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There are several things to consider when making an offer.
1. Asking price – The current list price is what the listing agent’s research and competitive market analysis has determined is a fair value for the home in its current condition.
2. Condition – The seller is aware of the current condition of the home and have considered that in the asking price. Sellers do not care what a buyer needs or wants to do to improve a home. They, and their broker’s market research, have already considered what the property should be worth.
3. Market – Most properties sell ABOVE the listed price. It is a popular strategy to list homes at the low end of the CMA (competitive market analysis) to promote interest and bring in more offers. This results in bidding wars and higher sales prices than what was originally asked for. I believe this is a disservice to buyers for a few reasons. A) If you list a property for $489,000 but have no intention of accepting anything less than $515,000 all of the buyers who rushed to see it who are only pre-approved to $500,000 will have no possibility of actually getting the house. B) This means their offers are there simply for the list agent to boost other, more competitive offers closer to their intended price. C) It forces the use of the 22AD form in situations. This is a form that allows a buyer to pay OVER the appraised value of a home with funds out of their pocket. Often time the highest dollar offer is not the best offer! When there is financing involved, a house is worth what an appraiser says, not what a buyer offers so the 22AD form guarantees a seller that they will get the appraised value PLUS whatever additional funds the buyer agrees to pay. This unfortunately has become a necessary evil in some negotiations.
4. Offer price – It is almost never a good idea to send in a low ball offer. If an offer is too low it will not even be responded to and can be considered insulting. If a property has sat for an unusual amount of time then offering less may get us on the playing field. The goal in offering less should be to get close enough that the seller will consider sending us a counter offer. Most properties fall in a 30-50% increase from the county’s assessed value. This is mainly relevant for non-cash offers as cash offers do not require an appraisal.
5. Earnest money – The more earnest money offered, the more serious the offer in the seller’s eyes. This also shows the financial state of the buyer. Low earnest money amounts can be a deterrent to the seller.
6. Type of loan – Cash is king and will always beat an offer that is financed. Conventional loans are less stringent than FHA/VA/other types of loans so they are more desirable from the seller’s standpoint. Often we will need to increase the offer price to compensate for the type of loan. This is because the seller will have more potential expense with items needed to be corrected to pass the appraisal process.
7. Bottom line – The seller is concerned only with the net amount they will be making from the transaction. If we are asking the seller to contribute to closing costs then that must be considered in the offer. A $300,000 property can have $9,000 worth of closing costs. If we ask the seller to contribute 3% of the purchase price and offer the asking price of $300,000, the net offer to the seller is actually only $291,000.
8. Appraisal – You are never required to pay more than appraised value of a home. If you agreed to purchase a home for $300,000 and the appraisal comes in at $290,000 the financing addendum protects you from paying over the appraised value. This can get tricky if we are asking the seller to pay closing costs because often times that credit can be the factor in a house not appraising at value. It is best to take that into consideration and what is fair to all parties if that occurs. There is a trend with buyers to include a 22AD form which state that a buyer will pay a specified amount OVER appraised value in the event of a low appraisal. It is important to be aware of this as several factors will be taken into account (If you are using an escalation clause, 22AD, and whatever the appraisal comes in at).
9. Desire – How badly do you want the home? At what dollar amount are you willing to lose it? Properties are the single most expensive asset you will ever purchase. The difference of a few thousand dollars over the course of a 30 year loan becomes very small. As long as a house appraises at what you and the seller have determined is a fair price everyone should be happy. You should always think “If we lose this house because of this offer, will I be able to sleep tonight?” If the answer is yes, then the offered amount is fine.
Conclusion – The best strategy is always putting your strongest offer in from the start. It shows that you are serious about the property and is likely to get a faster, more positive response. The home buying process is long, usually between 30-45 days, unless it is cash (which can close as soon as the inspection process is complete), and if you aren’t committed to it then it is likely the deal will fall apart at some point. Never make an offer on a house that you don’t really want. I do my best to get every client the house they want. The deals that fall apart are the ones that the people weren’t in love with.
