If you've found your dream home and you're ready to make an offer, you may wonder what price you should include in your offer letter. Should you offer the asking price of the home? Lower? Higher? There's no one right answer to that question, simply because it all depends on the market where you're buying the house. Luckily, you can become a market savvy individual by working with your Realtor and reading through this article to know the best offer price.
Competitive Market Analysis
When you decide to make an offer, your Realtor will help you by creating what's called a Competitive Market Analysis or CMA. A CMA is a multi-step process, but by going through it with your Realtor, you will learn more about your market and the best way to make an offer on the property you want.
Start by Gathering the Comparables
A comparable is a real estate term for a home that is comparable to the home on which you're making an offer. Your realtor will go into the Multi-Listing Service and make up a list of homes that are within a half-mile to a mile away from the home you're making an offer on, and are a similar size. Your Realtor will look at homes that are currently listed, pending or have sold within the last 6 months. This list will be what you use to create your Competitive Market Analysis.
Look at the Selling Price
For homes that are pending sale or sold, your Realtor will look at the sold price, not the listing price. The price the home sold for could be more or less than what the listing price was, and the sold price is a more accurate number on how much the home is worth. Comparing the selling price of the pending and sold homes to the listing price also gives them a good idea of the value of comparables.
The Realtor will also look at different parts of the comparable homes as well. They will note if the home has undergone upgrades, was sold as-is, had a roof or deck updated and so on. These elements will be included in the CMA.
Averaging the Prices
Once your Realtor has gathered up all of the sold prices and the facts of the about each of the comparables, they will add up all of the prices and average them. They will also look at the amenities the average home has; if all the comparables have a deck, then a deck won't boost up a property's value; but if only a few of the comparables have a deck, it will make that property more valuable.
After all of these elements are completed, the real estate agent will give you the Competitive Market Analysis. It will show you the average price of similar homes to the one you're making an offer on, as well as their average size and amenities. However, you can't take the average price and use that as your offer. First, you have to gather up some information on the home you're looking to purchase.
Compare the Home to the CMA
To find the home's value, compare it to the homes on the competitive Market Analysis. Does it have more or less bedrooms? A better kitchen? More deck space? A better view? All of these are factors in the value and price of the home. Take the average home's amenities and price and then add or subtract value when looking at the amenities, size and condition of your home.
Of course, some things will be huge indicators that your property is a different value than the average comparable home. If the property is in bad condition or being sold "as-is", it's likely less valuable than the average home in the area.
The main things to look for are the condition, location, features and basic amenities of the home when comparing it to the properties on the analysis. Once you've found a value for the home based on the competitive market analysis, you don't fully have your offer price yet. Next, you'll need to...
Determine if it is a Buyer's or Seller's Market
Knowing if the home is located in a buyer's or seller's market can help you determine what price to offer.
A seller's market means there aren't many homes for sale, and so there's more competition for one home. Buyers can end up getting into bidding wars on a home because of the lack of other houses on the market, and homes go quickly.
A buyer's market means there are many different homes on the market and therefore not as much competition for each home. A home may sit on the market for more time and so a seller may be more motivated to accept a lower offer. Buyer's markets can be seasonal. For example, winter is a buyer's market, because most people don't plan to move in winter, so they're usually heavily motivated to sell their home, letting a buyer able to get a lower price for the house.
If you are in a seller's market, be prepared to make your best offer first. That way, you won't get caught in a bidding war. If the seller accepts another offer and wants you to counter, you know that you have made your best offer, and move onto another house.
In a buyer's market, bidding slightly lower than the asking price can be helpful. The seller may counter offer, but it's possible to get a home for less than listing price and with more help on closing costs and repairs, as they're highly motivated to move.
Use this knowledge to ensure you have the right offer to get the property you want.
Finally, you'll need to make your offer irresistible by ...
Finding Your Seller's Motivations
Knowing what motivates your seller can help to move the sale along and get you the offer. Price isn't always the end-all be-all of an offer. There are times when an offer may look really good to a seller based on other parts of the offer, simply because of their motivations for moving.
Start by looking to see if the home has been on the market for a long time. The longer amount of time, the more motivated the seller may be and more willing to accept a lower price. See if your Realtor can determine what's kept it on the market for so long and see if you can use that knowledge to move the offer along. Is it because there are so many repairs needed? If you feel comfortable doing DIY's, offer to take the home as-is for a lower price. Has a contract fallen through because of a buyer? Show your pre-approval and give the seller a hefty earnest money deposit, but a lower priced offer.
Next, learn why the seller is moving. If they are downsizing to a small apartment, offer to "buy" any furniture they need to get rid of and can't take along. If they're trying to move quickly, (they are paying two mortgage payments) offer a lower price with a quicker closing date. They may take your offer because they'll be saving money. Although value of a home and how it compares to other houses nearby is important, the price may not be as alluring as something like a quick turnaround or a financially secure buyer.
Once you make an offer, make sure to stipulate that you want to have a home warranty on the property once you purchase the home. This will protect your systems and appliances when they fail from normal wear and tear. You can pick the plan that best suits your needs from Landmark by going to our compare plans and pricing page.