When you prepare an
offer to purchase a home, you already know the seller’s asking price. But
what price are you going to offer 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.
The first step in determining the price you are willing to offer is to
look at the recent sales of similar homes. These are called "comparable
sales." Comparable sales are recent sales of homes that compare closely to
the one you are looking to purchase. Specifically, you want to compare
prices of homes that are similar in square footage, number of bedrooms and
bathrooms, garage space, lot size, and type of construction.
If the home you are
interested in is part of a tract of homes, then you will most likely find
some exact model matches to compare against one another.
There are three
main sources of information on comparable sales, all of which are easily
accessed by a real estate agent. It is somewhat more difficult for the
general public to access this data, and in some cases impossible. Two of
the most obvious information sources are the public record and the
Multiple Listing Service.
in the Public Record
The most accessible source of information on comparable sales is the
public record. 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
Provided there have
been no additions to the property, the information available from the
public record is usually correct regarding sales price, square footage,
and numbers of rooms. This makes it easy to use the public record as a
source of data for comparable sale information.
Accessing the data
is another matter, at least for the general public. Realtors can generally
look up this information through title insurance companies. The title
companies either compile the data directly from the county recorder’s
office or purchase if from other companies.
One problem with
the public record is that it tends to run at least six to
eight weeks behind. Add another four to six weeks for the typical escrow
period and you can see the data is not current. The most current
information is the most valuable.
in the Multiple Listing Service
Most of the public is aware that the Multiple Listing Service is a private
resource where Realtors list properties available for sale.
Once a property is sold and the transaction has closed, the selling price
is posted to the listing in the Multiple Listing Service. Over time, it
has become a huge database on past sales, containing much more information
on individual homes than can be gleaned from the public record. This
information is only available to real estate agents who are members of the
local Multiple Listing Service.
Your agent will
provide you with this data to help determine your offer price.
– Pending Transactions
The most valuable information would be the most current, of course. A sale
last week has more validity in helping you determine a purchase price than
a sale from six months ago. The problem is that there is no actual record
of the sales price until the transaction is completed. The information is
not available in the public record because no deed has yet been recorded.
Neither is the
information available in the Multiple Listing Service. Once a property is
sold, it becomes a "pending sale" and all pricing information is removed
from the listing. Prices are not posted until it becomes a "closed sale."
This protects the seller in case the transaction falls apart and the
property is placed back on the market. It would give an unfair advantage
to future potential buyers if they already knew what price the seller had
been willing to accept in the past.
However, if a
Realtor has a reason to know the sales price, they can usually find out
through professional courtesy. Also, some real estate brokerages post
sales information on a transaction board in their office.
Influencing Your Offer Price
Gathering and analyzing information from comparable sales helps to
establish the range of prices you should consider when making an offer to
buy a home. More weight should be given to the most recent sales, but even
so, you need to do a bit more analysis before setting upon the price you
will offer. That is because you also need to consider the condition of the
property, improvements, the current market, and the circumstances behind
the seller’s decision to sell.
Condition Affects Your Offer
Since you have toured 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 - average, above average, or below
When evaluating a
home’s condition, there are a number of things you should consider.
Structural condition is most important - items such as walls, ceilings,
floors, doors and windows. Then paint, carpets, and floor coverings. Pay
special attention to bathrooms and bedrooms and whether the plumbing and
electricity work efficiently. Look at the fixtures, such as light
switches, doorknobs, and drawer handles. The front and back yards should
be in reasonably good shape.
ingredient will be information on the condition of the homes from your
comparable sales list. Provided you chose the right agent to represent
you, they will have actually visited most of those homes and be able to
provide key insights.
Improvements Affect Your Offer Price
Even when comparing exact model matches within a tract of homes, you
should note whether the previous owners have made any substantial
improvements. Cosmetic changes should be largely ignored, but major
improvements should be taken into account. Most important would be room
additions, especially bedrooms and bathrooms. Other items, like expensive
floor tile or swimming pools should be taken into account, too, but should
be discounted. A pool that costs $20,000 to install does not normally add
$20,000 in value to the home. Rely on your agent to give you guidance in
Conditions Affect Your Offer Price
A hot market is a "seller’s market." During a seller’s market, properties
can sell within a few days of being listed and there are often multiple
offers. Sometimes homes even sell above the asking price.
Though most buyer’s want to get a "deal" on a home, reducing your offer by
even a few thousand dollars could mean that someone else will get the home
A slow market is a
"buyer’s market. During a buyer’s market properties may languish on the
market for some time and offers may be few and far between. Prices may
even decline temporarily. Such a market would allow you to be more
flexible in offering a lower price for the home. Even if your offered
price is too low, the seller is likely to make some sort of counter-offer
and you can begin negotiations in earnest.
More often than
not, the market is simply "steady," or in transition. When a market is
steady, no real rules apply on whether you should make an offer on the
high end of your range or the low end. You could find yourself in a
situation with multiple offers on your desired house, or where no one has
made an offer in weeks.
are more difficult to define. If the economy slows unexpectedly, as it did
in the early nineties, people who buy on the high end of a seller’s market
(like the late eighties) could find their home loses value for several
years. So far, no one has proven reliable in predicting when markets
change or how good or bad the real estate market will become.
Motivation Affects Your Offer Price
Truthfully, it is rather rare that a seller’s motivation will dramatically
affect the price of a home, but it is often possible to save a few
thousand dollars. The most common "motivated seller" is someone who has
already bought his or her next home or is relocating to a new area. They
will be under the gun to sell the home quickly or face the prospect of
making two mortgage payments at the same time. Since that can drain a bank
account quickly, most sellers want to avoid such a situation and may be
willing to give up a few thousand dollars to avoid the possibility.
There are also
family crises that can motivate a seller to make a quick deal. However,
when you see a real estate ad that mentions "divorce," "motivated seller,"
"relocation," or something to that affect, beware. Although the facts may
be true, that does not necessarily mean the seller is motivated to make a
quick and costly sale. Most likely, the ad is more designed to generate
phone calls and leads rather than sell the home.
However, there are
times when a seller is truly distressed, willing to make a quick sale and
sacrifice thousands of dollars. With the seller’s permission, the listing
agent will post this information along with the listing in the Multiple
Listing Service. They may also inform other agents during office and
association marketing sessions or by flyers sent to other real estate
offices. Provided this information has been made generally available to
Realtors, your agent should know when a seller is truly motivated and when
it is just "puff" designed to illicit interest in a property.
The exception is
when an agent is selling a home they have listed themselves or selling a
home that was listed by another agent from their own company. In such a
situation, the agent may be acting as an agent for the seller, or as a
"dual agent," representing both you and the seller. In such a situation,
they cannot legally provide you with information that would give you an
advantage over the seller.
Decision on Your Offer Price
Comparable sales information helps you to determine a base price range for
a particular home. Adding in the various factors like property condition,
improvements, market conditions, and seller motivation help determine
whether a "fair" price would be at the upper limit of that range or the
lower limit. Perhaps you will feel a fair price is outside of that price
The "fair" price
should be approximately what you are willing to agree on at the end
of negotiations with the seller. The price you put in your offer
to begin negotiations is totally up to you and depends on
your negotiating style. Most buyers start off somewhat lower than the
price they eventually want to pay.
Although your agent
may provide advice and guidance, you are the one who makes the decision.
The price you put in the offer is totally up to you.