| Buyer
Information
Comparable
Sales, Your Offer Price, and Making an
Offer
When you prepare
an offer to purchase a home, you already know the seller's
asking price. But what price are you going to offer and
how do you come up with that figure? Determining
your offer price is a three-step process. First, you
look at
recent sales of similar properties to come up with a
price range. Then, you analyze additional data, such
as the condition
of the home, improvements made to the property, current
market conditions, and the circumstances of the seller.
This will help you settle on a price you think would
be fair to pay for the home. Finally, depending on
your negotiating
style, you adjust your "fair" price and come up
with what you want to put in your offer.
Comparable Sales
The
first step in determining the price you are willing
to offer is to
look at the recent sales of similar homes. These are
called "comparable
sales." Comparable sales are recent sales of homes
that compare closely to the one you are looking to purchase.
Specifically, you want to compare prices of homes that
are similar in square footage, number of bedrooms and
bathrooms, garage space, lot size, and type of construction.
If the home you are interested in is part of a tract
of homes,
then you
will most likely find some exact model matches to compare
against one another. There are three
main sources of information on comparable sales, all
of which are easily accessed by a real estate agent.
It is
somewhat more difficult for the general public to access
this data, and in some cases impossible. Two of the most
obvious information sources are the public record and
the Multiple Listing Service.
The most accessible
source of information on comparable sales is the public
record. When someone buys a home the property is deeded
from the seller to the buyer. In most circumstances,
this deed is recorded at the local county recorder's office.
They combine sales data with information already known
about
the property so they can assess property taxes correctly. Provided
there have been no additions to the property, the information
available from the public record is usually correct regarding
sales price, square footage, and numbers of rooms. This
makes it easy to use the public record as a source of
data
for comparable sale information. Accessing the
data is another matter, at least for the general public.
Realtors can generally look up this information through
title insurance companies. The title companies either
compile the data directly from the county recorder's office
or
purchase if from other companies. One problem with
the public record is that it tends to run at least six
to eight weeks behind. Add another four to six weeks
for the typical escrow period and you can see the data is
not
current. The most current information is the most valuable.
Most of the public
is aware that the Multiple Listing Service is a private
resource where Realtors list properties available for
sale. Recently, the public has been able to access some
of that
information on such sites as Realtor.com, MSN HomeAdvisor,
and others. Once a property
is sold and the transaction has closed, the selling price
is posted to the listing in the Multiple Listing Service.
Over time, it has become a huge database on past sales,
containing much more information on individual homes
than can be gleaned from the public record. This information
is only available to real estate agents who are members
of the local Multiple Listing Service. Your agent will
provide you with this data to help determine your offer
price.
The most valuable
information would be the most current, of course. A sale
last week has more validity in helping you determine
a purchase price than a sale from six months ago. The problem
is that
there is no actual record of the sales price until the
transaction is completed. The information is not available
in the public
record because no deed has yet been recorded. Neither
is the information available in the Multiple Listing
Service. Once
a property is sold, it becomes a "pending sale" and
all pricing information is removed from the listing.
Prices are not posted until it becomes a "closed sale." This
protects the seller in case the transaction falls apart
and the property is placed back on the market. It would
give an unfair advantage to future potential buyers if
they already knew what price the seller had been willing
to accept
in the past. However, if a
Realtor has a reason to know the sales price, they can
usually find out through professional courtesy. Also,
some real
estate brokerages post sales information on a transaction
board in their office.
Gathering and
analyzing information from comparable sales helps to establish
the range of prices you should consider when making an offer
to buy a home. More weight should be given to the most recent
sales, but even so, you need to do a bit more analysis before
setting upon the price you will offer. That is because you
also need to consider the condition of the property, improvements,
the current market, and the circumstances behind the seller's
decision to sell.
Major Factors Influencing
your Offer Price
Since you have toured
the property you are interested in, you should know how it compares
to the general neighborhood. All you have to do is put the home
in one of three categories - average, above average, or below
average. When evaluating a home's condition, there are a number
of things you should consider.
Structural condition is most important - items such as walls, ceilings,
floors,
doors and windows. Then paint, carpets, and floor coverings.
Pay special attention to bathrooms and bedrooms and whether the
plumbing and electricity work efficiently. Look at the fixtures,
such as
light switches, doorknobs, and drawer handles. The front and
back yards should be in reasonably good shape. The missing ingredient
will be information on the condition of the homes from your comparable
sales list. Provided you chose the right agent to represent you,
they will have actually visited most of those homes and be able
to provide key insights. Even when comparing exact
model matches within a tract of homes, you should note whether
the previous owners have made any substantial improvements. Cosmetic
changes should be largely ignored, but major improvements should
be taken into account. Most important would be room additions,
especially
bedrooms and bathrooms. Other items, like expensive floor tile
or swimming pools should be taken into account, too, but should
be discounted. A pool that costs $20,000 to install does not normally
add $20,000 in value to the home. Rely on your agent to give
you guidance in this area.
A
hot market is a "seller's
market." During a seller's market, properties can sell within
a few days of being listed and there are often multiple offers.
Sometimes homes even sell above the asking price.
Though most buyer's want to get a "deal" on a home,
reducing your offer by even a few thousand dollars could mean
that someone else will get the home you desire. A
slow market is a "buyer's
market. During a buyer's market properties may languish on the
market for some time and offers may be few and far between. Prices
may even decline temporarily. Such a market would allow you to
be more flexible in offering a lower price for the home. Even
if your
offered price is too low, the seller is likely to make some sort
of counter-offer and you can begin negotiations in earnest. More
often than not, the market is simply "steady," or in
transition. When a market is steady, no real rules apply on
whether you should make
an offer on the high end of your range or the low end. You could
find yourself in a situation with multiple offers on your desired
house, or where no one has made an offer in weeks. Transition
markets are more difficult to define. If the economy slows
unexpectedly, as
it did in the early nineties, people who buy on the high end
of a seller's market (like the late eighties) could find their
home
loses value for several years. So far, no one has proven reliable
in predicting when markets change or how good or bad the real
estate market will become.
Truthfully,
it is rather rare that a seller's motivation will dramatically
affect the price
of a home, but it is often possible to save a few thousand dollars.
The most common "motivated seller" is someone who has already bought
his or her next home or is relocating to a new area. They will
be under the gun to sell the home quickly or face the prospect
of making
two mortgage payments at the same time. Since that can drain
a bank account quickly, most sellers want to avoid such a situation
and
may be willing to give up a few thousand dollars to avoid the
possibility. There
are also family crises that can motivate a seller to make a
quick deal. However,
when you see a real estate ad that mentions "divorce," "motivated
seller," "relocation," or something to that affect, beware. Although
the facts may be true, that does not necessarily mean the seller
is motivated to make a quick and costly sale. Most likely, the
ad is more designed to generate phone calls and leads rather
than sell
the home. However,
there are times when a seller is truly distressed, willing
to make a quick sale
and sacrifice thousands of dollars. With the seller's permission,
the listing agent will post this information along with the listing
in the Multiple Listing Service. They may also inform other agents
during office and association marketing sessions or by flyers
sent to other real estate offices. Provided this information
has been
made generally available to Realtors, your agent should know
when a seller is truly motivated and when it is just "puff" designed
to illicit interest in a property. The
exception is when an agent is selling a home they have listed
themselves or selling
a home that was listed by another agent from their own company.
In such a situation, the agent may be acting as an agent for
the seller, or as a "dual agent," representing both you and the
seller. In such a situation, they cannot legally provide you
with information
that would give you an advantage over the seller.
Comparable
sales information helps you to determine a base price range
for a particular home.
Adding in the various factors like property condition, improvements,
market conditions, and seller motivation help determine whether
a "fair" price would be at the upper limit of that range
or the lower limit. Perhaps you will feel a fair price is outside
of that price range.
The "fair" price
should be approximately what you are willing to agree on at the end of
negotiations with the seller. The price you put in your offer
to begin negotiations
is totally up to you and depends on your negotiating style. Most
buyers start off somewhat lower than the price they eventually
want to pay. Although your agent may
provide advice and guidance, you are the one who makes the decision.
The price you put in the offer is totally up to you.
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