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Factors to Consider when Making a Real Estate Offer

You are ready to make an offer on your dream home and turn to your Realtor® for the offer price. Wrong. Your real estate representative will provide guidance as to a price range but will not tell you an exact dollar amount to offer. Your real estate agent will not want to risk losing the sale by recommending a price that is either too low or too high. Further, the buyer is ultimately responsible for the mortgage and maintenance of the house. It therefore makes sense that the potential buyer should be the one to determine the offer.

A buyer can use a three-step process to come up with an offer price:

1. Gather and analyze data on comparable sales, current trends, and the current market climate.
2. Gather and analyze data relevant to the home you are considering. This would include the condition of the home, improvements made, improvements that need to be made, and why the house is on the market.
3. Determine a fair market price for your offer based upon the results of the your analysis.

Your real estate agent can be an invaluable resource at this point in providing reports that may not be accessible to the general consumer. You may want to ask your agent for the following reports:

• Comparable Market Analysis
  Use the Comparable Market Analysis (CMA) to examine the recent sales of homes that are comparable to the property you are considering in size, age, and location. A CMA will provide you with information on active, pending, sold, cancelled, and expired listings.


• Sales Trend Report
  Review the sales trend report for the last six months to determine what prices homes were listed for and the actual sales price. If the homes are selling for a consistent percentage over the list price or under the list price, that percentage should be an indicator of what the seller should be willing to accept.


• Square Footage Trends
  Review the trends for square footage cost averages to see if the prices are rising or declining. Keep in mind that smaller homes have a higher cost per square foot than larger homes. Therefore, you cannot use the average to determine an offer price, however, you can use the current trend in the averages to your advantage in coming up with an offer price.


• The Current Climate of the Real Estate Market
  Is it a buyer's market, a seller's market, or a neutral market? The current climate of the real estate market is a major factor in pricing.

Next, you will want to analyze data specifically related to the home you are considering. This may include:

• The Price the Seller Paid for the Property
  Typically, the price the seller paid for the property would assist you only if the property was purchased within the last few years. If so, you can see what the climate of the market was at the time of that purchase. If the market was depressed with little appreciation, the seller's realistic selling price should be closer to the purchase price. The potential buyer can then make adjustments in the offer for improvements and appreciation.


• The Seller's Mortgage Balance
  The seller's mortgage balance can help you to determine the seller's state of mind as to potential offers. If the house is empty and the mortgage balance is high, the seller is most likely paying for two mortgages and may be more willing to negotiate. On the other hand, if the mortgage balance is low, the seller can afford to wait for a more favorable sales climate and may not be as willing to negotiate with a buyer.


• Days on the Market History
  You should check on the home's days on the market (DOM). If a seller's listing has expired, there is a good chance that the seller's agent will take the house off the market because the brokerage agreement between the seller and the agent has also expired. If a new agreement is made between the seller and the seller's agent, the agent will most likely list the house as a new listing even if it has previously been on the market. The seller may be more willing to negotiate in this event.

Using the information you have gathered, you should be able to determine a base price for the property you are considering. As in any negotiation, you should consider a price range. The lower end of the price range should be your initial offer price, leaving room for negotiation. The upper end should be the highest price you are willing to pay for the property. Make sure that the range is reasonable. The initial offer should not be so low that the seller will not give it any consideration. The upper end of the range should not be so high that you are uncomfortable with the mortgage payments. You should feel free to ask your real estate agent if the price range you have come up with is fair and reasonable.

You are now ready to write your purchase offer!

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