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that can be used, a general theory on replacement value or, for example, the value of a new bathroom compared to an outdated one, but ultimately, you know what is important to you in a home and you will determine the value of the property's individual features.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 Your target home has a kitchen that is outdated.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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The Somers - Philadelphia Real Estate
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Your right about this subject as one mans castle may be another mans average home. so to speak. You know there are some homes that just have a little extra value to some folks for any number of reasons.
Bill - So true. That is why sometimes with some listings sellers get that perfect buyer in the first week or two of the listing ! Which reinforces the proper need for pricing, internet marketing and having a property that shows very well ! That being said, there always seems to be a great deal of confusion for buyers in terms of what offer price they should come in with. This is where the experience and consultation of a strong buyers agent is imperative and resourceful. ~ Chris
Christopher and Stephanie:
Of course a cma will be the best approach with proper adjustments to determine value.
The art of the business for a buyer agent and buyer is to figure out or determine what a property is worth. When they do that then a offer can be made.
Based on a host of factors, how special the property is and basically how much the buyer is satisfied with it. A basic market demand assumption should be made.
Upon this, and other emotional and factural consideration, a bid should be made about 5% below your value you have reach in your cma.
Then negotiate to buy it up to or over the fair market value you set, based on the many personal considerations the property may possess for the buyer.
How well the property fills the need should drive the closing of the deal.
I have had people who wanted a certain area or block, and had to over pay for it. I have had times where they got it for less then we thought. It is an art not a science.
Best
Richard
Richard - Great comment ! A lot comes down to a buyers motivaton and the intangible benefits involved for sure. The psychology of it all can get very interesting for sure once the negotiation begins. Stephanie likes to say sometimes "If it is meant to be, it is meant to be." I like that quote : ) ~ Chris
Hi guys, we're flagging this for a feature. It's that good!! Keep up the good blogging :)
sincerely, Active castellum ( Lancaster PA Real Estate - Lancaster homes for sale )
Castellum - Thanks !! Stephanie was the author for this one. She worked on it pretty much all day... there are a lot of good points in there that can also be seperate blog posts. Great to see you here ! Also, thanks for the recommendation on Linkedin ! Will be going there and catching up in the next couple of days.
I too flagged this great post for a feature. This should be considered "HomeBuyer 101"
Love your approach!
JoAnna - Thanks for the compliment on this post ! You are right - there is a lot of info in it. Stephanie was going to reduce it because it got to be lengthy but it seems all the information is relevant as well as timely. So we kept it long : ) Homebuyer 101 would certainly be a great course for every interested buyer and consumer. It is an honor that you think this post would be the outline of that course per se !
Stephanie, I always liked that saying, if it was meant to be, it is meant to be.
So, let me get confusing.
I have taken things that were dead and gave them life. I have taken done deals and killed them. So, fate my have it turn, but we are an integral part of making fate's destiny.
A good agent who is on the ball and plays a good hand beats fate more than a stumbler.
So, all things being equal, fate is in the hands of the beholder to an extent. :)
We are at the mercy of the every possible variable that exists, some we can deal with some we can't.
So, every action we have taken then, was meant to because we did it.
Did I confuse?
Richard
YES! Finding a great Realtor you can trust! Each market is different and with our REO driven market we can only squeek out about 95% right now --------that's if something has been on the market 30 days with no offers!
Great post - Since I don't have the power to make it a feature, I did make it mandatory reading for our sales staff. It is a very insightful post. Thanks for sharing your insights.
Richard - I am with you on that. Stephanie has seen me taken some deals that were close to dead if not dead and bring them back to life. I agree without competent and professional agents, many deals would not make it to the settlement table for sure. So "if it is meant to be, it is meant to be" can have different meanings up until the end depending on the players involved. I still believe in that saying but I will work my butt off right until the very end and even beyond just in case : ). I follow what you are saying. ~ Chris
Renee - Trust is the huge buzzword I believe. I think once the consumer is working with someone that they really trust, they feel that much more comfortable as their is a real relationship. This allows for streamlined decisions and determinations on making offers and decisions throughout the deal itself.
Ryan - Wow ! Thanks for the compliment. We really appreciate it.
This is absolutely fantastic guys - I'd love to relog it! :-)
Liz - Thanks !! Glad you enjoyed the post ! You are more than welcome to reblog it : )
Congratulations on a great post - 'Should've been featured! I love your strategies and tips, and bookmarked this post so I can link to it in a future post of mine.
I agree this is so well presented and I think I'd like to reblog it too. May I?
Several good ideas on making offers.
I guess I'm a little "old school." If the agent & seller price the listing correctly in the first place, and buyer's will know it!
They'll know it, because they "see" the value by comparison shopping and exclaim: "That's the best home we've seen!"
In Tulsa, Oklahoma as with most of the world, selling a home boils down to price, location, and condition.
Location: I don't know about you, but in my experience moving the house is rarely a good option! So it is...what it is...and a bad location is only made up by pricing the house correctly (and usually lower than full market value for a good location).
Condition: Seller's choice. Show it well (not necessarily expensive, but clean and de-cluttered and repaired), or reflect the condition in the price. Some owners won't or can't afford a lot of "fix-ups," so again we're back to price. I highly recommend a "pre-listing home inspection." Or, at least one of the first things to complete after the sign goes up, and the seller pays for the inspection in advance! It works wonders when the buyer wants to negotiate repairs into the deal, only to find that most of them have already been completed!
Price: The above blog suggestions are really good ideas for the buyers to take a "run at it," and to make offers. The asking price is still determined by the seller.
I see our job as agents/brokers is to tactfully explain to the seller exactly what the determining factors are a buyer will look at to decide which house to buy. If the sellers understand what data the buyers will look at; if the sellers understand - in advance - what the market will bear; and if you have been honest with your presentation, the house will sell faster, and for much closer to full price.
Great blog, just my 2 cents!
Todd Davis, Broker/Owner Alliance Team Realty http:www.allianceteamrealty.com & Co-Founder Gold Star Clubs http://www.goldstarclubs.com - where business is made easy.
Great post, and good ideas. As for me, I look at what the last sold home was in that neighborhood which would be comparable in size, amenities, etc. Then I "show" that to the seller to give them an idea of how to price it, and I also "show" that to the buyer to let them know where to begin. ;-)
Hi Somers,
Hard to believe this didn't get featured yet :( We tried guys. You deserve some kind of praise though. Looks like it has conked you out for several days too :) See you on trulia.
Sincerely, Active Castellum
Hey Somers! I think the more posts about pricing and negotiating the better. I have one going into it's second week, and it's turning out to be very interesting.