“I can’t believe this market, every house is going for $100k over asking!” Whether in conversation or online forums, that- or something similar- has been commonly heard over the past couple of years. The impression is that everything goes for over asking. The reality is more nuanced.
This past July, the percent of homes that sold above their asking price was 40%. About the same number sold under asking, and 20% sold at their current list price (which may not be the original price of the house, but instead the price it was listed at when it found a buyer).
Of those 40% that sold over their asking price, they on average went for 3.2% over (or around $20k). Those that sold under their asking price did so at a 3.7% drop. Overall, the average for all houses in July in our area was a 1.3% increase over the list price. That’s the gap between the blue and red lines below, and you can see where it was for the past 13 months:
If you want to take one point away from the wall of numbers I just presented it’s that in 2023 so far, houses are selling for 1% over list on average.
With the raw numbers out of the way comes the question: how do you decide what to offer, in a way that protects you from spending more than you should?
There’s a popular sentiment that listing price is merely a suggestion, which is essentially true. Yes, when deciding what to offer on a house you should be looking at recent comparable sales for guidance. Just because Jimothy Homeowner thinks his house is worth 100 doubloons doesn’t mean it is, right? The comps might tell us it’s worth 75 doubloons, making a full price offer (and probably any offer) a poor choice. Ultimately the silence of the market will tell old Jimothy here that he needs to adjust or he won’t sell the house.
However! Assuming we’re talking about a reasonable variance- say, the comps suggest 90 doubloons, not 75- we have to start taking into account how the seller sees this going down. We’re all emotional creatures, and the person selling their house of 30 years is going through quite a bit of physical and emotional change at the moment. They’re attached to their house in sentimental ways, and no matter how much good advice they may have gotten from their own Realtor, it is still very difficult to treat a home sale as purely a business transaction. Our seller wasn’t going to consider a 75 doubloon offer when list price was 100, because to him that’s a wildly insulting lowball offer for his perfect, perfect house. But 90 is reasonable, and might make our seller disappointed but at least not angry. A buyer and their agent can work with disappointed.
Let’s look at the other side of the coin, when the sale price is likely going to go over list. This generally (but not always) happens in the first week or two of a listing, and when there are multiple offers on a home. How do we decide what to offer?
First and foremost, you don’t go above the highest number that you’re personally comfortable with. The golden rule is that if you know you’re competing with others, you offer a price that you’re happy with if you get the house and not unhappy if someone offers more. You wish everyone the best and move on.
Now let’s say it’s more wide open than that, and all you’re really trying to avoid is overpaying for the house. You don’t have a ton of information to go on, other than the bits your agent was able to glean from the listing agent who was probably being vague when asked about the quality of the competing offers and hopefully not outright lying. This is one of those spots where a buyer’s agent earns their keep. Finding out what’s important to the seller (aside from a briefcase full of cash handcuffed to your wrist, that’s a given) is key, and then attempting to figure out if the competing offers are recognizing those items. Do the sellers want a quick close? Occupancy after closing? Do they really, really not want to figure out what to do with that rusted old lawnmower that’s in the backyard? Terms matter. Not as much as dollars, but terms matter.
Escalation clauses are another way to make a strong offer while still protecting your upside. There’s a whole post to be written on this topic- and there are plenty of pros and cons to discuss- but essentially, an escalation clause commits a buyer to beating another offer by X amount, up to a maximum price.
Figuring out the right price and terms to offer factors in a bunch of data points. List price is a data point, of varying relevancy. It’s immensely relevant to most sellers, but not necessarily to buyers. Still, a buyer has to factor it in as there are two sides to every transaction. Comps matter, as those will give you the best indication of market value. Comps are also what appraisers rely on, and the appraiser is the one telling your bank whether the loan they’re making is a good one or not. The current market environment matters. Are houses routinely going well over list, or under? How long is it taking for houses to sell these days? Competition matters. If you’re in a competitive situation, comps start mattering less and it becomes more a question of how much you want the house and what you’re willing to do to get it, and then forming a strategy to win it.
The good news is that you don’t need to remember most of this. A good buyer’s agent will be advising you on the options before you make the decisions. Once again, YOU make the decisions.
