If you’re like us, you’ve seen plenty of headlines lately that say, “Sold for X dollars over asking!”. Some are reasonable – around $100,000.00 over the list price. And some are just so far-fetched, it makes you question what is actually going on. “Sold for $1 Million over asking!”. HUH?
In a hot seller’s market with low inventory and house prices rising, plus many bidding wars occurring, many homebuyers are paying over the asking price. But there are a number of things to consider when looking at what sold over asking means.
Let’s jump into a quick example. Let’s say a detached home in Toronto’s Roncesvalles neighbourhood is estimated to be worth approximately $2 Million. But the sellers along with their agent have decided that they are going to list the home for $1 Million in order to attract a huge number of buyers, get as many showings booked as possible in the shortest amount of time, and hold back offers until a set offer date.
On said offer date, the house ends up going into multiple bids and sells for $2.1 Million. The headlines no doubt will read “House in Roncesvalles Sells for $1.1 Million Over Ask in 7 Days!”. But is that actually correct?
Technically, yes. The house did sell $1.1 Million over the asking price/list price. But what many don’t look at is what the house’s market value is at the time of listing. This listing should be noted as selling $100,000.00 over current market value – but that’s not as exciting of a headline, is it?
Sold Over Asking Vs. Current Market Value
So, what goes into determining current market value? It takes into account many factors:
- Neighbourhood comps
- Location
- Beds / Baths
- Upgrades / finishes
- Parking
- Yard
- Sellers expectation
Once this number is determined, that’s the price that the sellers agree to sell at and what they expect the true market value for their home.
If these sellers listed their home knowing the current market value was around $2 Million, but only got offers of around $1.5 Million, the chances of them actually going through with the sale is very low. The broker would have taken the listing down and relisted it for the true market value of $2 Million. Then they would have waited until a true current market value offer came in that they ultimately would have accepted. Again – a pretty boring and un-newsworthy headline.
But what other factors come into play when paying well over the asking price? Let’s take a look.
Paying Over Asking & Your Financing
Homebuyers that pay over asking may find it difficult to secure the full amount of the financing they need.
Lenders rely on an appraiser’s opinion of the value of the home, which is most often determined by looking at the local area’s comparable sales and other local market factors. The appraised value, and not the actual purchase price, is used, in part, to determine the size of the loan. If the value is too low, homebuyers may not be able to secure the full amount of financing they need and may need to look for alternatives to cover the deficiency.
Sold Over Asking: Appraised Value Vs. Actual Value
Lenders require an appraised value from a licensed, experienced local appraiser expert to determine the current value of the property for lending purposes.
In many neighbourhoods, if the homes are being sold over asking, the prices of the comparable homes will reflect this, and the appraiser will provide a value that is more in line with the purchase price. However, if homes are not being sold over asking, the appraised value could come in lower than expected.
Our recommendation: use caution when submitting your offer and know the market, the neighbourhood and the comps extremely well.
Buying over asking makes sense for many homebuyers, especially if you want a home in a certain neighbourhood close to family or work in a competitive market. Before you buy, stay in close contact with your real estate agent and your lender or mortgage professional to explore different scenarios and your options.
If you’re looking for help in selling your home for the most money possible, or need help finding the right house or condo, get in touch with us today by filling out our simple form.
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