How much should you offer for the right home?
October 15, 2018
You found it! A home in your price range that has everything you need and a lot of what you want, in a neighborhood that feels good. But as we all know, the list price is usually just a starting point. How do you know exactly how much to offer?
Obviously, you don’t want to pay more than you need to, but you also really, really want the seller to say yes.
Your real estate agent is your go-to expert on what’s fair and strategic, but no matter how much you trust them, it’s your decision — not to mention your money. So what are the basics on the art and science of price? Assuming that you’ve got a grip on how much you can comfortably afford, zeroing in on how much to offer for a home comes down to answering five questions:
- What have similar homes sold for recently?
- How is the market trending?
- Are there any problems that should reduce the price?
- Are there multiple offers?
- What are the seller’s motivations?
Let’s go over each one in detail.
1. What have similar homes sold for recently?
In practical terms, the market value of a home is what someone is willing to pay for it. And the best way to estimate that is to look at what similar homes have sold for recently. Your real estate agent’s comparative market analysis, known as the “CMA” or “comp,” compiles exactly that information, giving you a price range to work with.
Typically, you’ll ignore the highest- and lowest-priced properties. They were unusually nice or unusually bad. Then you’ll take the average of what’s left and adjust your offer up or down based on any distinct pluses or minuses of the home you want, relative to the others. Age, condition, amenities, upgrades, location … It’s a balancing act. Maybe your home has a fireplace and is on a nicer street, but it has only one bathroom.
The seller’s agent will have done their own analysis before putting the home on the market, so chances are everyone will be on the same page as far as the upper and lower limits of a fair offer.
CMAs vary in length and complexity, depending on things like the size of your market and how active it is. But they almost always contain at least these five things:
Active listings. Homes currently for sale. These prices are good to know, but they don’t tell you the actual market value. Sellers can ask for as much as they want, and they’re not always realistic. In a buyer’s market, these homes might sell for less than the list price. In a seller’s market, they might go for more.
Pending listings. They’re under contract; they haven’t closed yet. Until they close, you can’t know the actual sale price. Negotiations could change it, or the sale could fall through. Still, these prices do give you a sense of the market.
Sold listings. These homes have closed recently, usually within the last three months. They’re the best indicator of the current market value of similar homes in the area you’re shopping in.
Off-market. Or “withdrawn” or “cancelled.” This usually happens because they were overpriced and no one would buy them. They can help you determine how much is too much to pay. But homes do go off the market for other reasons. Maybe the seller simply changed their mind, or the home inspection turned up something that broke the deal.
Expired listings. They didn’t sell, probably because they were priced too high, but maybe because they weren’t well marketed or needed repairs.
2. How is the market trending?
Are you in a buyer’s or a seller’s market? Nationally, it’s a seller’s market overall — as you might have noticed! But that’s not true everywhere. To take the temperature in your area, consider these questions:
- Are homes selling quickly or slowly? For both active and sold listings, check out the “DOM” — days on the market. Anything over 60 days suggests a buyer’s market (or a problem property).
- Are they selling for more or less than they were listed at? A clear gap in one direction or another is a trend. Adjust your offer accordingly.
- Are multiple offers the norm? In many places, there’s a shortage of starter homes for first-time buyers, so competition can be fierce. There’s also more competition during peak homebuying season, spring through summer.
3. Are there any problems that should reduce the price?
If your offer is accepted, you’ll get a professional inspection, and that could turn up something that changes how you feel about the price. But as you consider how much to offer, what can you learn about the condition of the property? You’ve got two things to go on: your own eyes and the seller’s property disclosure.
The DIY inspection: What do you see?
Do you see any neglected repairs or potential problems? If homes are moving fast, offering a lower price could be risky. But if it’s a possibility, try to schedule at least an hour for a second look at the home, when the seller isn’t there. Bring a flashlight, our downloadable self-inspection checklist, and a notepad.
Here are some general tips:
- Don’t be afraid to look in all the nooks and crannies and take photos. Check out the basement, attic, crawl spaces, closets, cabinet interiors, etc.
- Inspect the exterior of the home, the yard, and the garage for wear or disrepair.
- Ask the seller for a record of recent repairs.
- Be alert for signs of water damage. It can be more serious than it looks.
- Visit the neighborhood during the day and the evening. How busy is it? How noisy?
- Talk to the neighbors. You can learn a lot about the home and the neighborhood.
The property disclosure: What has the seller revealed?
Your real estate agent can tell you what your state’s requirements are, but sellers are often required to complete a standardized disclosureformrevealing anything they’re aware of that could be a problem for you. Presumably, they would figure something like that into the asking price, but you might have your own opinion about the math!
“Aware of” is the key phrase here. The seller won't necessarily know about every issue. If they’re not honest about a known issue and you end up having a problem, you can potentially sue them years later for whatever it costs you to fix it.
Because building codes are so important, a key disclosure is whether any upgrades have been done and whether the seller got the proper permits. It can’t hurt to check with the town or city to make sure the work really was approved.
4. Are there multiple offers?
It’s critical to know whether the seller will be considering other offers alongside yours. If the answer is yes, you’ll probably want to make your first offer your best offer. Meaning the highest price you can comfortably afford.
The trick is to not offer more than the house will appraise for, because the bank won’t approve a loan for more than the appraised value. Yet the bank won’t arrange for the appraisal until you have a signed contract with the seller. If it were to come in low, you’d have to either cover the gap in cash or walk away.
5. What are the seller’s motivations?
Know your seller. An elderly couple that’s downsizing after putting years of loving care into the house and raising a family there could be less money-motivated than a house flipper, for example. They might accept a more modest offer if they find you appealing in other ways. This is why agents often recommend including a personal letter with your offer. Are you just starting a family? Are you an avid gardener who admires the flower beds they’ve been tending?
Ready to take the next step in your homebuying journey with all the confidence of a smart and savvy homebuyer? Our comprehensive online homebuyer course is simple and easy to access on your computer, tablet, and mobile device. It's all the information you need, all in one place. Go ahead and get started today.
Filed Under: For Homebuyers