The real estate market is red-hot and isn't showing signs of cooling down anytime soon. With fewer homes on the market and lots of competition for properties, plenty of potential buyers are finding themselves in bidding wars.
During the four-week period ending May 2, a record 48% of homes sold for more than their list price, according to a report from Redfin. That's up 20 percentage points from a year earlier.
The average home sold for 1.4% over asking. That doesn't sound like a lot but can represent a few thousand dollars extra, given that the median sale price during that same period was $348,500.
And homebuyers don't have much time to decide just how far they are willing to go with their offer. Redfin also reported that a record high 45% of homes that went under contract had an accepted offer within one week of hitting the market, and 58% had an accepted offer within two weeks.
The pressures of that competition can mean bidding war participants may be unhappy with the results, win or lose. "Most people who lose a bidding war wish they had paid more. Some who win regret it," tweeted Redfin CEO Glenn Kelman, during a recent Grow Twitter chat.
Video by Richard Washington
So if you are in the market for a new house, experts say, it's worth considering just how much over asking price you are willing, and can afford, to go.
During Grow's Twitter chat, Kelman and other real estate experts weighed in on what to consider before you make an above-asking offer. Here's what they had to say.
If you end up in a bidding war, Kelman recommends pausing to consider how you feel about the potential outcomes.
"You have to simulate in your own mind how you'll feel when you win or lose a bidding war," he says. "You want to choose a Zen price, where you're happy if you won at that price, and happy if the house sold for more than that to someone else."
Finding that balance can be "hard to do, especially if you have a spouse." So make sure you talk about it ahead of time. You'll both need to be on the same page about your maximum cost, to help you find peace with your final offer.
Buying a home is naturally an emotional process. It is after all where you will live and make memories. When you fall in love with a house, it can be easy to lose sight of your finances. Trying your best to take emotions out of the equation can help you make the best decision, says CNBC real estate correspondent Diana Olick.
"DON'T GET EMOTIONAL (am I shouting??). It's just a house. Give yourself an absolute limit when you start the process and don't go above it. There is nothing worse than being house poor," she wrote.
Video by Jason Armesto
Seth Williams, founder of REtipster, also suggests taking emotions out of the decision, especially if you are looking for an investment property.
"If it's an income-producing property, draw very clear boundaries for your maximum offer and don't budge," he wrote. "Rental properties are a business decision, not an emotional decision. If the deal won't have positive cash flow with your offer price, move on to another property."
When making an offer above the asking price, you also must consider what the house will appraise for. If the home appraises for less than you offered, you must pay the difference in cash.
"You have to have a strategy going in when you're going over list price, because a savvy Realtor is going to come back and ask if you guarantee the difference," tweeted mortgage originator Jennifer Beeston.
A real estate agent is likely to ask you if you can show proof of funds in the amount you are willing to go over the asking price, Beeston said.
Most homebuyers go into house hunting with a price range in mind. But in this market, you'll need to factor into your budget the potential for above-asking offers.
"Most people who start shopping online enter a price range without leaving any room to bid above asking price. It can be a little heartbreaking, having lost a few offers, to realize that you need to start shopping in a different aisle of the grocery store," Kelman wrote.
To that end, before you start looking at homes, get your finances ready. Shopping around for a mortgage and getting preapproved can help you better understand how much house you can afford — and ensure you're ready to move quickly and beat the competition when you find your dream home.
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