There are a number of things to consider in determining the right amount to offer on your new home. First of all let's assume that you've done your homework and have been looking at homes and getting educated to the market. One of the biggest benefits of getting educated is you will have the ability to recognize the right home when you see it and understand value. The more closely the home meets all of your housing needs the higher the value to you so here is your checklist:
1. Get educated. Spend time looking at homes so that you have a solid understanding of value.
2. Ask your broker to do market analysis. Once you find a home that is a serious contender ask your broker to do a market analysis on it for you. A good market analysis is detailed and to the point using comparables that are very similar to the subject property, very close geographically and very recent transactions. I rarely go past 90 days in selecting comparables. While we're on the topic of market analysis, understand that the theory here is that if a buyer is willing to pay a given amount for a home like the subject property and the seller is willing to accept that price and neither buyer or seller are under any undue pressure to buy or sell (this is called an arms length transaction) then the comparable property should reliably be an indicator of market value. We look at active listings to determine the competition, pending listings (sold but not yet closed) to get an idea of what is selling at a given list price and sold listings as the best indicator of value. In this market there quite a few distressed properties. It is best to only compare distressed to distressed and arm's-length to arm's-length.
Like a good appraisal, a market analysis should contain only a few homes that are very good comparables to the subject property Ideally look at one or two active listings, one or two pending listings and at least two sold properties. This will give you a very good idea of market value on the subject property
3. Take a look at the tax assessment on the property. In our market place, tax assessments are usually significantly lower than sales price but they can be a good indicator by looking at the percentage of sales price to assessment across the comparables that you are reviewing.
4. Ask your broker for an AVM on the property. An AVM is an automated value model. A good example of an AVM is a Zillow "Zestimate" An AVM is more reliable in neighborhoods with many similar properties then for example rural properties. Your broker should have access to other AVMs that may be helpful for you.
Once you have reviewed these four items you'll have a very good feel for market value. Right now my market place is a strong sellers market. Take a look at the Market Action Index I've supplied below to give you an idea. What this means is that more likely than not, you will be competing with other buyers on most homes. Price is only one of the considerations of your offer but it is a big one. There are many things you can do to sweeten your offer but that is another post.
You will need to take into account other interested buyers. Ask your broker to call the listing Broker and determine what competition you have. I know this sounds simple but I will always call the listing broker and ask what it takes to get my buyer the house instead of it going to another buyer and they will frequently tell me exactly what I need to know. Watch for a future blog concerning agency relationships and why the listing broker may or may not have done the right thing in providing this information. In a seller's market there may not be a lot of latitude for negotiation of price but again, price is not the only consideration. In a market where you are competing with other buyers you will have less room for negotiation but that doesn't mean that there may not be some room.
Once you take all these items into consideration you will be ready to decide on the price strategy that is right for you. Remember the strongest negotiating position to be in is to always want to buy a house, never need to buy a house. One of the most important roles your broker will play is to help you stay objective in your decision-making process. Not that you shouldn't absolutely love the new home but it's important to maintain enough distance to be able to walk away from the transaction.
The last bit of advice that I would like like to offer is that you should choose a price such that if the seller accepts your offer you are excited about it, but if they don't you don't regret the amount that you offered. This is a personal decision and usually involves quite a bit of discussion in order to be at peace with the offer you make. Remember you can't win if you don't play but the objective is to win.
By Brian Leavitt, Designated Broker, Northstone Real Estate Inc
Brian has been a Real Estate Broker for more than 30 years and has
helped hundreds of buyers achieve their dream of how ownership.
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