4 Tips to Properly Price a Purchase Offer

The following is a guest post by Tali Wee of Zillow. I think this is a very interesting topic and the information in this post is very informative. As someone who is in the midst of the home buying process, it is also a very timely post. I definitely thought one of the most important things to do when buying a home was to properly price a purchase offer and determining the fair market value. It was relatively easy to evaluate comparable sales as many co-op apartments have the same layout, gross living area, amenities, and those which were in the same building were almost exactly the same. In areas where the housing market is heating up or hot, like it is in the NYC area, it is important to know how to price a purchase offer.

home and dollar sign on see-saw
Homebuyers in the currently recovering real estate market face the tricky challenge of making offers that match true home values while competing with inflated prices. Because inventory is low and demand is high, it’s a seller’s market full of bidding wars and spiked sale prices. Buyers might bid high to score homes they desire, but risk paying steep mortgages worth more than the values of the properties.

Review these four tips to make reasonable purchase offers that protect buyers’ investments but still motivate sellers to accept.

1. Study Home Values at Open Houses
Home values are unpredictable and constantly changing. So, how do home shoppers know if a home is overpriced, fairly priced or a great deal? The best way to judge home value is to become familiar with the market. Potential home buyers should visit open houses regularly to get an idea of asking prices, and then research online to view selling prices. House shoppers should start to grasp fair values after a month or two of viewing properties and comparing square footage, home condition, locations and specialized features.

When buyers feel comfortable with home values in their markets, they have greater confidence in making fair offers. Competitive markets are more challenging to judge home values because sale prices often vary due to bidding wars and high-priced investor offers. In those markets, it’s even more important for buyers to stay true to their knowledge of the market and avoid purchasing homes at inflated prices.

2. Evaluate Comparable Sales
Another way for buyers to establish fair home values is to compare listed homes to similar recently sold homes in the same areas. Comparable sales, also called comps, help indicate the current, local value of properties by comparing the year homes were built, lot size, square footage of home, number of bedrooms and bathrooms and the sale price.
Home values vary drastically by neighborhood as buyers are willing to pay more for homes within quality school districts, with close proximity to city centers, parks and transportation. Therefore, comps assist buyers who aren’t experts in a particular neighborhood to grasp local values. Buyers who complete their due diligence and thoroughly evaluate comps avoid overpaying for properties even if the amenities are enticing.

3. Sweeten Offers Without Paying More
The standard negotiation strategy of starting low and slowly raising offers to compromise on a purchase price does not apply to buying homes. Low offers are a waste of time in most cases, especially in competitive markets. Sellers might become offended, disregarding low offers or buyers could be seriously outbid.

Instead of bidding high or offering more than a property is worth, buyers should incentivize their offers. Sellers look for reliable offers from serious buyers. Buyers can pay larger down payments demonstrating serious interest and financial stability. Sellers view buyers with substantial cash as more likely to fund the transaction without complications. Sellers also favor buyers with loan pre-approvals, signifying healthy credit scores, debt-to-income ratios and lender support. Offers with fast contingency terms such as waiving inspections also appeal to sellers who want to speed up the transaction. Buyers can perform pre-inspections prior to making offers to avoid purchasing homes with structural damages.

4. Don’t Focus on the Competition

It’s easy to get swept up in the whirlwind of high bids in competitive markets. However, buyers who properly price their offers don’t let the rumors of numerous, high-priced bids distract them from the values of homes. Instead, they focus on the comps and their gut feelings of true home values. If a home has a huge pool and theatre room but the buyer plans to fill in the pool and change the theatre into an office, then the overpriced add-ons aren’t worth a higher offer.
Make asking price offers when it makes sense. Even if rumors suggest full-price buyers will be outbid, it’s not worth buying a home for more than its value just to win the bid. The costs of mortgages are steep, and underwater mortgages are major financial burdens. Beyond the expensive investment, it’s possible that the rumors aren’t accurate. Sellers might receive fewer offers than anticipated, even at or below asking price. Additionally, some high-priced offers might have extensive contingencies or little financial assurance.

The best way for buyers to properly price their purchase offers is to get to know the markets they’re shopping. Study local values through open houses and comps, and never offer more than the property is worth. Huge, underwater investments are avoidable if buyers research markets before bidding and stick to what they know, as opposed to following the trend of bidding wars. Lastly, buyers should save large down payments, get pre-approved by lenders and complete pre-inspections prior to making fair offers to increase seller interest.

6 thoughts on “4 Tips to Properly Price a Purchase Offer

    1. livingrichcheaply@gmail.com Post author

      That’s a good idea Laurie, thanks for sharing that tip!

    1. livingrichcheaply@gmail.com Post author

      There’s no exact science to pricing…it’s pretty subjective.

  1. Emma @ emmalincoln.com

    It amazes me how many friends I have who make offers without having any concept of average home values in the neighborhood. Whenever I am making an offer, I do my own research. Too often, my realtor is just giving me generic data and if I’m very familiar with all the sales for the past year within a 6 block radius, I can come up with the best price myself.
    Emma @ emmalincoln.com recently posted…how much does the american dream cost?My Profile

    1. livingrichcheaply@gmail.com Post author

      I know what you mean. It seems a lot of people just make an offer based on what the asking price is. I felt the same way as you in that I felt like I could come up with the best price myself by doing research. It would be different if the realtor actually ran the comps and showed me why she felt a good offer is. Although in defense of realtors, sometimes they know housing trends locally better than anything you can find online. Just because your research shows a certain price, doesn’t mean there won’t be offers over that price in a hot market. That kinda happened to us.

Comments are closed.