Buyers need two rules as they structure initial offer
Posted by Forget how you bought last home
Buying is fun, although the majority of people dislike the shopping process, because shopping is work. Shopping for a home is work too, especially when there is so much to look at. It’s like wading through a “Clearance Sale” bin as large as an Olympic swimming pool, filled with thousands of blue jeans minus the price tags. You know that if you persevere and find something that fits, you will get a great buy, but without the price tag, you don’t really know how good of a deal you should expect.
Too many home shoppers spend countless hours doing the laborious work of shopping for a home but fail to invest a few minutes thinking about a strategy for buying a home. A haphazard approach to structuring an offer to purchase can negate dozens of hours of research and legwork, because a failed buying attempt may mean that you have to begin the shopping process all over again.
When writing a contract for purchase, many negotiating points are worth considering, but let’s discuss price, since that seems to be at the top of the list for both buyers and sellers. When home shoppers find a home on which they want to make an offer, they can save time and plenty of frustration if they follow two simple rules on how to structure their initial offer.
Buyers, the first rule in determining an initial offer price is to forget how you bought your first home or your last home. In spite of what you hear from the throngs willing to offer their free advice, there is no rule that your first offer should be X percent below the asking price, nor is taking the asking price and dividing it by the property’s zip code a good strategy in establishing a starting point. Shock and awe may be good strategy for winning a war, but it isn’t a good one for winning with the seller.
A little fact-finding before you write your offer may mean the difference between spending weekends relaxing in your new home or spending the next few weekends walking through a bunch of homes you don’t own. The first and most important question to ask is how long the property has been listed. Ask your agent to show you the listing history, which will not only include how long the current listing has been active, but also whether the property was listed previously and the dates of any price changes.
The length of time a seller has been willing to suffer through the inconvenience of having his property listed may give you a peek into the seller’s perception of the current market value and his motivation. If the home has been on the market since Barak Obama was in high school, then one might conclude that the seller is a tad jaded as to what his home is worth or he is one of the many sellers who “don’t need to sell.” On the other hand, if the home has been on the market for a matter of days, it can be safe to assume that the seller may be a little resistant to a low-ball offer.
Time on the market is not necessarily a direct reflection of a seller’s current motivation, because motivation can change. A seller’s motivation can usually be determined by how frequently there have been price changes. It is rare to find a motivated seller who has had the same asking price for a long period of time. As a buyer you should know whether the seller is actively looking for the market by systematically adjusting the asking price or if he is looking for that one buyer who will fall in love with his property and pay what he feels his home is worth.
A buyer should also be aware of the level of activity the home is receiving. The number of showings is not public information, thus it does not have to be disclosed by the listing agent. But you don’t have to be Sherlock Holmes to pick up some obvious clues. For example, if the line of potential buyers waiting to see the home looks like what you might see just prior to auditions for “American Idol,” chances are the home is priced attractively. This is the case with most bank-owned homes that are coming on the market. These properties are receiving multiple offers, some over asking price. So, put away your negotiating handbook and just buy the dang home before someone else does.
On the other hand, if you know the home has been on the market for awhile, yet there are only three Realtor’s business cards lying on the counter and they happen to be covered with a half inch of dust, that may mean showings have been as frequent as you get breakfast in bed. Few showings can suggest a pricing problem and/or the seller may be open to more aggressive negotiation.
One of the biggest challenges agents face is convincing buyers that in spite of all the negative news about the real estate market, the homes that represent the best value are selling and the ones with the best prices are selling faster and very close to asking price. Sooner or later, all buyers end up believing us, some initially and the others after they are outbid on a home or two.
This leads us to the second rule. In addition to forgetting what they thought they knew about structuring an offer, the buyers must also re-define the term “winning.” Winning could mean something intangible, such as buying the home of their dreams or finding one across the street from grandma. Most likely, particularly in today’s market, it means getting a good deal. There’s nothing wrong with that, as long as the buyers don’t define a good deal by how much below the asking price they paid for a home.
If one buyer paid 30 percent under the asking price and another buyer paid 10 percent above the asking price on a different property, who got the best deal? It’s impossible to say because the purchase price, relative to asking price, is not what defines a good buy. On the surface a 30 percent reduction from the asking price sounds good, but that buyer still may have paid too much if the home was overpriced from the beginning. Likewise, the buyer who paid over asking price may have the deal of the century. Your purchase price, relative to recent comparable sales, is the best way to determine if your deal is a good one.
So, as you wade through the Clearance Sale bins of our real estate market, my advice is that if you find something that fits you, buy it. Because it will be the buyers, not the shoppers, who will end up looking the best.
Keep the faith.
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