Recently I wrote a post “How to Improve Your Odds of Getting YOUR Offer Accepted” which included this bit of advice:
“Understand the numbers: Bidding wars, low appraisals and commissions. Your mortgage professional should review strategies regarding how your offer may look like, including how long it will take to “break even” on bidding above the list price. What do your payments look like if you need to bid up $5K, $20K or more in order to “win” the bid. What happens if the appraisal comes in lower than expected? What if the seller is not offering to pay your real estate brokers commission? Understanding the numbers helps to reduce the stress involved with the “what ifs. You may be surprised that bidding up on a home doesn’t impact the payment as much as one would think as cost is amortized over 30 years with a typical mortgage.”
I think this is worthy of exploring in more detail. With these scenarios, I’m using a sales price of $800,000 with 10% down for a home located somewhere in Renton.
Let’s start with Bidding Wars. A “bidding war” is when there are multiple offers being presented at the same time on a home. Listing agents will try to create an atmosphere for this by pricing the home competitively and setting a time of when offers will be reviewed with the goal of having the potential buyers offering above the list price (sometimes much higher than the list price). It’s kind of similar to liars’ poker! A buyer will present an offer typically using an “escalation clause” which states how high a buyer is willing to go over the list price and at what increments. It’s important to note that sometimes, it may not be the highest dollar over list price that “wins” the offer; it could be largest down payment, non-refundable earnest money, an all-cash offer, contingencies waived or a quick closing, just to name a few.
Here’s a video that I created a few months ago that illustrates that if someone were to bid $20,000 over the list price, they would break even in about 10 months.
NOTE: I just rechecked this information and the appreciate rate for the 98056 zip code is currently higher; meaning that you would actually break even sooner. Of course, all of this is fluid and an estimation. With an estimated appreciation rate of 6.16%, the breakeven time period is reduced to 6.4 months!
If you’re considering making an offer on a home, your mortgage professional should be able to help run scenarios like this for you. This is something that I offer my clients so that they can understand how long it may take to “break even”. This results vary depending on the location of the home, current appreciation rates and the amount that is being bid over the list price. It’s important to have a Bid Over Ask report prepared for you.
This video reviews various offer amounts above the $800,000 list price. Payments include estimated property taxes and homeowners’ insurance. Rates are subject to change and credit approval.
Assuming you continue to do 20% down, bidding $20,000 over the list price (3rd column) would bring your payment up around $120 per month and you would need $4,300 more for your total funds for closing.
A buyer could bring their payment lower by asking for a seller contribution to go towards paying discount points to buy the rate down as well.
Stay tuned for future post where I address options for if an appraisal comes in below the agreed to price and when a seller decides to not pay for the buyers agent’s commission.
If you’re thinking about buying a home, I am happy to provide you with information to help you make informed decisions.
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