You found a great home and you want to get the best possible terms. How should you structure your offer?
You probably do not purchase a home very often. There is a natural tendency to want to offer a low price to see if you can find the seller's lower limit. Be careful. Offering too little may result in creating obstacles in negotiations as the seller may be offended. Offering too much leaves money on the table. As with setting a listing price when you sell, setting the correct offer price is a critical part of maximizing your returns.
Where do you begin?
First, look at the pattern for prices of similar properties. Look specifically at prices of similar homes sold recently, as close as possible geographically, to the home under consideration. If possible, collect data from a minimum of 3 comparable homes that have sold within the past three months. Go out as far as 6 months if necessary and as far away as 1 mile if needed to find the three similar homes. The older the sale, and the greater the distance, the less likely the sold homes will offer good price guidance. Do not use distressed sales as part of your comps.
Break down the particulars of each comparable:
- number of bedrooms/number of bathrooms
- lot details
- days on market
- list price
- sale price
- items that add or subtract from the value
- seller concessions
- the unique nature of the location within in the neighborhood (which can either add or subtract value)
- the average asking price and the average sales price difference for all recent sales nearby. This is an indicator of the average willingness for sellers to negotiate on price in that area. The seller will probably be in-tune with the flexibility of his neighbors.
- how long have current active listings been on the market in comparison to homes that sold 6 months ago and a year ago - is the time trending longer or shorter?
- what are the neighborhood price trends, Up/down/sideways?
- what is the tendency for neighborhood sellers to make concessions (closing costs, etc.)
- are there any factors that might suggest a higher or a lower offer that might not be so obvious from the listing?
- how motivated is the seller? Do you have any useful information about why the seller is selling?
- how popular is the listing? Do you anticipate multiple offers as you submit your offer?
- how much earnest money do you want to offer? This can impact the price you should offer.
Once you make your offer, be ready for the counteroffer. Have a plan – know how you will respond.
A couple of tips:
- Take care not to let emotions get in the way when formulating an offer or responding to a counteroffer. This can be an expensive mistake.
- Know your maximum price. Know your minimum concessions. Know the terms that are a must for you.
- Know the difference in how a seller looks at a price drop vs making concessions of equal value.
- The sellers' profits do not matter to you. The price that the seller paid for the home is largely immaterial. Many of my clients asked me, “how much did they pay for the home” when we are working to formulate an offer. The reality is that it doesn’t matter. What matters is the current market value of the home. (The only time you need to be concerned about the seller's profit (loss) is when the seller is up against a very low equity situation that may limit the seller's ability to negotiate).
- Focus on what you will gain by owning this home.
- Check your ego at the door. Develop the offer in a way that makes the seller feel like he or she is getting a "win." That is how you will win.
Call me when you are ready to buy a home I have the tools and experience to help you make the right offer.