How to Avoid Overpaying for a Home in a Seller’s Market

In a seller’s market, it’s all too easy to overpay to clinch the deal and land your dream home. There’s the pressure to try to outbid any other offer that comes along for fear of losing out, and it may seem that overpaying is the only course of action. However, there is a big difference between making a competitive and compelling offer and paying too much.

Here, we’ll take you through what makes a seller’s market and also how to avoid overpaying for real estate in a seller’s market.

Understanding a seller’s market

Like commodities or anything that’s traded, the higher the demand and the lower the supply, the higher the price will be. Following this, the lower the demand and the higher the supply, the lower the price will be. A seller’s market is typically characterized by low inventory and high demand. 

Also, note that some areas are more desirable than others and this is true when it comes to the Bay Area which attracts a high number of buyers and investors. Sellers in these areas often hold an advantage when it comes to how they price their property and at negotiations.

Signs of a seller’s market

Some of the most common signs of a seller’s market include:

• Fewer active listings – If you’ve been looking at real estate in a specific area and over time you’ve noticed that there are fewer active listings, it’s an indication that the area is becoming a seller’s market.

• Fewer days on the market – In a seller’s market, homes tend to get snapped up more quickly, and don’t spend as much time on the market. In a place like Danville, CA, the average time a home spent on the market in February 2023 was 34 days. The national average in January was 75 days.

• Multiple offers – In a seller’s market, it’s common for sellers to receive multiple offers on a single property, potentially leading to bidding wars. This is often a driving factor for buyers to overpay for real estate in a seller’s market.

• Higher sales prices than listing prices –. A look at the difference between the median listed price of a home in an area and the median sold price can indicate whether an area is a seller’s market. If homes on average sell for higher than their listed prices, then it’s likely to be a seller’s market.

• Fewer concessions – In a seller’s market, buyers have less room to negotiate the sales price, closing costs, or other terms, as sellers will be in a position to make fewer concessions.

Note that to be a seller’s market, an area does not need to have all of these trends present. However, when several of these trends are present, you’re likely in a seller’s market and will need to adjust your buying strategy accordingly.

What makes the bay area a seller’s market?

The Bay Area draws people in not only from all over the country but from all over the world. It is traditionally one of the most expensive areas for real estate in the United States and many of its cities have been seller’s markets for years. Here are the factors which contribute to the Bay Area being a seller’s market:

• The Bay Area is home to Silicon Valley, the center of the global tech industry. It has a robust economy and a strong job market with many well-paying jobs. This attracts top talent and entrepreneurs to the area, increasing the demand for housing.

• There is a limited supply of homes for sale due to zoning restrictions, limited land, and NIMBYism (Not In My Backyard, which refers to strong local opposition to proposed real estate developments in certain areas).

• The area attracts many foreign investors, high-income earners, and wealthy international students who can afford to pay high prices for homes in desirable areas.

What does it mean to overpay for a home?

Technically, overpaying for a home means paying more than the property’s fair market value (FMV). FMV refers to the price that a property would sell for in a healthy and balanced market based on comparable properties in the same area.

Overpaying is not uncommon for buyers in the Bay Area. It is a highly competitive market and many buyers are willing to pay a premium for a home in a good location. However, why do buyers often end up paying far too much for a property? Some of the factors include:

• Lack of market knowledge – Buyers who don’t have a good understanding of the local housing market may not know the fair price of a property.

• Emotional attachment – In some instances, buyers can fall in love with a home and become emotionally attached to it, which can cause them to offer much more than the objective market value.

• Bidding wars – In a seller’s market, it’s common for multiple buyers to bid for the same home, which can bring out their competitive streak and drive up what they are willing to offer.

• Unique and desirable features – Properties with unique or desirable features, such as breathtaking views, architectural significance, smart home technology, or a spacious backyard, may command a higher sale price than other properties in the area. How much extra a home can command for such features is often something that can be negotiated.

Reasons to avoid overpaying for a home

While many buyers are willing to pay a little over their initial budget to acquire their dream home, financially over-stretching yourself is likely to have long-term consequences. There are several reasons why you should avoid overpaying for a home:

• Negative equity – If you overpay for a home, you may find yourself owing much more on your mortgage than the home is worth. This is called negative equity and can make it more challenging to refinance your mortgage or resell the home if you run into financial difficulties.

• Limited resale value – Overpaying for a home can affect resale value in the future. If you finally decide to move on and sell your home, you may have to sell it at a lower price or wait for a very long time for the property to increase in value.

• Opportunity cost – Overpaying for a home can limit your ability to invest in other areas of your life, such as retirement, leisure, or investing in other financial pursuits.

Overpaying for a home can negatively affect your ability to achieve your long-term financial goals. It’s important to seek professional guidance to make sure you’re offering a fair and reasonable price for a home.

How to avoid overpaying for a home in a seller’s market

We’ve already seen that buyers looking for real estate in a seller’s market are willing to pay above-market prices. Here’s what you can do to avoid overpaying:

• Do your research – Before making an offer on a property, conduct research on the local housing market and recent comparable sales in the neighborhood. Look at comparable active listings to get an idea of a home’s FMV.

• Set a budget – Find out how much you can realistically afford to spend on a home before starting the property search. Once you set a budget, stick with it, even if it means walking away from a home you love.

• Get pre-approved for a mortgage – Getting pre-approved will give you a better estimate of how much you can afford to spend on a home. This will help you avoid looking at properties outside of your price range.

• Be flexible on timing – If personal and financial circumstances permit, try to be flexible with the timing of the sale. This could mean giving the seller enough time to find another home or putting off the home purchase until you find the right home at a fair price.

• Don’t get carried away in a bidding war – Avoid getting caught up in the heat of the moment and only make offers within your budget. The best option is to raise a bid only to your set budget.

• Don’t waive contingencies – Home inspections, appraisals, and other contingencies will help protect you from overpaying for a property. Although it’s common for buyers to waive contingencies in a bidding war, doing so can leave you vulnerable to heavy expenses later on.

• Work with an experienced real estate agent – A local expert provide insight into the housing market and provide advice on how much to offer. They will help you navigate a seller’s market and negotiate a fair price. An often overlooked truth is that a real estate agent will also often be an objective source of support in a difficult and anxious time. A good agent will help a buyer keep to their goals.

How to determine the fair market value of a property

Determining the FMV of a home in the Bay Area can be challenging due to the variability of property values from one neighborhood to another as well as the tech upgrades, architectural design, and other unique features that make each property distinctive.

However, there are tools and methods which can help you better estimate FMV:

• Online valuation tools – Real estate websites like Zillow and Redfin offer free online valuation tools that can provide a rough estimate of a home’s value based on recent sales data and property characteristics. However, these are fairly loose evaluations and buyers should not solely rely on these tools when determining a home’s value.

• Recent sales data – Recent sales data for comparable properties (or “comps” for short) show prices on properties with similar features in the same neighborhood.

• Comparative market analysis (CMA) – A knowledgeable agent who is familiar with the local housing market can provide valuable insight into property values. They can conduct a CMA by gathering and analyzing recent sales data. They will also examine other factors that affect a home’s value, such as location, condition, and features.

• Real estate market trends – Developing an understanding of dominant real estate trends in the Bay Area market will also help you estimate a property’s value.

It’s important to keep in mind that determining the FMV of a property is not an exact science, and there can be variations in the estimates provided by different tools and methods. It’s worth using more than one source of information to help you get a more accurate idea of a home’s value.

Making a good offer in a seller’s market

While it’s important to avoid overpaying for a home, knowing how to make a strong offer when the right property comes on the market is just as crucial. Here are some tips for making a good offer in a seller’s market like the Bay Area:

• Get pre-approved for a mortgage – Having a pre-approval letter from a reputable lender sends sellers the message that you’re a serious buyer and that you have the financial means to make a home purchase.

• Offer a higher price – It’s not unusual for homes to sell above the asking price in a seller’s market. Consider making an offer that’s above the asking price, but take care not to overpay significantly. Your agent will help you determine a compelling but fair price for the home.

• Include an escalation clause – This clause refers to a contract addendum that can help you compete with other buyers. It allows you to increase your offer if another buyer makes a higher offer. The clause specifies that you are ready to pay a predetermined maximum price above the highest competing offer. This can help you avoid overpaying significantly while still being competitive.

• Make a larger earnest money deposit – Also known as a good faith deposit, an earnest money deposit shows the seller that you’re serious about buying the home and that you’re acting in good faith. Consider making a larger deposit than typically required to show your commitment to the buying process.

• Be flexible with closing – If the seller needs to close quickly or wants to stay in the home for a few more months after the sale, be as flexible as possible with the closing date to secure the deal.

• Include a personal letter – Consider writing the seller a letter expressing your interest in the home and why you’re the right buyer for it. This can help you stand out from the competition and potentially establish an emotional connection with the seller.

Keep in mind that every real estate transaction is unique. The components of a strong offer can vary based on the specific circumstances of the seller and the property for sale.

Work with a realtor in the Bay Area

Landing a dream home is a challenge in a seller’s market, however, you should never have to overpay. There are fairly priced real estate options out there, and with me in your corner, your interests are always at the forefront.

As a seasoned Realtor and leading producer at Golden Gate Sotheby’s International Realty, I specialize in Danville, San Ramon, and other nearby communities. If you’re looking for the perfect home in the Bay Area, feel free to contact me, Kimberly Ghazvini, at 650.444.3148. You can also send an email or leave me a message here for more information.