At times we overpay for things, whether it’s a tech gadget that just came out, a name brand that’s really the same thing as the generic label or the latest hyped product that we just “have to have”. This happens in retail stores, on eBay, in supermarkets and even in real estate – especially lately as inventory has shrunk and prices have been climbing.
Appraisers definitely need to be realistic about the way the market is shifting, but at the same time sometimes buyers simply offer too much for a house – which is why the appraisal comes in lower than the contract price. Today let’s consider some reasons why buyers offer more than a property is worth.
10 reasons why buyers sometimes offer too much on a property:
- Value: In an increasing market buyers figure the house will be worth more soon.
- Emotional Attachment: Buyers fall in love with a property and meet the seller’s price even though the price is clearly too high for the market.
- Competition: If buyers offer conservatively in a market with very little inventory, someone else is going to have a better offer. This is why buyers are sometimes offering at list price or above even when the list price is too high.
- Strategy: Some buyers offer at higher levels hoping for a lower appraisal (or they are willing to pay the difference between appraised value and contract price simply for the security of getting a contract accepted).
- Fear of Rejection: Buyers get burned-out from having offers rejected, so they begin to get more aggressive with their offers.
- Cash & Financing: When there is so much cash in the market, financed offers need to find a way to be more attractive to sellers, so higher contract prices are a natural pathway for buyers. This is especially true with FHA or other nearly-100% financed offers (It’s less painful to offer more when you’re not spending your own money, right?).
- Easy Money: It’s really cheap to borrow money right now, so buyers can afford larger loans. This means offering $10-20K above list price doesn’t make much of a difference in a monthly mortgage payment.
- Good Deals: Many buyers remember how high prices used to be, so offering more in today’s market still feels like a deal because current values are far lower in the post real estate “bubble” burst.
- Cap Rates: Investors are focused on cap rates instead of nearby sales. This means they can essentially ignore other sales and pay more for the property than a regular buyer because the cap rate makes the investment work.
- Fear of Being Left Out: Some buyers are frantic about making a purchase because they want to buy now before they are priced out of the market.
Questions: What else would you add? What do you see happening in the Sacramento market (or your market)? If you have multiple offers at a seemingly unrealistic price, when does that become the market instead of just prices that are too high? I’d be curious to hear your insight below.
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