- Steve Marcus/Reuters
- More than 39 million Americans, both renters and homeowners, are overpaying on their homes.
- First-time home buyers are more likely to overpay on a house than repeat buyers – a study completed in 2016 found that they overpaid an average of about $2,860, or 1.04% for the same house.
- Here are the warning signs you may be overpaying on a house, plus tips on how to avoid paying more than you should.
- Visit Business Insider’s homepage for more stories.
When it comes to buying a home, it can be hard to determine if you’re getting the best deal or getting ripped off entirely. However, in an age where online resources abound, the housing market is becoming even more transparent. Buyers can attest that you no longer need to depend on a seller or real estate agency to tell you if you’re getting a fair price – that information can often be found via independent sources. Why, then, do people still overpay for their houses?
According to a report by Harvard researchers in 2017, 1 in 3 renters and buyers overpay for their housing. That figure represents about 39 million Americans. First-time home buyers are even more likely to overpay on a house. In a study conducted by Jessica Shui and Shriya Murthy for the Federal Housing Finance Agency, it was found that first-time buyers overpaid by about 1.04%, or about $2,860.
Business Insider spoke with Zillow economist Jeff Tucker to learn more about the signs you may be overpaying, plus 5 ways to make sure you’re getting the best deal on your new home.
Here are the biggest signs you’re overpaying on a house:
The listing price is drastically different from other comparable homes in the same or a similar neighborhood
The first red flag home buyers should be aware of when it comes to getting a fair price are the prices of homes in the same or similar neighborhoods. Rather than looking at what comparable homes are valued at, buyers should instead look at what people actually paid for similar homes most recently.
If a home is significantly more (or less!) than comparable homes in the nearby area, make sure to ask your realtor or real estate agency why. Depending on their answer, you may be able to negotiate a price more in line with the area’s present market value.
The home has spent a long time on the market
Beware of homes that just won’t sell – it usually means they are overpriced.
“If the home has been sitting on the market longer than similar homes nearby, it’s a good sign that the list price was set too aggressively by the seller,” Tucker says.
However, inquiring about a home that has been listed for months or even years does have its advantages, he explains.
“The silver lining is it’s an indication that the seller might be more willing to negotiate, either on the sale price or other valuable concessions.”
The home has hidden maintenance or foundational problems you didn’t know about
Even if a home doesn’t have a huge price tag, you still want to make sure you’re getting a quality home for a good price. Before placing an offer on a home that seems like a great deal, make sure you know if it comes with expensive maintenance issues. A new septic system or badly-build foundation may end up costing you thousands of dollars in the end. Make sure you’re doing due diligence to find out exactly what maintenance the property will need before you put in a final offer.
You might also overpay simply out of convenience
If you’re in a time crunch or desperately want to get into a certain neighborhood, you may end up paying the price. Homebuyers who end up overpaying out of convenience may come to regret their decision down the line. If you have to move to a specific neighborhood in a short amount of time, make sure you’re still setting aside time to do your research. Spend a weekend or two to scour the web and compare homes.
If you’re in a serious time crunch, it may also be worthwhile to hire a real estate agent. Their experience and knowledge of the market (including homes not yet for sale!) may pay off when it comes to getting you the best price.
And now, how to avoid overpaying on a house…
Use online tools like Zillow to make sure you’re getting the best deal
When determining if you’re getting a fair price, the first place to start is by looking at the price estimates of similar homes in the same area. Online tools like Trulia or Zillow allow you to shop smartly for a house, without ever getting in touch with a real estate agent or making a single phone call. Jeff Tucker spoke to BI about how Zillow uses innovative technology to compare homes similar to the one you’re interested in.
“Zillow uses machine learning to find recent comparable sales nearby and shares them publicly. On any home listing on Zillow.com, even for homes off-market, just scroll down to the Zestimate [and] click ‘More models’ under the home’s Zestimate to see several comparable home sales we identified.”
Tucker also explained that you can explore houses in the area you’re looking at and manually compare their Zestimates to each other. Plus, with a new algorithm that launched June 27, Tucker explains that the median nationwide error rate of the Zestimate for homes on the market is now less than 2% – meaning these price estimates are more accurate than ever before.
Pay attention to the neighborhood – this can include land value, the overall housing market of where you’re moving to, land scarcity, and more
Location, location, location. Some homebuyers may be willing to fork over a couple extra thousand dollars in order to buy a house right next to their favorite coffee shop or in the best school district. It’s all about weighing up what’s most important to you as a buyer, and acknowledging that just because a home is in a better location, it may not be the best deal.
In essence, don’t put an offer in on a house if it’s falling apart but in a great area – unless you plan on flipping it and selling for a much higher price. Location can add value to a home, however. According to Tucker, a home’s location may be even more important than the house itself for long-term market value.
“The location is more important [than the house itself] for long-term market value, though without a crystal ball it’s hard to be certain which neighborhoods will always be desirable,” Tucker says. “Houses in themselves tend to deteriorate over time, like other durable goods such as boats and cars, and maintaining them is costly. What can really appreciate in the long term is the land the house sits on, and that appreciation is being driven by neighborhood amenities and scarcity of land.”
Make sure you have an appraisal contingency clause in your contract
The standard protocol for buying a house involves putting an offer in on a house and having that offer either be rejected or accepted by the seller. If your offer is accepted, the next step is to have an appraiser go into the home and give you an estimate for what the home is worth – this information is for you and the bank giving you a loan. Most of the time, the home is worth around what you paid for it. However, if the house is appraised for drastically less than what you paid, you may want to have an appraisal contingency in your contract just in case.
An appraisal contingency states that a home’s appraisal must come within 5% or 10% of what you paid. If you overpaid by more than that figure, you can negotiate with the seller. Appraisal contingencies can oftentimes prove invaluable to the buying process, as banks will often not lend you more than what the home is truly worth – even if you paid more for it.
Don’t get into a high-priced bidding war for the sake of getting your “dream house”
When it comes to buying a house, especially for the first time, emotions can easily cloud your judgment. However, Tucker warns that just because you fall in love with a house, that doesn’t necessarily mean you should pay more for it.
“Houses are not like soul mates – there will always be more options on the market, so don’t break the bank trying to outbid other buyers for the first or second home you really like,” he says. “You will always negotiate better when you’re truly willing to walk away from a bad deal.”
The bottom line – don’t get into a ludicrous bidding war and end up overpaying. You’ll most likely be just as happy in another home that’s within your set budget.
When in doubt, hire a real estate agent
If you’re struggling to find a great home for a great price, hiring a professional may be the solution to your problems. Real estate agents are experts on how to find a great home for an even better price. A buyer’s agent will have the inside scoop on properties about to hit the market, plus homes that have been sitting for a while and could be negotiated on.
A real estate agent will also have comprehensive knowledge of the market, allowing them to tell you exactly what a fair price is in the area you’re looking at. When it comes to the life-altering decision of buying a home, sometimes it’s simply easier to leave it to the professionals.