SpencerBarron.com

You’ve spent three months on the internet looking at homes until you’ve narrowed down the area you like. You then spent another month looking at what’s available and have finally narrowed it down to one. You want to make an offer but don’t want to spend too much. How do you start the negotiating process?

What is a home really worth?

There is going to be a difference between what you would be willing to pay and what somebody else is willing to pay. Would I buy a home if I can rent a home in the same neighborhood for half the monthly cost? How highly do I esteem the large yard? Is it more work or a great place for the kids to play? The value of the home really comes down to what it’s worth to you.

We all know that appraisals don’t really mean anything. There is a wide range that homes could be worth depending on how long the seller is willing to wait for that one buyer. The appraisal exists for the sole purpose of the lender understanding the risk to their money. If the price can be supported, they lend the money. This is actually quite different than value from the perception of a buyer. Value is the perception that somebody has about a property based on their own personal views.

The most important factor in your house purchase is knowing if the house is what you want. Buying something because you couldn’t find anything better is different than finding your dream home in your price range. On just your average home, you might take some negotiating risks that you wouldn’t if it was the neighbor’s home you have coveted for the last 10 years.

When I buy a home, this is my list I go through.

1. How long do I plan to live here?
2. If it’s been on the market awhile, why hasn’t it sold?
3. What is the neighborhood doing? Is it stable or improving?
4. Does the home need work? How much?
5. Can I improve the home to add value?
6. Could I rent it for my mortgage? What are homes in the area renting for?
7. What are similar homes on the market listed for, and what have they sold for?
8. From what I observed on the property, what seems to be the situation or motivation of the seller?
9. From property records, what does the seller owe?
10. If that was my house, how much would I expect to walk away with?
11. What are typical offers in my area with regards to contingencies and concessions?
12. What is the average sold price to list price ratio?
13. What concessions do I need to get, if any?
14. Do I need any contingencies?
15. Do I really want this house?

Once I’ve decided what it’s worth to me, I’ve established the most I’d be willing to pay for a home. Sometimes, this is actually higher than the asking price, but again that depends on the property, the situation, and the market conditions. Some buyers are so nervous about paying too much that they’ll let a price difference of less than a couple hundred dollars keep them from closing the deal. In most cases this comes down to the fact that most people can’t suffer the blow to their ego that may come if they don’t WIN the negotiation. Some people feel that if their offer isn’t countered then they didn’t get everything they could have out of the seller. Some people are more concerned about how much less they get under the asking price rather than whether or not it’s actually a good deal.

What is a good deal?

I’ve seen a lot of suggestions saying that home builders are offering great discounts and upgrades on their properties, so that is where you should look for a home in this buyer’s market. You should still ask yourself, “Is it actually worth it?” Just because you get a home for less than what someone was asking for it doesn’t mean it was a good deal. Even if you paid more than the asking price doesn’t mean you got a bad deal.
In Denver, homes usually sell within 3% of the final list price. But homes usually sit on the market until they’re 10% lower than their original list price. This says a lot about how the seller’s idea of value is different than a buyer’s. It takes time for sellers to come to the realization that their homes aren’t worth their list price and lower the price. Because of this separation between buyers and sellers, I remind my buyers that if the most they want to pay is 10% less than the list price, it’s highly unlikely that the offer will even be considered. In the Denver market 10% can easily be $30,000. Most of the time, the seller actually feels like he’s losing that much money if he accepted that offer.
Remember, a home will almost always sell for what it’s really worth. Don’t let the fact that you have been psychologically anchored to some advertised list price be the strongest influence on your perceived value.

So what happens when you just write low offers on homes? If the home is actually worth the list price, the home is probably getting showings from other buyers. When your low offer comes in, the listing agent leverages it with other interested parties to get a better offer for his seller. It is my recommendation to make your first offer just below what you think the seller’s minimum sell price is. It’s just close enough that you will at least get a counter and who knows, if they’re desperate enough they just might take it.

Some other top negotiators suggest the following. Say a home is listed at $200,000 and you want to make an offer. You would like to end up at $195,000. If you offer $189,000, you might end up settling at the $195,000 because you have given the seller the opportunity to WIN. This is probably the most typical approach to negotiation, but it doesn’t always work, especially if your initial offer is so low that even if you split the price difference it still wouldn’t be acceptable. I find that if you offer too low, you often just get some sort of cursory price drop of a thousand or so. This isn’t helpful and just creates ill feelings with the seller who might not feel like considering any of your offers in the future.
Of course, there may be evidence that the home has been for sale for a long time. Perhaps there are foundation issues that aren’t reflected in the price. By pointing out the issues of the home along with your low offer, you could possibly get the home for less than asking price. But again, you have to ask yourself, if I get it for a low price, is it still a good deal?

When it come to concessions and contingencies, I try to keep it simple. The more you ask for, the weaker your offer seems. The seller may personally have a problem with paying your $3,000 in closing costs but that same seller may have been willing to give up his house for $6,000 less than your offer. Sellers are funny like that. If you want a concession, ask for it upfront and ask for a little more than you need. Try to negotiate the price as something separate than the concessions.
When I make an offer, I have already gone through all my questions. I know exactly what it’s worth to me. If that price is within 5%-10% of the list price then I consider making an offer. I write offers that could conceivably be accepted as is. I make sure I start negotiations in the ballpark. I negotiate hard on a home to get it below my max price but if I really want the house, I’m not afraid to pay for it.

Other posts: All Denver Homes are Overpriced

Technorati Tags: Real, estate, home, value, offer, negotiations, low_ball