Determining How Much To Offer For A Home
Finding the perfect home for a buyer can be a difficult journey, both emotionally and mentally. The truth of the matter is that this is only the beginning, and there is still much to be done to complete the home buying process.
One of the most critical steps in buying a home is the successful negotiation of the contract. As a buyer, there are many things that will need to be considered. What contingencies if any to ask for? When to set the closing date? Should the seller provide a home warranty? And the one question every buyer wants to know...what price should be offered?
Ultimately, it is the buyers decision as to how much to offer for a home. It is my goal to provide a buyer with information on what to consider, and also what to avoid while they deliberate their offer price.
What Should A Buyer Avoid When Determining A Price:
There are a couple of things that I encourage buyers not to use as determining factors while considering what to offer on the home they have chosen.
Using Online Home Value Estimators: You know the term "If I only had a nickle", well that is how agents feel each time a client is mislead by websites with home value estimates. Often this leads to dissappointment for the buyer if the estimate is lower than the actual market value. Valuators found on sites like everyone's favorite home site that starts with a "Z" and rhymes with Pillow are often very inaccurate. Studies have been done comparing recently sold homes to the online estimates which found the values on the "Pillow" site were $15,000-$20,000 lower or higher than the price the homes sold for.
Tax Assessments: Please keep in mind that there are differences between assessed value, appraised value, and a homes market value. A tax assessment value is formulated to do one thing, determine property tax amounts. This has no direct correlation to a homes market value. On multiple occasions I have prepared comparable market analysis reports for home owners to use in disputing their tax assessment, and successfully helped homeowners have their tax debt lowered.
Best Practices For Determining How Much To Offer:
Always remember that every seller has their own reasons for selling their home, and often expectations as to how much they will be willing to accept for it. Also keep in mind that no two houses are exactly identical, and coming up with a price can be tricky. While this is all true, following these suggestions can help to narrow down the elusive perfect price range.
Reviewing The Current Local Market: The buyers agent should explain the current state of the market in which the home is located, which will include determing if it is a buyers or sellers market by researching the absorption rate. This is an indicator determined by measuring the number of listings as compared to rate of sale to determine how many months of inventory are currently listed for sale. If the number is 6-7 months then it is a balanced market, under 6 months is a sellers market, over 7 is a buyers market. In a buyers market, it is normal for many of the listed homes to have been on the market for considerably longer than in a sellers market. Sellers who have been on the market for long periods of time may be more motivated to accept a lower initial offer. New listings are probably not going to consider similar offers.
Know How Much The Seller Paid For The Home: Tax records will reflect the price the seller paid for the home when they first purchased it. The seller may be the original owner, and have lived in the home for many years, so in this case time and inflation would make their original price irrelevant in determing an offer price. New construction cost can also be higher than a homes current value on a property that was recently built. Think about the new car depreciation when driving off the lot. However, a price a seller paid for their home in the past 4-6 years or so can definitely be a factor to consider. For instance, if the seller paid $200,000 for their home five years ago, and now wants $275,000 we need to know what upgrads they have completed to justify a $75,000 price increase. Possibly they purchased the home as a distressed property, or again refer back to knowledge of the current market, which will help to determine if this price increase is in line with other houses currently listed.
Know The History Of The Properties Past Transactions: Researching the transaction past of the home can let us know if it has been unsuccessfully listed since the seller moved in. If the house has been listed for sale before, possibly multiple times this can be an indicator of the sellers motivation, and also the sellers refusal to accept offers. House listings can end different ways, expration of listing contract, being withdrawn by seller, price reductions, etc.
Work With A Professional: Most people will only make a handful of real estate transactions in a lifetime. It makes sense to enlist the services of a professional who is dedicated to representing their best interests. A Realtor can assist a buyer in deciding how much to offer, along with other contingencies they need to consider. Ultimately, the offer price is the buyers decision, and a Realtor can provide the buyer with crucial data needed to make an informed decision.
Request A Comparative Market Analysis Of The Property: I provide my buyers with a CMA (Comparative Market Analysis of the property they have decided to make an offer on. The listing agent most likely prepared a CMA for the seller in determining the price to list at, and as a buyer you deserve the same leverage going into negotiations. A CMA is created by comparing the subject property with other houses that have sold recently (typically past 6 months, less in a fast changing market), within the subject properties neighborhood, or school district. An added benefit of having a CMA prepared is it helps in lowering the risk of having a problem arise from a low appraisal.
Determine Your Highest Price: Make a decision and stick to it. Once you have decided on a home you would like to buy, set the highest price you are willing to pay. It is always a good decision to know entering a negotiation how much you can afford, and if the seller pushes back with a price over that maximum it is time to back away. Buying a home is a very emotional time for both buyers and sellers. Setting boundaries can help to avoid making mistakes that could be regretted for years.