We found a house we love! How much do we offer for it?

I was just reading this question on Trulia.  It seems to be coming up over and over again in different variations:

• We just found a dream home.  How low do we go?
• Is there a standard formula for offering lower than asking price? 
• How much lower can we offer without offending the sellers?

And, so on...

First of all, home buyers, make sure that you are working with a great Real Estate Agent.  You need that Real Estate Agents' help to ensure that you make the right offer.

In answering the above questions, I will assume that you found a home that you see yourself living in and are not buying to flip (update and resell).  Having said that what are the steps:

Have your Real Estate Agent run a Comparable Market Analysis (CMA) to look at what is currently on the market, what is under contract or is in escrow and what has Sold within the last 3 months in a 1/2 a mile radius from the home that you like.

• The reason you want to look at Active properties (for sale on the market right now) is to understand how much inventory is there and how long have these homes been offered for sale.  This will help your Real Estate agent calculate the number of months of inventory and assist in coming up with the offering price strategy.
• The number of homes under contract or in escrow will also show you how quickly these homes are selling compared to how many homes are on the market.  Critical in coming up with the offer price strategy.
• Finally, the number of homes sold and the price per sq. ft.they sold for will help you come up with a Sale Price range for the property that you found.  I use a simple formula to come up with the range.  I first look at the lowest priced home per sq. ft., then the Average price per sq. ft. of all solds and the highest priced home per sq. ft.  Take each one of these numbers and multiply the sq. ft. price by the number of sq. ft. in the house that you want to make an offer on.  This will give you a range of offer price from low to middle to high.  Compare that range to the asking price.  Where is the home priced on this range? 

Next, take a look at the condition of the home that you like and compare it to the ones that are on the market.  It doesn't hurt to actually visit some of the homes that are currently available on the market.  This will give you a very good sense of how your dream home compares in price and condition to others.

Finally, before you come up with the asking price, your Real Estate Agent should sit down with you and discuss your other terms.  How strong are you financially?  What are the contingency periods for inspections, loan and appraisal?  You should already be fully approved, right?  I preach that all the time.  I will NOT work with any of my Pasadenabuyers that are not pre-approved.  That would be doing a disservice to my clients!  Ok, enough preaching and back to the subject.

The stronger you are financially, the more leeway you might have with the price.  Unfortunately, the weaker you are financially, the more scrutiny you will get and unfortunately, might end up paying a tiny bit more.

As you can see, there are so many different things to consider.  I've listed just a few.  So, buyers - find a good Realtor that can guide you through the process of buying a home.  And, listen to their advice!

Good luck in your home search!