Asking Price, Property Value, and Purchase Price. What’s the difference?
How much should you overbid above the asking price? Hint: wrong question!
⅓ of houses sold 50K above asking price
What is going on in the Dutch real estate market? It is clear for some time that prices are quickly increasing, with no expectations of decreasing anytime soon. To illustrate this, you can see the numbers and trends of the average sales price for Dutch properties over time:
However, the information provided here doesn’t adequately give us the true story of what is really going on behind these numbers. To provide you with additional context for better understanding, let’s first walk through how the Dutch residential purchase process works.
The bidding process in a sellers market
If we could go back in time, some might say that life (and buying a home) was easier. However, we do not always agree with this statement.
Rather, we’d say that the purchase process may have been slightly more straightforward for the less experienced buyer.
Houses listed on the market were more often than not, listed at an asking price that was based on the estimated value of the property for sale. The buyer would view the property, and based on the quality of the house, the buyer may have bid a little more than the asking price to strengthen the offer, or they might’ve bid slightly lower than the asking price because of some technical or aesthetic issues. Buyer and seller would then negotiate and come to an agreement.
Today, the situation is a little bit different.
Due to an imbalance of supply and demand, multiple buyers now submit bids on the same property, but of course the seller can only agree to 1 offer. And having simultaneous negotiations with 8, 9 or 10+ potential buyers makes it quite complex.
As such, the industry introduced the bidding system. Any interested buyer of a property has the opportunity to submit an offer up until a specified deadline. At this point, the seller will decide on the best offer, based on both the bidding price as well as other contractual conditions.
Nothing strange you would say, and a fairly straightforward process. But in a very tight market, where property values change fast and a lot of people are interested in the same property, there’s actually one more tactic that helps sellers drive up the price even more.
Selling agents intentionally list properties at lower asking prices than the actual values of the properties.
Why would they do this? Well this strategy has 2 results:
1) Significantly more potential buyers will come to visit the property, hinting to other prospects that they’ll have to submit a very strong offer should they want to win against their competition. In this case, the buyer and buying agent need to take the time to more carefully assess and calculate the true value of the property before submitting an offer. They cannot (should not) trust that the asking price gives a good indication of the property value, and thus expected purchase price.
2) Selling agents discovered that listing the asking price really low in the end results in a very high purchase price. The final result: lower asking prices (compared to the value), leads to offers of greater value, and thus increases the selling prices.
As a result, people overbid most of the time on the asking price by a significant margin, but when we look at how much they overbid on the actual value of the house, the gap is actually a lot smaller.
Value, value, value: the asking price, the property value, and the purchase price
Let’s have a look at the following scenario. Two neighboring properties, Property A and Property B, have 100% identical characteristics, and are being sold by the same selling agent.
Property A: The agent decides to list Property A at €395.000, although its actual property value is €415.000. A lot of interested candidates visit the property and the house is sold at €435.000. This means the house is sold €40.000 (10%) above the asking price and €20.000 (4.8%) above the value of the house.
Property B: The agent decides to list Property B at €375.000. They want to attract more people to the viewing and generate increased competition. Like Property A, the property value of Property B is also equal to €415.000. A lot of interested candidates are bidding on the property and the house is sold at €435.000. This represents a sales price of €60.000 (16%) above the asking price (6% more than Property A), but with the same €20.000 (4.8%) above the actual value of the house.
The key takeaway here is that the asking price is never the key factor in the game, it is simply one data point. The percentage in which people overbid on the asking price is truly dependent on the strategic selling choices made by the selling agent and seller. Whereas, the percentage in which people overbid on the actual value, well that’s fully in the control of the buyer and their buying agent.
Note: In the Netherlands, banks will finance an amount based on your income, and only up to 100% of the property value, not the selling price. Therefore, any amount that is bid above the property value would need to be provided by another financial source (i.e. cash savings, gift, etc.).
If Property B would have been sold first, and you base your offer for Property A on the percentage difference between the asking and sales price of Property B (16%), then you would offer €458.200 for Property A, an amount of €43.000 over the actual value.
By understanding the difference between asking prices and actual property values, we know that this is not necessary, and that €435.000 would have been enough to secure the property, avoiding a scenario where you’re actually overpaying for your new home, or cannot even purchase the home as you cannot afford the amount over the actual value.
The asking price turned into a ‘bieden vanaf prijs’ (minimum price to make a bid) and is usually not reflective of the properties’ estimated value
Selling agents intentionally use a lower asking price to generate competitive interest, leading to prospective buyers offering higher bids and more favorable contractual conditions
Do not focus on the difference between asking price and purchase price, rather focus on properly assessing and calculating the actual value of the property
Purchase prices may be 5%, 10% or even 20% above the asking price, but are not always that much higher than the actual market value, which is the most important factor when you need to secure a mortgage