Note: This is a chapter in my new ebook called The Ultimate Guide to Buying (and then Selling) Your First Home. I will post a chapter a week. If you like what you read, you can pick up a copy here for the price of a candy bar! Buy a candy bar or be a real estate guru! This chapter is deciding on what to offer on a house and continues the story from the previous chapter found here.
I started the discussion on what to offer with the following point to Steve and Sally. “As you know by now, buying your first home can be quite an experience. There are lot of considerations to keep in mind when buying your first home. One of the most stressful decisions for some first-time home buyers is how much to offer on a home. You know the asking price of the home you love. What do you offer on the house? First time home buyers will often rely on what they see on television or what they have been told my friends and family. Some will say to go in aggressively while others will tell you to be timid in your approach. Do you try to get the best deal, or play it more conservatively in the hope you don’t put off the seller?” Steve nodded understandingly while Sally seemed to be a bit more stressed after my opening statement. I told her not to worry that despite your approach to making offers, here are three questions to keep in mind as you are considering your offer price.
1. Is the asking price too high? – Buying your first home can be challenging in terms of not knowing what the market will bring in terms of home value. I handed Steve and Sally a Comparative Market Analysis (CMA) to help them determine the home’s value. Real estate agents are trained to do this, although the training is limited compared to that of a home appraiser. I used a sales comparison approach. With this approach, I told them that I looked at three recently sold homes as well as homes currently on the market. These homes are similar to the target property and each one is less than half mile away from their target property. From all this data, I told them that I was giving them a range of possible home values. Next, I told them there are some other things you can do on your own to evaluate if the price is too high. As you think back on the house showing, try to remember its condition. Is it in good repair? Does it need many upgrades? Logically, the more money it takes to get the house to move-in ready condition, the less you should offer on the home. You will also need to look at the external aspects of the home. What kind of neighborhood is it in? Is it near a school or a major intersection? The old adage of location, location, location is spot on when it comes to value of a home. A great home in a bad location will be worth much less than the same home in a great neighborhood.
2. What kind of risk taker are you? – I next gave the following scenario to Steve and Sally. “If you were giving a $1000 and told you could invest it in a high-risk stock with a potential for some great return on your investment or a low-risk bond that will guarantee you some minor return on your investment, which one would you do?” Risk is a part of the consideration when determining what to offer. If you answered that you would roll the dice and go with the high-risk stock, you probably have the fortitude to move forward with a low-priced offer. How low you go depends on how serious you want your offer to be taken. Many sellers will look at low ball offers with less serious consideration, because they will often be offended. Other sellers will be willing to consider any offer. Generally, anything more than 20 percent off asking will not be taken seriously by sellers. On the other side of the coin, if you answered that you want the guaranteed minor return on your $1000 by going with the bond, you will probably put in an offer much closer to asking. Of course, real estate is like any other endeavor, there is no guarantee a seller will go with your offer. However, making offers closer to asking price will help to build a good rapport with the sellers so negotiations can go more smoothly. Of course, if you are in a multi offer situation where you are competing with another bid, all the usual approaches to offers are off the table. The approach you take must be much more conservative, because low bids do not stand a chance. In many multi offer situations, you will find yourself discussing offering above asking price to win the bidding war.
3. How much assistance to seek from the seller? – Steve and Sally had one final consideration to make. Offers come in all shapes and sizes. How someone buying their first home constructs their offer depends on their own unique situation. One of the things you can seek from the seller is assistance with fees and closing costs. For example, buyers will want to get a title policy for their property, which protects them against title defects. This cost is usually requested of the seller, but some buyers will want to make their offers more attractive by absorbing this cost. This is true for all the fees associated with a real estate transaction. Some other fees include home warranty costs, which will protect you from undiscovered and unplanned repairs during your first year of home ownership. If a new survey needs to be drawn up for the title company, will you ask the seller to pay for this cost or will you take it on? Closing costs associated with a mortgage is another consideration when making offers. Many first-time home buyers will not have much in terms of savings, so the closing fees might need to be covered by the seller for the deal to happen. A good rule of thumb when it comes to fees in your offer. The less you ask a seller to pay, the more attractive your offer will be to the seller. If you ask for too many fees, will the seller be turned off from your offer? Most sellers will simply counter with a difference in the fees covered, but some sellers will be offended enough to reject the offer altogether. It is best to tread carefully when requesting sellers to pay for fees and closing costs.
Steve and Sally listened to what I had to say to them. When I was done, they both looked scared, like a deer caught some car headlights. I told them that I knew these decisions were stressful, but we could go through the One to Four Residential Contract in detail to be sure that we have covered all the aspects of the offer. Steve readily agreed that this was a good idea as he wanted to make sure he understood the offer he was making, even if it meant he would need to consult with his attorney before making the offer. Sally agreed, but still looked very worried. Without further ado then, we launched into the actual contract to discuss terms of the offer.