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.
Comparable Sales
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.
Comparable Sales 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 correctly.
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 it 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.
Comparable Sales 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.
Recently, the public has been able
to access some of that information
on such sites as Realtor.com, MSN
HomeAdvisor, and others.
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.
Comparable
Sales – 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.
Other
Factors 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.
How Property 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 average.
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.
The missing 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.
How
Home 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 this
area.
How
Market 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 you
desire.
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.
Transition markets 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.
How
Seller 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 elicit 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.
The
Final 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 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 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.
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