In the world of real estate and buyers, there seems to be a little imbalance in what the actual value of a home might be and what a buyer might be willing to pay. In many cases, a buyer will overbid on a property even though the neighborhood, the age of a particular home or even what a realtor believes is way over the mark.
When sellers bring in appraisers, obviously, they want the highest price possible placed on their property. Usually appraisers go by the surrounding homes within the neighborhood and what the home comes with. Example, the house next door is just as nice as this one, but this one has a swimming pool and the other does not. Immediately, this home has a higher value placed on it. To get the best appraisal, current owners should take the time to bring the value up in inexpensive ways such as renovating outdated kitchens and baths.
So why are buyers willing to pay more than the appraisal value of a particular property? Possibly the actual market value should show a good increase in value over a rather short period of time. Many times buyers do not want to spend endless time putting in new offers over and over again so are willing to go for a higher price to drive away competition. Or more than likely, there are fewer homes on the market to accommodate all buyers in this particular area.
Money Has a Say
When rates are down, getting a larger loan vs a smaller loan is not really going to have that big an impact on the buyer, so offer more in order to push down the competition and get the home they want. Obviously, the more money placed down on a home, the bigger the attraction will come from the seller.
The Financial End
Buyers are financing almost the entire purchase which comes down to spending someone else’s funds. But keep in mind, if you offer more than the appraisal on a property, you will have to come up with the difference out of pocket. Lending institutions will not give a potential buyer money over the appraised value.
What’s a Good Deal?
With interest rates down, buyers feel they can get more for their loan then a few years back. Calculating property value over a period of time can be difficult. Will the market continue to grow or fall into the decline? Are you able to overpay on a property and how quickly can you recoup that amount?
Another fallacy is the number of bidders on a particular home. Just because numerous buyers are bidding on the property does not mean the assessment value of that property should go up. Other factors to consider are how competitive are sales and where is the real estate market today? Combinations can dictate whether someone offers more for a certain property than the actual value truly is or stay on the conservative side.
Some buyers are not concerned with the cash flow because they have more than enough and not concerned with loans! There are buyers who will flip homes they purchase and then resell them. Again the motive of buyers should be taken into account before going after the same property.
Sellers are going to look at multiple offers and probably ignore lower offers. Buyers should not fall into the trap of the house being everything they are looking for and end up getting in over their heads. Smart buyers will give themselves some leverage by looking at homes that are slightly lower than their maximum is.
So, why do buyers overpay for property? Unfortunately, in some cases, their decisions are being ruled by their hearts and not their common sense.