Things That Influence Your Asking Price
Determining your offer price is a three step process. First you look at similar property types which come from three data sets: one, recent sales, two, pending sales and three, active listings. Usually these comparables will have similar square footage, features and benefits. Next you consider additional factors such as the current market conditions, condition of the home and neighborhood, improvements made to the property and the circumstances of the seller. Finally, you have a determined a “fair” price and depending on your negotiating style, you can adjust off of that for your offer price.
I. Similar Property Types
A. Active Listings
Much of this work has been done already by you the buyer in shopping the active listings on the market. It may be that you’ve noticed that the subject property you are putting an offer on is priced reasonably, priced low, or you may find that it seems priced high, compared to the others you’ve been looking at. Either way, it gives you a feel for the market and prices. Using the property search solution off this site gives people the extra edge in becoming and being educated about active listings, pricing and how fast properties cycle when set at a certain price.
B. Pending Sales
Pending sales really do provide the freshest reservoir for what buyers who have shopped the market are saying in what they are tolerating in price. This is the real competition that is actually more influential, in setting what the price of homes get set at and sold at, than most people would think. Brian has a template where he can pull up all comparable active and pending sales and overlay a template that automatically computes the price per square foot of all the comparable homes. Then he can compute the average price per square foot for both active and pending ones. He usually does this as a service for the buyer, especially when they need this extra assurance about price before writing the offer.
C. Sold Sales
Brian can pull up on the Multiple Listing Service any and all sold comparable properties and specify back a certain amount of months. The active listings and pending sales will often depict the most recent and valuable information, but it is not uncommon to dip back into the sold sales when limited amount of pending and actives exist; also to confirm what we may already know.
II. Additional Factors
A. Current Market Conditions
In a hot market or “seller’s market” properties can sell within the first few days. Occasionally homes will go for above asking price with multiple offers coming in on them. So, when thinking about coming in too low to get a “deal” on the property, it is possible you might offend the selling party or lose out to a more serious offer coming in on the table at the same time. I try to get people thinking about needing to ask anywhere from 5K below asking price, on up to full price or over asking price. It just depends on the property.
A “buyer’s market” is a slower market. This is when properties linger on the market for a longer while, so it is much easier thinking about bartering back and forth more in this environment. Even if the offer price is way too low, it is likely that the seller will still make some kind of counter-offer and you can begin negotiations in earnest.
An in-between or “steady market” can be in transition, neither a hot or slow market, but in between. This kind of market is harder to define as to how offer prices are approached. It is less predictable about what you can get away with, with a seller. You need a good agent that can help discern some of these things, in any case, when talking with the Sellers realtor. You will have both houses that could be getting multiple offers on them and houses that have been sitting on the market for some time. So far, no one has proven able to reliably predict how good or how bad the real estate market will become.
B. Condition of the Home and Neighborhood
The condition of the neighborhood does reflect on value. To read up more on the importance of Location, Location, Location see the article on it. The condition of the home may be average, below average, or above average. There are a number of things to consider. The most important considerations are structural- to deal with areas around walls, ceilings, floors, doors, and windows. Then you could look at paint, carpets, and floor coverings. You could look at how “dated” things are, particularly the kitchen and bathrooms. Pay attention to bathrooms and bedrooms, whether the plumbing, electricity, vent and duct work are functional. You can look at fixtures, light switches, doorknobs, and drawer handles. The front and back yard condition can be more significant to you than first thought, when you start sinking money into the landscaping.
C. Improvements made to the Property
Particularly in tract home situations, you should pay attention and ask for information about what upgrades came with similar and same model homes and ask whether or not the previous owners have made any substantial improvements. A lot of times, if they have, you can get insight into certain limitations with same model homes and how they have been overcome or not overcome. This goes for improvements on all homes for that matter. Getting to know what improvements have been made or even thought about being made will give you information that you may have not thought about, concerning the property. Pay attention to room additions, especially bedrooms or bathrooms. Kitchen remodels, expensive tile or swimming pools are examples of upgrades that need to be taken into account. Most home buyers are not appreciative of the upgrades into a home and how this can increase the value and price of the home. How much value and increase in price can often be subjective to the house, market and market conditions. You need to count on a good agent to help you know how much more these things increase the price of a home.
D. Circumstances of the Seller
Most often the sellers’ motivation will not dramatically affect the price of a home, but sometimes knowing the sellers motivation can help to save a few thousand dollars. Some situations that may make the seller more vulnerable to consider a lower offer might be: If the house is vacant and the seller is paying a mortgage on it, if the seller has to relocate for a job and has a deadline to do it in and if the seller may need to sell first before they can buy. These are just some examples.
One thing to be careful of is if the seller has conditions that make him a distressed seller and the distressed seller tries to use this to their advantage and in reality is not that distressed. You have to ask yourself if the seller is advertising it as a distressed sale in order to draw more attention. Your agent can be critical in helping you discern between true distressed situations, which can possibly save thousands on, vs. those that are not. One example of overexposure on homes can be the pre-foreclosure, foreclosure and bank sold homes. Often because of the increase of exposure we have seen some of these homes go for more than they otherwise would have.
III. Adjust off “fair” price for Offer Price
Once you have weighed similar property types and additional factors you will have come up with what you consider to be a “fair” base price. It may be equal to full asking price, above full asking price or below full asking price.
The “fair” price should be what you are willing to approximately settle for at the end of negotiations with the seller. The price you put in your offer to begin with depends on what you decide. You might ask your realtor at the time what he/she advises or recommends, but then the final decision is totally up to you.