Apr 29, 2011
One of the hardest and most important decisions homebuyers face is how much to offer for their next home. And the glut of information on the web about real estate only makes buyers even crazier than the decision itself does. Supply, demand, foreclosure rates, mortgage rates – buyers think they need to run spreadsheets and do fancy math to make a smart offer. And, accordinging to Trulia, THAT can be super intimidating.
But the fact is, there is a pretty short list of steps you need to take to make a smart offer – one that gets you a great value, but is also likely to be successful at getting the property. (A low offer does not make for a great deal if you don’t get the house!)
Step 1: What do the “comps” say? First things first. When it comes to pricing a home, or making an offer to buy one, the ‘first thing” is the home’s fair market value. Buyers should work with an experienced, local agent to understand what the home’s value is. Most agents will do this by offering you a look back at similar properties that have recently sold in the neighborhood – i.e., the comparable sales, or comps. Ideally, look for comparables that are very recent sales (3 months or less before you’re buying), very similar properties (i.e., same number of bedrooms, bathrooms, square footage; and similar style, condition and amenities). If you do get into contract, these may be the same comparables which will be considered by the appraiser, so looking at them before making an offer can:
(a) provide factual support for a lower-than-asking offer or for the asking price, in a negotiation, and
(b) result in a sale price at which the property will actually appraise, later on – avoiding the common glitch of the deal falling through because the appraisal comes in way below the agreed-upon price.
Also, looking at comps is the first step for a prospective buyer in the reality-based universe of current home values. The fact that a seller bought or refinanced the place at a given value 5 or 6 years ago is entirely irrelevant to what it’s worth today, as is a buyer’s belief that the place was worth $100K less at the trough of the market, in 2009. The key words here are current home values.
Step 2: What can you afford? This step is critical for buyers. It’s a must to make sure that your offer price for any given home falls within the range of what is affordable for you. This includes offering a price within the range for which your mortgage was preapproved, but also includes making sure that the monthly payment and cash you’ll need to close the deal (down payment + closing costs) are affordable in light of the particular house. If, for example, the property will require repairs for which you’ll need to conserve cash, or has HOA dues you hadn’t planned on, you may need to refigure your offer accordingly.
Step 3: What’s your competition? This is another step at which it’s critical to check in with your agent. You need to know what level of competition you’ll face. Buyers should also be cognizant of the competition level they will face for homes. Believe it or not, even on today’s market there are properties and neighborhoods in which multiple offers are the name of the game. Work with your agent to understand the list price-to-sale price (LP:SP) ratio , which lets you know how much under or over the asking price properties are selling for in your target home’s neighborhood; the higher the LP:SP ratio, generally speaking, the less competition there is among buyers.
Your agent can also brief you on:
(1) The number of offers – if any – that have been presented on “your” property (which the listing agent will usually, gladly tell). If there are other offers, you’ll want to make a higher offer to compete successfully against them; and
(2) The number of days the home has been on the market, relative to how long an average home stays on the market before it sells – the longer it has, the more pressure is on the seller, price-wise, and the less competition the buyer is likely to have. (One exception is the sweet spot scenario, when a property that has been on the market for a long time has a price reduction and gets a bunch of offers as a result! )
4. How much do you want to buy) it? Has the listing in which you’re interested been reduced at all? By how much? Has the listing agent informed you that her clients are highly motivated, flexible or have an urgent need to sell?
Of course, all of real estate is hyperlocal, so it’s important to understand how motivated buyers are in your local market, generally speaking, before you set your offering price.
5. How much do you want to buy the place? Step #4 was about taking the motivations of the folks on the other side of the bargaining table into account when formulating your offer and your list price. This step is all about you – what’s your level of motivation? Now, buyers, you certainly shouldn’t offer a price way above what the place is worth (see Step #1) just because you really, really want it, unless you have the cash to throw around. But within the range of the home’s fair market value, it may make sense to move higher within that range if you are highly motivated to get that particular property. Every region of the country is different so consult with your experienced, local agent for the best advice…refrain from listening to agents in areas outside the property’s locale or to co-workers or to family members that have watched way too much HG TV!