In a competitive housing market, it can be easy to get caught up in bidding wars and even the fear that you’ll somehow miss out on owning a house. And if you keep putting in offers that are rejected, it might feel like you have to push even harder to snag a home.
Pressure to get a house in today’s market has led people to surrender necessary contingencies designed to protect them and pay more than the appraised value. These can be risky tactics to make an offer stand out. It’s critical that you consider your budget and goals carefully, so you can avoid making a very expensive long-term mistake.
There are several factors you should consider before you pay over the value of the home.
- Actual affordability. The first, and perhaps most obvious one, is can you afford it? If the appraisal comes in low, then you’ll have to make up the difference out of pocket. If that leaves you with an empty savings account and no safety net, this is not the healthiest for you financially.
- Consider when you plan to sell the home. The other affordability issue comes in if you have to pony up the cash to sell your home sooner than expected. The closing costs to sell a home can run into the thousands of dollars. So if you pay more than the value, this could make it expensive to sell if you’re not in the home long enough to gain sufficient equity. If you sell the house in less than five years, you’re taking a significant risk since the value might not catch up with what you paid.
- Is it true love? Finally, be honest with yourself about how much you like this home. If this is not your dream home and you’re buying out of fear or desperation, you could quickly find yourself with a case of buyer’s remorse. And selling a house that costs more than it’s worth takes time and money.
When to pay more than the appraised value
Housing inventory is at record-low levels and many homeowners are not as willing to sell, so buyers are left with slim pickings. What is available is often very expensive, and coveted by many other eager buyers.
So. what happens when your dream home comes up for sale, and the price is above the appraised value? Some experts say it’s OK to pay above the market price if the following boxes are ticked:
- First, make sure you can afford the monthly payments.
- Make sure the gap you have to pay between the mortgage amount and the cost of the home does not leave you empty-handed in case of an emergency.
- Next, make sure you can afford to sell if you have to. If you sell before the equity builds, you’ll have to put money on the table to offload it.
- And finally, determine how long you plan on staying in the house. The more you pay over the appraisal, the longer you should plan to stay for the equity to catch up.
“The advice that I like to share with my clients is that you are paying the prices for that house that you would have normally paid about 18 to 24 months from now,” says Yawar Charlie, director of estates division for the Aaron Kirman Group at Compass Real Estate. “Therefore, the calculation is you have to stay in that house approximately two years longer than you normally would have to turn around and regain the equity that you paid at the original purchase price.” (Forbes Advisor)
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