Determining Your Offer Price

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.

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.

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.

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 transaction broker 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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