How to Make an Offer for a Home

November 02, 2016

If you’re a fan of home-buying shows that follow couples who are seeking a home in a new city, looking for a deal to flip or even searching for a much smaller home to live more simply (how do they do that???), then you’re probably familiar with some of the factors that go into looking for a home that provides a good value without over-paying. But one thing those shows don’t broadcast are the negotiations for price and how people actually arrive at what they will offer. Making an offer for a house is not just a wild guess. There are some things you and your real estate agent can do to find a price that will be accepted without overpaying. Here are some expert tips:

First, ask your agent to do a comparative market analysis (CMA). This is basically a mathematical analysis of homes that are similar to the one you’re looking at, including the number of bedrooms and baths, the square footage, the neighborhood, etc. and evaluates whether yours is priced in line with recent sales and other current listings. The CMA report will include the specifics of the properties used in the comparison so you can use your judgment as to how relevant the comparable pricing may be.

Keep in mind that it’s the sales price that matters, not the list price. There’s a rehabbed home in my neighborhood that’s listed for 50% more than the buyers paid a year ago. Sure they’ve done a lot of work to the property, but enough to double its price? Since it’s been on the market for several months now, I’d say that prospective buyers feel the same. Once the home sells, then we’ll know what it’s really worth.

As you’re deciding on what price to offer for “your” property, pay attention to the adjusted average sales price in your CMA. First, throw out comparables that are extreme, like a teardown/rebuild that was sold as a foreclosure or on the higher end of the spectrum, homes that are overly upgraded or way nicer than the one you’re looking at. Then adjust the average price by how the remaining comparables actually compare to yours:

Are they smaller or larger? More beds/baths or less?
Do they contain similar upgrades and features? (When we bought our top-floor condo, we felt it was only comparable to other top-floor units, even though many of the similar sales in our neighborhood were middle or ground floor. We were willing to pay a premium to not have footsteps overhead)
Are they actually in the same neighborhood? Depending on where you are looking, one street over can make a difference in price, so pay attention to proximity.
How long ago were they sold? The more recent the sales transaction, the more relevant the sales price.

Use your powers of reasoning to decide how comparable these other homes actually are. The averages aren’t worth much if there’s nothing nearby that’s similar to yours. That’s one of the issues with estimator sites like Zillow. It uses publicly available information to estimate values, but doesn’t adjust for things like inferior location or big upgrades post sale.

For example, Zillow shows our property losing $25k in value in the two years since we purchased due to several foreclosures and low sales prices on our street in the past year. What Zillow doesn’t “know” is that this is one of the hottest neighborhoods in the US right now and all of those properties were teardowns being rebuilt into multi-unit condo buildings similar to ours that will sell for possibly $100k more than our purchase price. Once those condos sell, I expect the estimated value of our place to far exceed what we paid.

Finally, knowing where the market is in terms of trends will play an important role in determining your offer price. Here are some factors to consider:

Buyer’s market versus seller’s market: If it’s a seller’s market, you may find yourself competing with other buyers and making several offers. In a buyer’s market, you’ll have more time to do analysis.
Number of days on the market: If you’re looking at a home that’s been on the market for a couple months, especially in a seller’s market, you’ll definitely be able to offer a lower price than if the property was just listed.
Timing: Generally speaking, spring and summer are hotter markets than fall or winter. The other timing factor is interest rates. Don’t buy a house just because rates might go up soon, but if you’re planning to buy, potential rate increases could add a sense of urgency that limits your bargaining potential.
Seller’s motivation: If you can suss out why the current owners are selling and you learn that it’s due to a pending divorce, job relocation or other more urgent need, you’ll know you can probably go lower than if they were just seeing if they could sell.

At the end of the day, your agent will be a tremendous source of guidance and advice in this area, which is one reason it’s important to find someone who specializes in the neighborhood you’re looking in. Here are two final tips when making your offer:

Make your best offer on your first offer. Assuming the sellers will counter could lead to a flat out denial, especially if you’re competing with other potential buyers. It can be tempting to play the “how low can we go” game, but if you really want the house, don’t play the game.

Don’t offer more than what the property can appraise for. Plenty of people learned this the hard way back in 2008–2010 after they paid top dollar for homes that ended up appraising tens of thousands of dollars less than they owed after the bubble burst. If a seller accepts your too-high offer and the appraisal comes back lower, you could end up back to square one without a deal.

Stick to what you can afford and accept that if you don’t get the house you want, it wasn’t meant to be. We had this experience with the first offer we made and our agent saved us from making a big mistake. We lost to someone who offered $25k more than the listing price, which in retrospect was a bad move… for the other buyer.

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