Pros and Cons of Over-Bidding on a Home
1
WHAT ARE THE PROS OF OVER-BIDDING ON A HOME?
- Better Chance of Winning the Bid: In a free-market economy, the monetary value of something is what someone is willing to pay for it. If you find value in owning the home at the price you bid for it, then that's what it's worth to you.
- Potentially Higher Resale Value: The demand for houses is likely to remain higher than the supply of houses for quite some time. The National Association of Realtors estimates that we have a shortage of roughly 5.5 million homes in the US due to demographic trends and a decade of under-building homes. This means that home prices are likely to continue climbing, albeit at a much slower pace, throughout the next few years. The long-term average house price appreciation in the US is roughly 4% per year, which is significantly less than the 20% per year annual appreciation we've seen in the past year.
2
WHAT ARE THE CONS OF OVER-BIDDING ON A HOME?
- Appraisal Gap: What happens if the lender doesn't agree with you on the value, and the appraisal comes in below what you are willing to pay? In this case, you'd either need to come up with the difference in cash or potentially switch loan programs to include monthly mortgage insurance.
- Potentially Lower Resale Value: Home price appreciation has already slowed down significantly. What happens if you want to sell the property and the next buyer doesn't want to pay you as much or more than what you paid for it? Here's a potential worst-case scenario to consider: let's say you overbid on a home and the value drops by 20%. Then it starts going up by 4% per year, which is the long-term average home appreciation rate in the US. It would take roughly 5 years for you to breakeven, or start building wealth through homeownership. In a potentially bad-case scenario like that, are you willing to keep the house for 5 years?
44%
That's how many offers went up against competing offers during the past few months.
Source: Momentifi