Overview
When you prepare an offer, you know the seller’s asking price based on the listing, however, what price are you going to come to the table with and how do you come up with that figure?
Determining your offer price is a three-step process. First, you look at recent sales of similar properties to come up with a price range. Then, you analyze additional data, such as the condition of the home, improvements made to the property, current market conditions, and the circumstances of the seller. This will help you settle on a price you think would be fair to pay for the home. Finally, depending on your negotiating style, you adjust your “fair” price and come up with what you want to put in your offer.
Comps or Comparable Sales
The first step in determining the price to offer it to evaluate sales of similar homes which are also known as comparable sales or comps. Comps are recent sales of homes that compare closely to the one you are looking to purchase. You will compare homes that are similar in square feet, bedrooms, bathrooms, garage, lot size, etc. The ideal situation is to find a recent sale or comp for a property in the builder tract that you are looking to purchase in.
The two main sources for comps are the public record and the multiple listing service (MLS).
Multiple Listing Service (MLS)
Most of the public is aware that the MLS is a private resource where Realtors list properties available for sale. Your agent will have access to the MLS to analyze and pull past sales data to share with you to help in determining the price to offer.
Public record
The most accessible source of information on comparable sales is the public record which your agent obtains the data through the title company or access to tax records. When someone buys a home the property is deeded from the seller to the buyer. In most circumstances, this deed is recorded at the local county recorder’s office. They combine sales data with information already known about the property so they can assess property taxes correctly. As long as no additions have been made to the property since last sale, the public record is a good source, however, the information does lag in terms of real-time updates, so the MLS will help to cover this gap.
Pending transactions
The most value for what to offer in a purchase is the most recent sale, however, if there is not substantial data, you Realtor can also reach out to the listing agent if there is a professional reason to gain knowledge on the sales price of an existing home that is pending or under contract but not yet closed.
Property condition
Since you have viewed the property you are interested in, you should know how it compares to the general neighborhood. All you have to do is put the home in one of three categories – below average, average, or above average.
The condition of the home requires evaluating a number of things. First, structural condition is most important such as walls, ceilings, floors, windows, doors, etc. Next, pay close attention to the kitchen and bathrooms in terms of upgrades, plumbing, electrical, and overall condition. Lastly, evaluate other items, including paint, carpets, and floor coverings and outdoors the front and back yard should be in good condition.
Home improvements
When comparing the same model of home in a builder tract, you should identify if the prior owners have made any major improvements. Cosmetic changes such as paint and flooring should generally be ignored unless in terrible condition, however, major improvements such as room additions should be considered. Other items, such as a pool or expensive flooring, should accounted at a discount as a $30,000 pool does not add $30,000 in value.
Market Environment
No one is “know-it-all” when it comes to predicting markets. There are key data points to monitor that indicate when we are in a buyer, seller, or steady market, however, what is hard to predict is when the market will turn the other direction. The data points will start to move, but if they continue to move towards one market or back towards the other is the challenging part.
In a buyer’s market, you have more latitude in terms of your offer price, closing costs, and timing and what concessions you can get from a seller. In these cases, you may have more room to negotiate depending on activity from other buyers and potential offers.
In a seller’s market, you have to be more aggressive in terms of pricing, sharing of closing costs, and adjusting timing to align with the seller. All of these items are negotiable, however, as a buyer you should never trade the key contingencies that protect you from the home inspection, appraisal, clean title, and loan approval (if applicable). The last thing you want to do is get into a transaction and have buyer’s remorse because you gave up too much as part of the diligence process between contract signing and closing.
At the end of the day, know the current market environment and what it will take to beat out the competition for the home you want, but do not go beyond your means and know when to walk away.
Seller Motivation
Seller motivation can help drive part of the offer depending on the circumstances and what the seller has allowed the listing agent to disclosure. The seller may be relocating due to a job, trading up to a new house, or going through some sort of personal or financial hardship. In these scenarios, the seller may be motivated to act quickly and sacrifice a few thousand dollars. Lastly, if the home has been sitting on the market for a while, this may further motivate the seller to accept an offer depending on their urgency. While this isn’t always crystal clear due to confidentiality, your advisor will talk to the listing agent to get a sense of motivation and what will get a deal across the finish line.
Final decision on offer price
The final decision of offer price lies in your hands as the buyer, what you are comfortable with, your negotiation style and taking into account the above factors. Be thoughtful, realistic and know what you are willing to live with at the upper end of your price point and at what point you are willing to walk away to find another home that meets your lifestyle and investment goals within your budget.