Do Buyers Overpay When Competing with Multiple Offers?
At Timber & Rose Realty Group we have had the pleasure of helping hundreds of buyers over the years. In fact this year alone we have had over 150 home buyers sign up for our monthly home buying class, many of which become homeowners shortly after they take the class. One of the questions we have gotten most over the last four years since the class was started in 2020 is, “If it is a Seller’s Market and I will have to compete for a home, doesn’t that mean I will be forced to overpay for the home?”.
This is a fair assumption and one based on all of our understanding of supply and demand. The concept of supply and demand at its root is quite simple; if there are more buyers for an object than there are objects to be had, then whoever wants the object most will be willing to pay more. Supply and demand is not so simple though because there are many factors that are in play with each industry. Let’s compare houses to another commodity we all know… milk.
Funny enough, even in trying to explain the difference in supply and demand in an industry as singular as the milk business, we now have almond milk, coconut milk, oat milk, and many other varieties. There was a day though recently when there was only one kind of milk and everyone knew what a gallon of milk cost. It was a measurement so well know that economists would track it like a gallon of gas, or a loaf of bread. Assuming we are only talking about a gallon of non-fat cow’s milk we should continue.
When you walk into the store and see that a gallon of milk is $3.99, you can probably feel that the price will be the same tomorrow as it was yesterday. If there is only one container of milk left in the whole store, you will still only expect to pay $3.99. Why? Because if the store raised the price of the last container of milk, you would simply leave and go buy it elsewhere that is willing to sell it for less. Why don’t you run around town and buy each item on your grocery list at different locations? Because the prices at other locations don’t vary enough for you to spend the time and gas to do so. Only when we cannot get an item at all will we usually spend the energy to go elsewhere. If all the stores around town raise the price per gallon of milk, we would either grumble and buy it, or choose not to. The one thing we would not do is say that the milk is not worth what the store is asking for it if we cannot get it cheaper somewhere else. The milk industry has decided what the price per gallon is for us.
Therefore, the major difference between milk (or gas, wheat, oil, coffee, and other commodities) and real estate is that the price asked for a piece of property is not set by a larger governing body. Real estate prices are estimates based on what the seller thinks the buyer would be willing to pay. Think about that in the form of milk. What if you walked into the store and one day it was $5.99 and the next it was $14.99. If it was the last container someone might be willing to pay the $14.99, but if it sat on the shelf the grocery store would probably decide to lower the price little by little until they found the number consumers are willing to pay.
The misunderstanding by buyers is that some authority lists a home for sale and therefore it must be worth the number being asked. Before all the online websites like Zillow, Realtor.com, etc. buyers didn’t know home prices. Now buyers are very savvy about what they are shopping for. They can essentially have an understanding of what all the grocery stores in town are asking for a gallon of milk, how many gallons are available, and when the stores are dropping prices. Home buyers know today if a house is listed high or low. This doesn’t help in knowing how much over list to pay though when competing with other home buyers.
Alas, we get to the answer to the question, “Will I be overpaying in a multiple-offer situation?” The answer is possibly if you are paying in cash, and no if you are taking out a home loan. There are three safe guards in place from overpaying for a home when you work with Timber and Rose Realty Group. The first is that we never allow a client to submit an offer on a home without first running sales comparables for the property you are making an offer on. These comparables will tell us the most recent activity in the neighborhood or area and how much other homes were able to sell for. If you did need to sell within the first year after buying due to a job transfer for example, you should know what to expect to sell for. The sales comparable analysis should also help you know what number is realistic to offer and give you a break-even point in the future. The second safe guard is in getting an appraisal. A third-party appraiser (usually costs $700-800) will come out to the property you are purchasing and give you their idea of the value. The value the appraiser comes back with should be pretty close to the value your real estate agent gave you during the sales comparable analysis, or you need a better agent who understands the values of the area. The third safeguard is the lender. If the appraisal doesn’t come back for at least what you offered the seller, the lender will not give you the loan. You can still close the deal but you would need to contribute the difference in cash (which is why we say it’s possible to overpay when paying with cash). So, there are three times that you will be made aware of the market value of your property, and three times to walk away from the offer.
Now that you understand that the price set for homes, or the “listing price” is simply a guess or hope by the sellers and often not what the market is willing to pay for it, you can see that “over-paying” for a home is not about paying more than the list price. It is more about whether the bank will give you a loan, what you can sell it for again when you need to do so (most home buyers stay in their home between 7-10 years), and whether you are comfortable with the monthly payments.