Home sales in most of the country are mired in a market best characterized as sluggish, bordering on comatose. Although there are some positive indicators, like low interest rates and a gradually improving economy, the housing market is still struggling to recover.
Even so, there are occasionally multiple offers even in slow markets. This occurs when a prime listing comes on the market that has features most buyers want; it’s in a good location; it’s in good condition; and it’s priced at or under market price.
If a competitive listing is priced below market value to stimulate activity and a quick sale, paying over the price probably makes sense if you’re not paying over current market value. In some cases, however, a listing in a prime location will attract many offers ending up with a sale price that can’t be justified by recent sale activity in the area.
This happened frequently in 2005 and 2006 when appreciation was running rampant in many areas. Home prices were rising so quickly that recent sales were out of date in terms of price. In most cases today, this is not the case, which raises the question: Are flurries of multiple offers on some properties in some markets creating bubble pricing?
A couple made an offer in April on a home in Piedmont, Calif., which has an excellent public school system. There were seven offers. The couple bid close to $200,000 over the asking price. There were three offers higher than theirs.
One of the buyers asked if the house had good resale value at the price he offered. Given the volatility of the current market, there’s no guarantee that the house would sell for the price paid in the midst of a bidding frenzy if it had to be resold in six months. If you asked the price you paid for it, it would not have the attractive appeal that it has when it was listed for $200,000 less.
A listing could appraise for less than a highly inflated price created by a bidding war, even though buyers were willing to pay the price. If the buyers had made many previous offers and lost out, they might have felt a sense of desperation, especially if they had three children and were under a deadline to get them into good public schools.
Buying or selling under duress does not reflect fair market value. Fair market value is the price a willing and able buyer will pay and seller will accept with neither party under undue pressure to act.
HOUSE-HUNTING TIP: Paying over the asking price, particularly if it’s hundreds of thousands of dollars over, doesn’t make sense unless you can afford it and it’s a "forever" house. If you were to get transferred by your employer or divorced, and had to sell the house within a short period of time, it could result in a financial disaster.
Paying over list price in a buyer’s market isn’t always a bad idea. Recently, an elderly couple bought a charming, level home in a choice location that happened to be near their son’s home. They could walk to shops from there. It was perfect. There were 11 offers. It sold significantly over the asking price, but was worth every penny to the successful buyers.
The decision of how much to pay should be based on a good understanding of market values in the area and on your personal financial situation and lifestyle goal. If you choose to pay more than the comparable sales indicate, understand that you may not be able to sell for the price you paid.
THE CLOSING: It could be worth it if it improves your quality of life.
