How to Decide on an Offer Price for a House
I’m always looking for new and exciting things to write about. Especially when those ideas come from readers of the blog. Consequently, I was fishing for ideas from some of my co-workers at my sheriff’s agency when one of them posed an excellent topic. How the heck do you decide on an offer price for a house?
You see, this co-worker has a friend who was shopping for homes and making offers without me! A travesty in and of itself! I’ve since rectified the initial problem by convincing her I’m the bestest Realtor out there. However, she was frustrated because she didn’t really understand how to make an offer price and felt like the Realtor wasn’t being straight with her. Common problems, sadly. Do you go above asking? Below? When is it appropriate to make a full-price with contingency offer? All valid questions and all things I will discuss.
The Offer Price
The straight and skinny answer is like anything else in life – it depends. Real estate is negotiation. EVERYTHING is negotiable. That is the great thing about this business. That said, the problem arises when the Realtor doesn’t keep the client in the negotiation loop. Clients aren’t expected to be experts in the market. Consequently, the client won’t know what customary is in the market (some markets routinely underprice and expect an overbid; others price high and expect under-bids). Clients also don’t have all of the data as neatly organized as a Realtor does. Notice my phrasing, people DO have access to the same information; however, it’s not neatly organized and readily available at any point in time.
So, how does a Realtor come to an offer price? Hopefully, it’s a process that involves checking market comparisons, time on market, and any previous contract history on the property. Plus, there are many intangibles to identify: how do the upgrades in a particular house mesh with the overall upgrade level in the neighborhood, what are those upgrades actually worth, and what sort of mind frame is the seller in? There are tons of variables a Realtor could use. That’s why the answer to “what’s a good offer price?” Is always depends.
I’d like to illustrate that point a little further with some scenarios.
Scenario 1 – The Field General Client
Clients come in different flavors. That has to be considered when making an offer on a house. Some clients are more involved, some take a backseat; however, I make a habit to always keep my clients in the loop regardless of their “involvement” in coming up with the details. After all, I can only provide information. They have to, ultimately, give me permission to act on their behalf.
Enter, the field general client. This is a client who not only understands the real estate process, but also understands negotiations. I love these people. Every discussion with them feels like I’m in a war zone with my chiefs of staff. We’re talking tactics and ideas. It’s awesome.
Field generals also tend to want to underbid and leave room for getting sales perks – like closing costs or a home warranty. My first client ever was a field general. I advised her, based on the market conditions and speed of the particular neighborhood, we should offer at the listing price. She went $1,000 below and asked for a home warranty. We ended up closing on the house at $3,000 less than listing price in a market that was on average going above listing and appraisal price.
Scenario 2 – The Failed Flip
HGTV makes flipping homes look so easy and now we have a huge influx of flippers in the marketplace. Florida is literally flooded with them. Because of that, margins have tightened and most of the gems are gone. This leaves a market prime to fail in without proper guidance or experience.
The ‘flip’ side (hah, get it?) is that failed flips are great purchases for buyers. They get a newly renovated, turn-key home for generally less than what it’s worth.
For any flipped home, the buyer should always guess how much the investor put into the home. This can be done by looking at the previous MLS history on the property and comparing it to the new listing. It’s not a perfect method, but it will provide you a baseline. Essentially, by figuring out all of the costs, plus a perceived profit margin, a buyer can figure out just how low the seller might be willing to go. A failed flip would be when the listing price is lower than the baseline, plus the profit margin. For instance, the investor buys a home at $95,000 and puts in $45,000 and they want a 30% margin, then listing price should be $182,000. This is a simple example. The real world has things like carrying costs, closing costs, and other such profit gobblers.
I’ve had this play-out. I estimated the home was actually worth more than the listing price. However, I also estimated the seller was bordering on a 3-5% profit margin. Our offer price was full-price, but we asked for closing cost concessions. I recommended asking for more than we would get due to the time the home had been available. We took the counter-offer of reduced closing costs, and, like I figured, we got the home below appraisal value.
Scenario 3 – The Overbid
In my market, you generally don’t overbid on a property. That said, there are reasons to do so. Whatever the reason though, the end game is generally just to secure the contract over another bidder.
Here’s my quick disclaimer. I ONLY recommend considering an overbid in two scenarios. The first, is if you believe the house is worth more than the listing price and consequently, you’re just giving up potential equity. The other scenario is when a buyer can afford to (and is willing) pay for “negative equity”. Negative equity meaning the buyer has to bring extra cash to the closing table because the appraisal is lower than the sales price.
For a practical example, I had a buyer in love with a home in their dream neighborhood. We had a multiple offer situation, so we upped the price and went over listing. I told them worst case scenario the appraisal comes in low and they either come with a larger down payment or they forfeit the sale and walk away losing their appraisal and their inspection fees. It’s an important risk to understand whenever you over bid. Buyers who aren’t flush with cash should always be mindful when placing an overbid on the offer price.
As a special negotiating tool, there is one more time that an overbid makes sense; however, it’s generally done later on once the contract is already secured. It’s over the issue of closing costs. Should closing costs prove to be insurmountable for the buyer, the buyer can offer a higher sales price in exchange for the seller covering closings costs in the same amount. Thus, the buyer just finances their fees (with a larger mortgage) and the seller walks away with the same amount of cash in hand.
As you can see, the answer to “What’s my offer price?” is a tricky one and should always be handled on a case by case basis. Statistics tend to indicate that, in my market at least, that homes will sell within 3% of their listing price. Note, I said listing price, not appraised price. That’s why, when selling, it’s important to price your home adequately and with proper marketing. In a perfect world the difference between an appraisal and a sales price would be zero! Unfortunately, life isn’t perfect.
If you’re looking for a knowledgeable Realtor in the Central Florida area, I encourage you to reach out to me. You can visit my Facebook page here or my business webpage here. I can help buyers find the home of their dreams. If you’re a buyer with a low credit score, I can help you too! Sellers, I use my economics background to price your home appropriately to ensure you get as close to that “zero” mark on the appraisal. That means more cash in your pocket. Check out my marketing page here for more information!
Celts, what type of client are you – one who takes charge and helps the Realtor or one who sits back and decides what to do with the information? Which do you think is more effective? Let me know in the comments below! If you haven’t already, subscribe to the newsletter in the banner at the bottom of the screen and check out the Cash Flow Celt Facebook Page