The heaviest question I ever deal with when representing a buyer is, “How much should we offer on this?” For the sake of this writing, let’s set aside the liability an agent would have to face if they ever answered this one directly and they turned out to estimate too high or too low. Let’s just take a look at the hoops that could be jumped through to get a good range.
There is a lot of great information on the internet, which can make a buyer pretty close to well-armed. There is also a lot of confusing, misleading, and simply incorrect information out there, which can make a buyer armed and dangerous. Supply and demand, foreclosures, mortgage rates –all presented in opinion pages and blogs and filtered through someone’s value system and personal experiences can overwhelm and intimidate people.
The truth is, there is a pretty short list of steps you can take to come up with a solid offer, an offer that gets you as a buyer not just a good deal, but a deal that will close escrow. Remember that an offer that is too low does not make for any kind of a deal at all if it does not get accepted!
First, find out what you can afford. Don’t guess, talk to an expert. Your loan officer can show you the different guidelines for different types of loans, and can give you a sense for what your ultimate monthly expense will be based on the loan product you use to buy. Also, think beyond the monthly expense and consider closing costs, and take a good look at any upfront expenses a given house might represent. Will you want to remodel? Will you need to do repairs? All of this activity can add up to a significant expense. Make sure you write all these numbers out and consider them all before you make an offer.
Second, find out what the comparables look like. What would a professional pin the fair market value to? You need an experienced, local agent to help you to understand how to get an appropriate range for the home’s value. This is generally done by examining similar properties that have recently sold in the neighborhood.
In this market, it is important to limit yourself to fairly recent sales, within the last 12 weeks if possible. You should also look for exact comparables, which would be the same floor plan with the same amenities in the same neighborhood. If you can’t find something exact, you will need to consider the impact differences can have on value. Pools, cul-de-sac lots, corner lots, community parks, power lines, the condition of the neighbors’ houses, and proximity to schools and shopping can impact the value of one home versus another. While looking for comps, try to look at the same homes that will be seen by an appraiser. Never try to justify your opinions by using homes out too far in time or space from the home you are trying to set a value on. This will only backfire on you.
Keep in mind that your real estate agent is not an appraiser, and a good agent will help you to determine a range in value, not an exact value. It will ultimately be up to you as the buyer to make the final decision as to offering price, and appraisers can always do something you did not expect.
Third, think about what else is going on in the market as it pertains to this particular home. Find out what kind of competition is out there. You can find this out by looking at things like how many comparable homes are listed in the same town or subdivision you are considering. How many are foreclosures and/or short sales? How many are trashed on the inside, or hard to show? All of this not only affects you but the seller as well. Competition, or the lack of it can drive prices up or down to some degree. Believe it or not, even in today’s market there are still properties and neighborhoods in which multiple offers happen. Talk to your agent about the area “list price” to “sale price” (LP:SP) ratio. In general, higher this LP:SP ratio, the less competition there is among buyers.
Also try to find out about other offers there may be on the property. Listing agents are generally open to sharing some of those details. If there are multiple offers in place, you may need to boost yours to be on top. Then take a look at how long the home has been on the market. The newer the listing, the “hotter” it is considered to be. A “cold” listing is much more likely to be responsive to a lower offer. Also take a look at the latest price reduction; that can add some “heat” back to the listing if it was a very recent or very significant price drop.
Work with your agent to get all the information you can, but please remember that it is not up to them to choose your offering price for you any more than it is up to your financial planner to make the final say in your other investment strategies. Certain things always boil down to you, and it really is up to you to make sure you are happy before you make an offer.
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