First-time home buyers are often terrified with the notion of making an offer on a house. After all, there’s a lot of money on the line, not to mention the major life-change of becoming a homeowner. But you shouldn’t be afraid. You should be prepared. In this article, you’ll learn how to make an offer on a house based on preparation, planning and price research.
We will get to the actual steps of making an offer in a moment. First, I want to bring you up to speed on the current housing situation in the United States.
Study Local Conditions, in Your Housing Market
The first thing you need to realize is that we don’t have a single housing market in this country (despite what the media says to the contrary). We have dozens, even hundreds, of individual markets that are controlled by conditions at the local level. So you can ignore whatever CNN says about the “the” housing market, as a singular entity. You are concerned with conditions at your local and city level.
Before making an offer on a house, you need to understand what is happening in your local market. You can use this knowledge when shaping your offer, and also when negotiating with the seller.
Some questions you should be asking at this point:
- What have home prices been doing for the last few months, in your city?
- What are the housing analysts and experts predicting for the next few months?
- What is the inventory situation in your area?
- How long are homes staying on the market before being sold (average “days on market”)?
If you’re using a real estate agent, he or she should help you answer these questions. That’s a big part of their job. Still, you shouldn’t rely entirely on your agent for this kind of insight. Do your own research. Be a well-informed, market-savvy buyer.
Making a smart offer on a house starts and ends with market awareness. Are you in a buyer’s market, where there is plenty of inventory but few buyers? Or, is it more of a seller’s market, with fewer homes to choose from and plenty of competition from other buyers? Maybe you’re somewhere in the middle. Before you make an offer on a house, you need to figure out where you fall on the spectrum. Find out what the supply-and-demand situation is in your area.
How to Make an Offer on a House, Using “Comps”
You’re making an offer on a house. Where do you begin? How much should you be offering at the start? Going too high or too low can cause problems:
- If you offer too much, you might end up overpaying for the property. The house might not even appraise for the amount you’ve offered. You could end up with negative equity from day one.
- Going too low can also be a problem. If you “low ball” the sellers, they might not even make a counter-offer. They are certainly not obligated to counter. In some states, the seller is under no obligation to respond at all. They can ignore your initial offer entirely. It’s rare, but it can happen.
So where do you start? How do you make a reasonable offer on a house? You can start by using comparable sales, commonly referred to as “comps.” As the name suggests, these are recently sold homes that are similar (comparable) to the house you are offering to buy.
Before making an offer on a house, you should review all of the homes that have sold in the area recently. Focus on the ones that are similar to the target house — same size, same style, same number of rooms, etc. You can find information about recently sold homes online, using Zillow or Realtor.com. Your real estate agent should provide this information, as well.
The more data you have, the easier it will be to shape your offer. Thus, making an offer on a house in an active real estate market is easier than in a slow market. In an active market, you should have plenty of data to use.
What is the average sale price of the comparable homes? This is where the offer starts. But it doesn’t end here. Next, you need to consider any differences between the comps and the house you want to buy. In a newly built, modestly priced subdivision, there might not be very many differences to consider. All of the homes might be very similar in size and style. In older neighborhoods, higher-priced neighborhoods, and homes that lie outside of the suburbs, you’ll encounter more variation from one house to the next. You must consider these differences when making an offer to buy a house.
Let’s say your closest comp is a three-bedroom property with 2,200 square feet. The house you want to buy is similar in style, but it has four bedrooms and 2,700 square feet. In this scenario, you would probably have to start your offer higher than the comps to compensate for the size and room differences. The same goes for houses that are similar in size but have extra features that add value, such as a swimming pool or a more spacious lot.
Odds Are, Your Initial Offer Won’t Be Accepted
It is rare for an initial offer to be accepted, without any negotiation at all. It can happen, especially when the initial offer is a strong one. But in most cases, there is at least one round of negotiation.
There are two reasons for this:
- Most buyers start by offering less than the full asking price.
- Some homeowners have a tendency to take things personally, and to attach emotional value.
Again, I am generalizing here. There are exceptions to every “rule.” The point is, there is a good chance your initial offer will be countered by the seller. You should be encouraged by a counteroffer — not discouraged.
A counteroffer is the seller’s way of saying “no” to your first offer, while keeping the negotiations open. They have shown you that they really want to sell the house, but not at the price you are offering. Or maybe they’ve accepted the price but dismissed some of the conditions (like your request that they pay your closing costs). You need to be prepared for a counter-offer scenario. You need to know how much you are willing to spend on the home, and this number needs to be based on market data.
Lastly, I would encourage you to keep the big picture in mind, when making an offer on a house. It’s silly to let the perfect home slip through your fingers because of a small difference in price, especially when the purchase price is spread across monthly mortgage payments.
Let’s say you reach a point in the negotiations where you are offering $275,000 for a certain property. But the sellers are asking $283,000, and they won’t come down from that number. Eight thousand dollars sounds like a lot of money when you say it out loud. But when you roll into a 30-year mortgage, it is much less significant.
Here’s what the monthly payments would come to, when using these two numbers:
- $275,000 over 30 years with a 3.5% interest rate: $1,234 per month
- $283,000 over 30 years with a 3.5% interest rate: $1,270 per month
I’ve used the current average mortgage rate for this scenario, as reported by Freddie Mac. As you can see, the difference in mortgage payments is only $36 per month.
So the questions you need to be asking are: (1) Is there a good chance the house will appraise for $283,000? (2) Can you afford the monthly payments on a loan of that size? (3) How badly do you want the house?
If you do the math and ask the right questions, you should have an easy decision to make.