Whether you’re a first-time homebuyer, or have been around the block before (pun intended), deciding how much to offer for a house can be stressful.
It goes without saying that you want to get your dream house at a rock-bottom price. And of course the seller wants to get top dollar.
Somewhere between those two prices is what you will end up paying for your house. Let’s start by assuming the house you’ve found is not “distressed,” meaning it is not a short-sale or bank-owned property. (More about those in a future article.)
Classic Example of a Home Purchase Negotiation
Before you make an offer, your Realtor should look up recent sales of comparable properties, or “comps.” If the property you’ve chosen is in a community or subdivision of similar types of homes, finding comps should be fairly straightforward. If the house is located in an area where there have been few or no recent sales, or the homes vary widely in terms of size and quality, it can be more challenging for your agent to locate comps that will help determine a purchase price that makes sense.
For example, let’s say that the house you want is listed for $245,000. It is located in a neighborhood with recent sales, the homes were all built within a few years of each other, and are of similar size and quality. The house for sale and the comps all have nice pools and updated interiors. Four homes sold within the last three months for $210,000, $190,000, $225,000 and $236,000, with the higher-priced sales being the most recent.
Your agent lets you know that the house you would like to buy has been on the market for ninety days, which tells her that the seller might be getting anxious to get an offer. She suggests an offer of around $205,000 to start and explains that the seller will probably give a counteroffer. With the offer she submits to the seller’s agent she includes the comps so that the seller can understand the buyer’s decision regarding price. After some back and forth, you and the seller agree to a price of $228,000.
Congratulations! You’re under contract.
Overpriced Homes and Low-Ball Offers
We often encounter sellers who believe that the best way to sell a house is to price it far above market value as indicated by recent comps, because they can always come down in price but can’t go up. This is usually a mistake because selling a house is all about getting potential buyers in the house to see it. A house that is grossly overpriced will have few showings and in the long run will take longer to sell, and may sell for a much lower price because it was on the market so long that agents and prospective buyers assume there is something wrong with the house.
Conversely, we also run across many buyers who assume that ALL sellers overprice their homes and that the only way to get a fair price is to automatically make an offer that is way below the asking price, just on principle, and regardless of any comps we provide. The net result in many cases is an angry seller who rejects the offer and won’t even give a counteroffer.
It’s important to work with a Realtor that you trust, and who will provide valuable information and insights about pricing. If the house you want to buy is clearly priced well above what the comps indicate, the best you can do is present an offer that makes sense and ask your agent to tactfully include the comps with the offer so that the seller’s agent can (hopefully) use that data to help the seller evaluate the offer in your favor.
Multiple Offer Situations
When there are more buyers than sellers for the type of home you’re looking for, you could find yourself bidding against other buyers – and possibly paying more than the listed price.
How do you know when this is the situation? The seller’s agent will tell your Realtor if other offers have been received or expected to come in that day, so that you can make your highest and best offer. The seller will pick the most attractive offer and do any further negotiating with that buyer. If that one doesn’t pan out, they will then come back to the second best offer and do the same. The seller cannot counter all the offers at the same time, as they could end up legally being on the hook to sell their house to multiple parties!
Of course you’d prefer not to pay more than the listed price, but if you really love the house, and the comps are in line with what the seller is asking, it’s not necessarily foolish to offer more. If getting a deal is what matters to you more than getting a particular house, then making an offer in this situation is not for you and you should continue your search.
The Deal Hangs on the Appraisal
Like most buyers, you probably need to obtain financing to purchase a home. Your lender will require that the house appraise for at least the purchase price, and here is where the experience and professionalism of your agent will count the most. If your agent does not provide you with the right comps and expert guidance prior to signing a contract, you could end up spending hundreds of dollars – and in the case of luxury properties, much more – on inspections, the appraisal and a survey, only to have the lender disapprove the loan because the property didn’t appraise.
What happens if the appraisal comes in low? The appraisal can be appealed, but such appeals are unsuccessful more often than not. You really have three options. Your best solution is to renegotiate the purchase price down to the appraised value. Naturally, the seller will be resistive to this, especially when the gap is significant. The seller might decide he can do better with another buyer. But a savvy agent should be able to help the seller understand that if the first buyer couldn’t get financing due to a low appraisal, there’s a good chance a new buyer would have the same problem.
If the seller won’t budge and you really want the house you will have to bring additional funds to the closing to make up the shortfall. You may balk at this option…after all, who wants to pay more than a property is worth? Or you may have just enough for the down payment and closing cost, but no more. However, if you feel strongly about the house and its potential future value, plan to stay for many years, and have the funds, this might be the right choice for you.
Your final option is to walk away from deal. In most residential contracts the purchase is contingent upon the buyer being approved for financing, so you should be able to cancel the contract and get back your earnest money deposit.
The Bottom Line
When determining which house to buy and how much to offer, make sure you and your Realtor consider the impact the appraisal will have on the deal. Keep in mind that the house will need to appraise for at least the purchase amount in order for the lender to approve your loan.
The sale of a home is often stressful and emotional for both the seller and the buyer, so work with an agent you trust to keep your home search and purchase transaction moving forward in a businesslike fashion.
And remember – buying and moving into a new home should be a happy occasion! Make sure you invite us to the housewarming party!
A Note From John & Debra
Please let us know if we can help you in any way…call Debra at 727-286-1249 or John at 727-642-6864.Google+