How do you determine your offer price ? Strageties and Tips !
How do I figure out a fair bid on a home ?
Every buyer asks this question. To the naked eye it seems like a pretty simple question, but it can become anything but simple ! Hidden in that inquiry are an infinite number of variables that can affect your answer.
In determining your bid for a home, you must first have an idea of what you believe is a fair sale price. Fair sale price is based on solid facts and statistics as well as some more challenging variables that are relative to the buyer's needs.
How do I determine a fair sale price ?
Comparable Sales (Comps) + Personal Value = Your Fair Sale Price
Comparable Sales: Comparables or comps for short are based on the value of similar properties that have SOLD within a 3-6 month time period. The most accurate comps are taken from homes within a close radius to the target property. Comps will set the fair market value of a home. (Your Realtor will be able to provide you with the most current comps based on SOLD homes. Sales comps are not based homes that are still for sale.)
Tip: Comps should be looked at as a soft numbers or a price range to help you determine a fair sale price of a home. Comps are not carved in stone. There is no one single value that you must rigidly adhere to.
Personal Value: There are an infinite number of factors that may alter the comps on a home such as the value of upgrades or lack of upgrades, the value of the location, the size, shape or usefulness of the land, the layout and the square footage inside the home... I can go on. Many of these nuances cannot be calculated with a simple mathematical formula. You will need to give your own value to those items base on your unique needs. Yes, there is a price per square foot formula that can be used, a general theory on replacement value or, for example, the value of a new bathroom compared to an outdated one, but ultimately, you know what is important to you in a home and you will determine the value of the property's individual features.
Example (based on fictitious values and round numbers):
Asking price for a home listed for: $210,000.
- Comps show similar home values at around $200,000
- The comparable homes have updated kitchens. Your target home has a kitchen that is outdated. You will need to spend around $5,000-$10,000 to make it functional for your needs.
- You want to put in a pool and this home has a big yard (unlike the others in the area) which adds a lot of personal value to you: unknown $ amount.
Your fair sale price may be may be around $195,000 give or take. But, what is the intrinsic value of that pool to you and your family? Hmm... a little more difficult to quantify isn't it? And there can be an endless array of scenarios that can add value to a particular home for a particular buyer.
How do I determine my initial bid on a home?
Let's assume you know where you want to land for a final sale price. This is where buyers get very creative. As Realtors we are always practicing the art of the bid and honing our ability to strategically foresee how a seller will respond.
Offer prices are typically determined with the notion that there will be negotiations. The common belief is that as a buyer, you never buy a home at its so called "sticker price". This belief is generally the strongest in a "buyer's market", which we are currently in right now. There are several factors and variables that can be considered when deciding on a fair starting bid. Here are a few of the strategies we have seen.
- Meet me in the middle. Start at a number where the seller can meet you in the middle. Using the example above: Listing price: $210,000. Bid: $180,000 and hope to land a counter in the middle at $195,000.
Tip: There are no hard and fast rules. Fair does not always mean equal.
- Differential based offer. This is an offer based on a percentage of where average homes sell compared to their list price. (Your Realtor has access to the differential percentages and it should be very specific to your target area.)
Tip: If a home is priced at fair market value or grossly over priced, the differential will not give an accurate calculation.
- Take it or leave it. With this approach, the buyer offers a price and is firm.
Tip: This is not always effective in market where negotiations are expected.
- Hail Mary or Shotgun. This approach is often associated with investors or a buyer looking for a "steal". There is very little emotion in this offer and getting a property well under market value is often the main goal. Home buyers may also slip into this category if they are shopping above what is affordable for them or when they perceive a false opportunity such as "days on market".
Tip: Many days on the market does not always equate to a motivated seller.
- Strong terms. Formulating an initial bid is not only about the money, it is also about the terms. Leveraging the terms in your bid is a tool that may land you on the purchase price that you are looking for. Examples of terms in a bid are: money on deposit, settlement date, strength of your mortgage, dates for inspections, and of course the price.
What is the best approach ?
In our opinion, the best approach is the one that incorporates all of the above. The best approach starts with finding a great Realtor that you can trust. You do not have to figure this out alone ! Their knowledge of the market and experience preparing bids for homes can get you closer to the price that you are aiming for and getting your deal closed !
Review Questions:
- How much does the market say the home is worth?
- How much is the home worth to you?
- What is the differential in the target area?
- How flexible will you be on the final price?
- When will you be firm and stop negotiations?
- What are the terms you will use to strengthen the offer?
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