I continue to see higher and higher prices in my market in Northern Colorado. Our market may not be as crazy as California or some other areas of the country, but I am still seeing multiple offer situations all the time. This brings up the question of how much to offer in a hot market and if it is smart to offer more than list price?
Many people do not want to “get in a bidding war”. However, if a home is in a bidding war that usually means it is priced really well and a great deal. I am all about buying great deals when I flip houses, buy rentals or even buy my personal residence. If I have to be in a multiple offer situation to get a great deal, I have no problem bidding against other buyers. The tough part is making sure you do not overpay for a house, even if it means you don’t buy properties for a while as an investor.
Why are house prices rising so much?
Housing prices are rising in many parts of the country. In Colorado we have seen prices go up 30 percent in the last few years and other parts of the country have seen even higher prices. There are many reasons prices go up and down, but the biggest cause is supply and demand. We went through a huge housing crisis in the last decade, with house prices decreasing greatly. During the housing crises there was very little if any building going on. Most builders could not build new houses cheap enough to compete with the REO and short sale inventory.
The market started to recover years ago, but builders still did not have confidence to start new projects, because no one new if the recovery would last. There were a lot of experts who thought the housing market was in a false recovery and would fall back down again. I think most have realized this is a pretty real and significant recovery at this point and it is safe to start building again.
While those builders were sitting on the sidelines, our population continued to increase and the inventory of REOs and short sales decreased greatly. Now, we have a housing shortage instead of an oversupply of homes. Prices have also increased for building supplies, permits, water and other items that affect the prices of new houses. While builders have started to build again, the cost of new houses is much more than it was ten years ago. In my market the builders can’t build cheap enough to meet the median home price and most buyers have to buy existing homes.
There was no building for years, while population increased and housing demand increased.
- REOs and short sales provided cheap inventory, but they have decreased significantly.
- There is a shortage of housing and builders cannot build cheap enough to meet low to medium end demand.
- In my opinion prices will not drop anytime soon and may continue to rise in some areas.
Should you buy a house when prices are high or rising?
I buy a lot of houses. I usually buy 15 to 20 houses a year as either flips or rental properties. I buy houses when prices are high and when prices are low. I have bought flips since 2001 and went through a couple of booming markets and one down market. You can make money on real estate in any market if you buy right and keep your investment guidelines in mind. The risk in buying investment properties in an appreciating market is when you sacrifice cash flow or profit, because you assume everything will keep rising. Even though I think prices will not drop dramatically, that doesn’t meant they can’t.
I have been buying rental properties in an appreciating market, but I make sure they still meet my cash flow guidelines. I like to make close to $500 a month in cash flow after all expenses are paid. I also like to buy my rental properties at least 20 percent below market value, which I am still doing as well. Although I am paying more for properties now than I was three years ago, I am still making about the same amount of money on them.
On my fix and flips I also use the same guidelines to determine if I should buy a property or not. My guidelines come very close to the 70 percent rule for buying flips. I do not buy a house to flip and assume it will be worth more than it is now due to a market going up in value. That is how investors end up getting in big trouble if the market turns, which history says it will at some point. I am down to five flips in my inventory now, because I have not sacrificed my buying criteria due to not finding deals (I had ten flips the end of 2014).
If you are buying a personal house that is a completely different situation. You will be basing your purchase more on the house, your family needs, how much you can afford and other factors that many investors do not think about. When buying a personal house in appreciating market you need to look at how long you plan to live there, if you can afford it and whether it is better to rent or buy. It is not always advantageous to buy a home instead of rent, depending on the market rental rates compared to values and how long you are planning to stay in the house.
Why do buyers pay more than list price for a home?
Now that we have discussed if you should buy in a rising market, should you pay more than list price? Many people get frustrated with the buying process when they have to compete with multiple buyers who want the same house. I can understand why it is frustrating, because most consumers are used to buying things they know they can buy.
If you go to a grocery store you know the prices and you know they have inventory. When you buy a car at a dealership, you know what the price is and if you pay that price, you can get that car. However, houses are unique because no two are the same. They are all in different locations and all different. If two buyers want the same house, you cannot make another house exactly the same as the first. With new construction you may be able to buy a similar house in a similar location, but it will not be exactly the same.
When a buyer sees a house listed for $150,000 and they agree to pay $150,000, it doesn’t seem fair that they may not be able to buy the house. Another buyer could offer more, or have a more attractive offer based on terms besides the price. That is exactly what happens in a very competitive market. Many times if more than one buyer wants a house, the seller will ask for the highest and best offer from all buyers. Each buyer will get a chance to raise their offer and they may even pay more than list price for the home.
Should you pay more than list price on a house?
Do not be scared off by multiple offers, it is actually a good thing. When a house has multiple offers, it means that other people think the house you are buying is a good deal. If you want a great deal on a house, especially as an investor you will have to deal with multiple offers. When I make offers in a multiple offer situation I will try to ignore the list price as much as I can.
I know how much I can buy the home for and still be within my investing guidelines. That price may be less than asking price or more than asking price. I have won multiple offer situations when I offered much less than asking on a home I already knew was a good deal. It surprised me that I got the house, but I still got it. I have also offered $30,000 more than the asking price on a home that was under priced and did not get that house.
My advice is you should pay more than list price, if the home is worth more than list price to you. If the home is not worth more than list price to you, then don’t pay more for it. Don’t let the list price stop you from getting a great deal or multiple offers deter you from making an offer.
Do not get frustrating with multiple offers or having to pay more than list price. Remember the seller is trying to get the most money for their house and you would probably do the same thing. In some cases it makes sense to pay more and some cases it does not. Here is a great article with more tips on how to get your offer accepted.