Buyers are offering 20 to 40% above asking price. How do I compete in such a scenario?

If you're working with an experienced Realtor, they should be able to determine if a home is listed under value, and by how much. From that point they should be able to give you the final price--above initial list price--at which comparable properties are closing. If that price is within the range you're qualified to purchase, make an offer comparable to the other final "closing" prices.Accept that the "great price" that you initially saw on MLS is just a teaser to entice multiple offers. Let go of that in your mind...most likely it wasn't/isn't real. If you can do that--and make an offer that meets the market--you'll sleep a lot better at night...and probably close on a home sooner.