With the shortage of housing supply, many prospective buyers are discovering a harsh reality about today’s real estate market: They need to come up with a lot more money than they expected. If you’re beginning to browse listings, you might be wondering whether you’re going to need to offer over the asking price to become a homeowner.

Should I offer over asking price in today’s market?

Navigating the real estate market can feel like navigating traffic on the highway: You need to pay attention to other drivers. Figuring out whether you should offer over asking price relies on knowing how many other prospective buyers are submitting offers higher than the list price. In 2021, quite a few houses were selling for more than the price tag attached to them: 29 percent of buyers paid more than asking price, according to the National Association of Realtors.

While over-asking price has become the norm in some markets, valuations in many areas are beginning to come back down to Earth in 2022.

Rising interest rates are already having “a cooling effect,” says Tina Pierret, broker and agent at Fridrich & Clark Realty in the Nashville, Tennessee area, citing one colleague who recently listed a property at $650,000 in Williamson County (one of the hottest real estate markets in the country), hosted 50 showings and only received one offer — at the asking price.

Still, there are plenty of areas where buyers are looking at the list price and deciding to make an even bigger offer.

“We look at a local market comparison to see where homes have been closing to help gauge a realistic offer price,” says Michael Wolfington, agent with RE/MAX Equity Group in Beaverton, Oregon. “The days on market are also considered. New listings that have prime locations and good schools and conditions are going to have very high demand and many times will go over list price.”

Why should I offer over the asking price?

Offering over asking price might sound odd — after all, you wouldn’t go to the store, pick up a shirt with a price tag and then tell the cashier you want to give more money for the sale. Real estate is different, though, particularly right now when there aren’t enough homes for sale to meet buyer demand. So the asking price might simply serve as a starting point.

Whether you should offer over asking price depends on your answers to a few key questions: How badly do you want the property? How long do you think you’ll stay there?

“The buyers also need to decide if the property is a long term-investment or a unique, forever home that is hard to find versus a common production house where another one could come on the market in the days to come,” says Wolfington.

How much should I offer over asking price?

If you decide you’re willing to pay more than asking price, how high should you go?

“How much over a buyer is willing to spend has to do with supply options, quality of the property and then reviewing all the data regarding values in their area,” says Wolfington “Many times, it is a lifestyle choice for the buyers and spending a little more money over time for their perfect house is worth it.”

There is no set amount to consider when thinking about the right amount of extra cash to include in your offer, but you do want to avoid starting too high. This is an area where the right real estate agent can make a huge difference. For example, Wolfington calls listing agents to get a sense of how far offers from other buyers are going over.

Buyers should consider the trajectory of prices, too.

“In some sectors of our market where appreciation is steadily increasing year over year, you can realize enough appreciation within a few years to account for the amount you are willing to pay over the asking price,” says Pierret.

Tips when offering over asking price

If you’ve found a home you absolutely can’t live without, you might be ready to offer anything to get the keys. However, there are risks involved with deciding you’re going to win a bidding war, no matter the cost. So if you’re thinking about offering over asking price, keep these tips in mind:

Ask your real estate agent for data to drive your decision

There’s no magic number or a specific percentage when offering a higher price tag, so lean on your real estate agent for guidance and historical and local market context.

“I’ll look at data from the past 90 days and compare average and median values in terms of percentage over asking price,” says Pierret. “These are the kind of analytics any buyer should expect their Realtor to provide to make an educated decision on an appropriate offer.”

Be ready to cover an appraisal gap

An appraiser will assign a value to the home to help your mortgage lender understand what the property is worth. Pierret drills down into a buyer’s finances to understand how much money they’ll have remaining if there’s a gap between the appraisal and the agreed-upon offer price.

Let’s say you make an offer to pay $450,000 for a home, and you’re setting aside $45,000 to cover your down payment and closing costs. If an appraiser values the house at $425,000, you’ll need to either come up with $25,000 in additional cash to make up the difference, ask the seller to reduce the price (or meet you halfway) or, regrettably, cancel the agreement.

“Decide ahead of time what your comfortable limits are, and specifically how much cash you are willing and able to bring to the table to cover a potential gap in the appraisal,” says Pierret. “Don’t let the market pressure you into going beyond what is reasonable for your financial situation and will cause you to lose sleep at night.”

Recognize the insurance implications

While the adage “a home is worth exactly what someone is willing to pay for it” rings true, other important parties are involved in assigning a valuation to the house.

“When you look at what you’re going to pay to insure a home, the insurance company is looking at what it would cost to rebuild the home — not what it would take to buy it,” says Pierret.

Avoid making any offer without seeing the house in person first

Let’s say you’re moving across the country for a job starting in three months, but finding time to actually visit and browse for homes feels impossible. You might be tempted to turn to FaceTime for your purchasing decision. Beware of the consequences.

“I’ve seen homes being sold two, three or four times,” says Pierret. “A buyer who wants to relocate might submit a big number after a virtual tour, and the seller accepts. Then, the buyer flies in for the inspection, and buyer’s remorse sets in. They decide to walk away from the deal.”