take your offer seriously if they don’t think you can get the financing to buy their house. With an all-cash offer, the seller knows you’ve got the money in hand and can seal the deal without waiting for a lender to approve or deny a loan.
How Do I Determine My Budget?
Making a successful offer on a house is one thing, but if you can’t afford to pay your mortgage, the deal won’t work out for you in the long run.
Before you tour your first house, sit down and figure out how much you can afford to pay every month.
Pro tip: Keep your monthly mortgage payment at 30% – 40% of your gross monthly income.
If you’re wondering how much you can afford to pay on a mortgage every month, use our mortgage calculator. Plug in prices and interest rates to estimate what a house may cost you each month.
Alternatives to Offering Over Asking Price
Instead of offering the most money – offer the right perks. Make it easy for the seller to pick your offer out of the pile of offers they’ve received. Some strategies you can use include:
- Allowing the seller to rent back the home until they’re ready to move out
- Making a larger down payment
- Offering to buy the house with cash
- Making an earnest money deposit (or making a larger deposit)
Money isn’t everything. Thinking beyond the asking price might be the key that unlocks the door to your new home.
Put yourself in the seller’s shoes. If you were selling your home, chances are you’d want the most you could get for it. In competitive markets with sellers juggling multiple bids, offering over asking can make your offer more appealing to the seller, giving you a better chance of getting your offer picked.
Local market conditions trump national market trends. Consult your real estate agent and make your best offer based on what’s going on in your market.
It depends. In competitive markets, 7% over can be a reasonable offer. You just need to be mindful of the potential for an appraisal gap if you plan on making a non-cash offer, because if the home appraises for less than what you offered, you’ll have to make up the difference.
Remember, Your Offer Might Be Accepted
When you’re duking it out for a home in a competitive housing market, making an offer over asking is routine.
But you don’t want to win the house to lose the homeownership war. Make an offer that’s under your lender’s preapproved amount, so you have some cash to play with in case you need to up your original offer. Maybe winning the home will mean winning the seller’s heart with some desired concessions.
Whatever you do, make sure it gets you closer to closing on the home.
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The Short Version
- Every listing situation is different, but a general rule of thumb is to offer 1% – 3% over the seller's asking price when there are multiple offers
- If you offer too much on a house without comparable sales data, the house might appraise lower, and your lender might not approve your purchase offer
- Sellers don't always accept the highest bid. Consider other ways to make your offer more attractive, like allowing the seller to rent the home until they’re ready to move out