Determining Your Offer Price

Whenyou prepare an offer to purchase a home, you already know theseller’s asking price. But what price are you going to offer and how do you come up with that figure?

Determiningyour offer price is a three-step process. First, you look at recentsales of similar properties to come up with a price range. Then, youanalyze additional data, such as the condition of the home,improvements made to the property, current market conditions, and thecircumstances of the seller. This will help you settle on a price youthink would be fair to pay for the home. Finally, depending on yournegotiating style, you adjust your "fair" price and come up with what you want to put in your offer.

Comparable Sales

Thefirst step in determining the price you are willing to offer is to lookat the recent sales of similar homes. These are called "comparablesales." Comparable sales are recent sales of homes that compare closelyto the one you are looking to purchase. Specifically, you want tocompare prices of homes that are similar in square footage, number ofbedrooms and bathrooms, garage space, lot size, and type of construction.

Ifthe home you are interested in is part of a tract of homes, then youwill most likely find some exact model matches to compare against one another.

Thereare three main sources of information on comparable sales, all of whichare easily accessed by a real estate agent. It is somewhat moredifficult for the general public to access this data, and in some casesimpossible. Two of the most obvious information sources are the public record and the Multiple Listing Service.

Mostof the public is aware that the Multiple Listing Service is a privateresource where Realtors list properties available for sale. Once aproperty is sold and the transaction has closed, the selling price isposted to the listing in the Multiple Listing Service. Over time, ithas become a huge database on past sales, containing much moreinformation on individual homes than can be gleaned from the publicrecord. This information is only available to real estate agents whoare members of the local Multiple Listing Service. Your agent will provide you with this data to help determine your offer price.

Other Factors Influencing Your Offer Price

Gatheringand analyzing information from comparable sales helps to establish therange 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, youneed to do a bit more analysis before setting upon the price you willoffer. That is because you also need to consider the condition of theproperty, improvements, the current market, and the circumstances behind the seller’s decision to sell.

How Property Condition Affects Your Offer

Sinceyou have toured the property you are interested in, you should know howit compares to the general neighborhood. All you have to do is put thehome in one of three categories - average, above average, or below average.

Whenevaluating a home’s condition, there are a number of things youshould consider. Structural condition is most important - items such aswalls, ceilings, floors, doors and windows. Then paint, carpets, andfloor coverings. Pay special attention to bathrooms and bedrooms andwhether the plumbing and electricity work efficiently. Look at thefixtures, such as light switches, doorknobs, and drawer handles. The front and back yards should be in reasonably good shape.

Themissing ingredient will be information on the condition of the homesfrom your comparable sales list. Provided you chose the right agent torepresent you, they will have actually visited most of those homes and be able to provide key insights.

How Home Improvements Affect Your Offer Price

Evenwhen comparing exact model matches within a tract of homes, you shouldnote whether the previous owners have made any substantialimprovements. Cosmetic changes should be largely ignored, but majorimprovements should be taken into account. Most important would be roomadditions, especially bedrooms and bathrooms. Other items, likeexpensive floor tile or swimming pools should be taken into account,too, but should be discounted. A pool that costs $20,000 to installdoes not normally add $20,000 in value to the home. Rely on your agent to give you guidance in this area.

How Market Conditions Affect Your Offer Price

Ahot market is a "seller’s market." During a seller’smarket, 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 ahome, reducing your offer by even a few thousand dollars could mean that someone else will get the home you desire.

Aslow market is a "buyer’s market. During a buyer’s marketproperties may languish on the market for some time and offers may befew and far between. Prices may even decline temporarily. Such a marketwould allow you to be more flexible in offering a lower price for thehome. Even if your offered price is too low, the seller is likely tomake some sort of counter-offer and you can begin negotiations in earnest.

Moreoften than not, the market is simply "steady," or in transition. When amarket is steady, no real rules apply on whether you should make anoffer on the high end of your range or the low end. You could findyourself in a situation with multiple offers on your desired house, or where no one has made an offer in weeks.

Transitionmarkets are more difficult to define. If the economy slowsunexpectedly, as it did in the early nineties, people who buy on thehigh end of a seller’s market (like the late eighties) could findtheir home loses value for several years. So far, no one has provenreliable in predicting when markets change or how good or bad the real estate market will become.

How Seller Motivation Affects Your Offer Price

Truthfully,it is rather rare that a seller’s motivation will dramaticallyaffect the price of a home, but it is often possible to save a fewthousand dollars. The most common "motivated seller" is someone who hasalready 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 theprospect of making two mortgage payments at the same time. Since thatcan drain a bank account quickly, most sellers want to avoid such asituation and may be willing to give up a few thousand dollars to avoid the possibility.

Thereare 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 theseller is motivated to make a quick and costly sale. Most likely, thead 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 aquick sale and sacrifice thousands of dollars. With the seller’spermission, the listing agent will post this information along with thelisting in the Multiple Listing Service. They may also inform otheragents during office and association marketing sessions or by flyerssent to other real estate offices. Provided this information has beenmade generally available to Realtors, your agent should know when aseller is truly motivated and when it is just "puff" designed to elicit interest in a property.

Theexception is when an agent is selling a home they have listedthemselves or selling a home that was listed by another agent fromtheir own company. In such a situation, the agent may be acting as anagent for the seller, or as a transaction broker representing both youand the seller. In such a situation, they cannot legally provide you with information that would give you an advantage over the seller.

The Final Decision on Your Offer Price

Comparablesales information helps you to determine a base price range for aparticular home. Adding in the various factors like property condition,improvements, market conditions, and seller motivation help determinewhether a "fair" price would be at the upper limit of that range or thelower limit. Perhaps you will feel a fair price is outside of that price range.

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 negotiatingstyle. Most buyers start off somewhat lower than the price they eventually want to pay.

Althoughyour 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.