Why Listing Prices Are Like an Auction’s Reserve Price

The near record-low supply of homes for sale coupled with very strong buyer demand is resulting in bidding wars that are driving home prices up.

In the past, a home’s asking price was generally the ceiling of the negotiation. Buyers would try to determine how much less than the full price they could offer and still get the home. Usually, the outcome was the buyer and seller would agree on a revised price that met somewhere in the middle.

Today is different.

Homes today often sell for more than the list price. In some cases, they sell for a lot more. Selma Hepp, Deputy Chief Economist at CoreLogic, explains:

“The imbalance between robust demand and dismal availability of for-sale homes has led to a continual bidding over asking prices, which reached record levels in recent months. Now, almost 6 in 10 homes listed are selling over the asking price.”

You may need to change the way you look at the asking price of a home.

Instead of looking at the asking price as the ceiling of negotiations, think of the list price of the house as the reserve price at an auction. It’s the minimum the seller will accept in many cases. Therefore, if you really love a home, be prepared that it may ultimately sell for more than the sellers are asking.

Be ready to close an appraisal gap.

With current home price appreciation, appraisal gaps are becoming more common. An appraisal gap occurs when the price of your contract doesn’t match up with the appraisal for the house.

According to data from CoreLogic:

“Beginning in January 2020, nationally, 7% of purchase transactions had a contract price above the appraisal, but by May 2021, the frequency had increased to 19% of purchase transactions.”

When this happens, chances are your lender won’t loan more than the home’s appraised value. That means there’s going to be a gap between the amount of loan you can secure and the contract price on the house.

In today’s competitive market, the seller may ask you to pay the difference out of pocket. Make sure you know your budget, know what you can afford, and work with a trusted advisor who can help you make all the right moves as you buy a home.