Is It Dangerous To Pay Too Much For A Home?

Using the "iron-hand-in-the-velvet-glove" approach to create win/win negotiation is one of the most overlooked ways to save money and generate instant equity when you purchase.  

Here's an example. The Petrees are in a bidding war for the house they really want and are willing to give the seller his inflated selling price of $95,000, plus cave in to his demands to pick up $300 of his closing costs.

It's obvious that they've thrown money away in the $300, but that's just the tip of the iceberg. By overpaying for the house, it costs them more money for the down payment on the mortgage, more in closing costs (since most mortgage costs are based on a percentage of the mortgage), not to mention thousands of dollars more in interest over the years due to the larger mortgage. All together, overpaying for the house will cost the Petrees over $5,000 if they own the home for ten years (based on 95 percent financing at 8 percent interest and
standard closing costs).

But there's more. Because they purchased at an inflated price, their equity buildup is off to a slow start. And if they're forced to sell before the house can realize some significant appreciation, they may have to bring money to closing. They could have avoided these losses by better negotiating from the start.

You may be saying, "At least they got the house." While that's true (and overpaying is sometimes born of necessity in a seller's market where properties are scarce), the Petrees should be aware of and be willing to accept the consequences of overpaying. Unfortunately, many buyers don't realize until too late the potential damaging effect caused by leaving money on the bargaining table.

When negotiating, keep in mind my favorite home buying adage: "You don't make money in real estate when you sell, you make money when you buy!" Sins like overpaying, over-leveraging and overspending on closing costs will come back to haunt you later in less equity in your home coupled with fewer selling and repurchasing options.