The Florida market
The housing market is experiencing a shortage of houses and a high demand from buyers, complicating the home buying process. But is a buyer offering the asking price enough in this market?
As a property manager, I would tell you I have witnessed several people miss out on an opportunity because they were not able or willing to go over the asking price.
The COVID-19 pandemic has become an unexpected beneficiary for the US housing market as home prices climbed sky-high and broke records during the period. In June 2021, the average cost reached $ 363,000, indicating a year-over-year increase of 23.4%. Additionally, single-family homes in the country are now entering bidding wars, and the buyer who has the most cash completes the fastest win.
It can make the process of buying a house complicated since it can make it hard to determine what a reasonable asking price should be.
Whether you are buying a house for the first time or are unfamiliar with the current real estate landscape, you must set your budget ahead of time. This way, you will know exactly how much you can afford and when it is best to walk away.
Let's look at some fundamental aspects that can help you determine how much asking price you should offer.
The higher demand and shorter supply of homes
Nowadays, the housing market is anything but ordinary, and buyers should expect intense competition. Homes are receiving multiple offers (an average of 3.8) and selling like hotcakes (an average of just 17 days), highlighting the competition in the market. That is because of the high demand and shortage of available houses in the market.
During the pandemic, low-interest rates, coupled with more people working from home, drove the demand for single-family homes dramatically in different areas. This type of economy has given sellers the luxury of choosing the highest offer they receive.
Is it enough to offer the asking price?
It is no longer enough to offer the asking price in today's highly competitive real estate market. Although every house and listing is different, paying above the asking price has become common practice, so buyers need to consider this when making an offer.
These days, some listing agents intentionally list the price of a home below its market value to make it appear more compelling. Unfortunately, these types of listings result in a customer-feeding frenzy, and it is common to hear winning bids that amount to several thousands of dollars over the asking price.
For a home buyer today, it is essential to be realistic about the real estate market and the impact on your asking price. Offering below or even at the asking price may not cut it in today's cut-throat housing market. But, much like an auction, the person who bids the highest gets the house.
Currently, the seller could list the asking price at the floor level of the negotiation process. It means that if you love a home, the seller may sell it at a much higher price than what they have been asking. Typically, the asking fee can exceed at least 1% to 3% over the listing price if there are several interested buyers. For example, a home listed as having a $550,000 may ultimately sell for up to $16,500 more beyond that. This cost increase can be prohibitive for many buyers. Some asking prices increased way beyond these lower ranges.
But before you quickly increase your offers, you need to do some simple math and discuss a few things with your agent. A critical question you need to determine is what prices are not acceptable to evaluate whether you can afford the house.
Offering too much
If you are set on the house and compelled to offer higher than the home value, please think again. A decision like this may not be your most beneficial response.
There can be appraisal gaps because of the home price appreciation environment and the bidding war prevalent in the market. It is the gap between the price listed in the seller and buyer contract and the actual appraisal of your house.
For example, your home's actual market value may be $550,000, but because of the bidding war, the price raised to $566,500. However, when the appraiser researches your area, they find that the highest justifiable price for the home should be $555,000 indicating the appraisal gap is $11,500.
An appraisal gap can pose a problem for a buyer since if you are taking out a home financing loan (like most homebuyers do), your lender will not loan you more than your home's appraised value. Unfortunately, this means that you will need to pay out the difference of $11,500 out of your pocket, in addition to making the down payment.
This kind of money is not something that an average home buyer can throw around. Even if you can pull together this much funds to buy the house, you will be out of funds to make any upgrades or repairs to your home. You may also have drained your emergency funds for buying a house.
In addition, if you lost your job or need to sell the property in a hurry for any reason, you will also have to contend with accepting a lesser amount of money than what you paid, which means a loss on your end. It may also reduce your ability to buy another home in another place.
How to determine your highest offer
If you want to establish how much house you can afford, you need to determine the maximum budget for buying a home. To do that, you should set a monthly budget and account for upfront costs like the budget for repair, maintenance, or upgrades, lender points, and closing costs.
It is also a good idea to work backward and determine how much payment you can make easily in a month. For example, if you can afford no more than $2,500 of the monthly mortgage, make sure you do not set your sights on a house that will result in a higher mortgage because your finances will not handle it. Instead, make sure you find out your interest rate and add it to the principal amount and associated costs to determine your maximum offer.
A good rule of thumb should amount to no more than 25% of your monthly take-home income to figure out your maximum mortgage.
Avoid overpaying for a dream home.
Sometimes, it may not be avoidable to overpay for a home. For example, you may need to offer a higher price than you expected. But you also do not want to make an expensive mistake that you will regret.
To ensure that you do not pay an unreasonable amount for a house, you should request your agent to research recently sold comp properties. In addition, your agent should find out about the other listed properties to ensure you don't overpay beyond the home's appraised value.
In addition, look for actively listed properties in other affordable areas where you can afford more houses. Do not shy from looking at homes that are slightly outdated or in need of minor repairs or upgrades. These properties likely do not have much competition, and it may be easier to get your offer accepted at the asking price or even less in some cases.
How to maximize your budget to buy a house
If your goal is on a higher-priced home, some things can help improve your finances.
Firstly, you should try to save up to offer larger down payment and show the seller you are a serious client. Other than that, you won't have to borrow as much from the lenders and avoid paying private mortgage insurance.
Another way to maximize your budget is to improve your credit score by paying off outstanding debts and paying other debts on time. Also, check your free credit report to find out if there are any errors, missed payments, or negative accounts and resolve those.
A good credit score will encourage lenders to offer you better interest rates and a higher loan amount. When your interest rates are low, you will be paying a smaller mortgage each month, which means you will be able to afford a more significant mortgage payment and a more expensive home.
The auction-like atmosphere in the housing market means buyers need to reevaluate what price they can offer to sellers. As a Licensed Community Association Manager, I suggest you work with a professional real estate agent. The agent should be familiar with the local market so that they can help you determine the accurate market value of your home. In addition, you should request a copy of all Home Owner Association documents to ensure that you agree to the rules and regulations.
"Buying a home is a big step up into another echelon of society, of respect, and of well, responsibility...that is 100 percent worth it." - Homestratosphere.com-