Offering $75k (~15%) over asking in a top-20 U.S. city – are we insane?

Question

Persona/income details: we make ~$230k/year in a medium-COL Midwestern U.S. city. Looking to spend no more than $550k on our first home.

House details: listed for $450k in a sought-after neighborhood. The house was purchased a couple of years ago for $38k over an asking price of $250k. The current owners have done a ton of great work and it's a beautiful spot, although the basement is unfinished. Finished square footage is 1750.

Houses have been easily going for 30-60k over asking in several areas we've been looking, and it seems as if the list prices are lower than market value either 1) for the seller's agent to say, "I sold the last house for $X over list" or 2) to cause a bit of a bidding frenzy. There isn't much inventory here, just like in other cities.

Our realtor thinks the house will go for at least $500k, and we are thinking of offering $525k to "seal the deal" as best we can (with an inspection contingency of course). We looked at a handful of recent comp sales and the price per sqft is around $325, so even at $525k this house would clock in reasonably at $300.

Is this offer stupid? We aren't in a major rush to find a house (we have until June/July at the latest for closing). The last house we offered $25k over a $440k list and got blown out of the water. Our rationalization is that 1) this is a great neighborhood and will be for the foreseeable future, 2) $525k, even at $75k list, is well within our budget, 3) the list price could be total bullshit for the reasons listed above, and 4) even if when we go to sell this place in 5-7 years we sell it for somewhere in the ballpark of what we paid, we would be fine with that since we view housing more as a necessity vs. an investment – gotta live somewhere.

Update:

After offering $70k above asking, inspection contingency, and up to $15k above appraisal, we finished 2nd out of 13 offers. Promising outcome, yet unfortunate as we didn't get it. Thanks, everyone, for all of your advice! The list price doesn't really matter – I think the sellers priced it low intentionally to stir up a baker's dozen's worth of bids.

Answer 1

At 2.5% $425K costs $1679/mo

At 2.5% $350K costs $1383/mo

Another way to look at it is that $75K difference is just under $300/mo. $3600/yr. To some people, this is a lot of money. To a couple making $230K, it's not really that much.

I'm not being flippant with your money. Just offering that if the location is right and the house suits you, you can see yourself living there for, say, 10 years, $75K shouldn't make or break the deal.

To put things in perspective, a bank will gladly loan you over $1.2M. You are already being conservative keeping the mortgage under 10% of your monthly income.

Answer 2

There is no right price for a house, there is only the right price for you. Unfortunately you won’t know what others are going to offer, so you don’t know whether you are offering more than you need to or less. The best you can do is guess on what others might offer and decide whether that is over or under what you would be willing to pay.

Look at the market for houses, look at what you are actually willing to pay, look at your opportunity to get other houses. Any way you look at it, you are almost certainly going to either pay more than you have to, or not get the house. The question will be how much more than you have to are you comfortable with.