Reader question: “I will be shopping for a home starting in the fall of 2014. I know the housing market has changed a lot since the last time I purchased a home, in 2002. How much should I offer below the asking price, when buying a home these days? Is there a certain rule of thumb or percentage I should start with?”
That depends. For starters, you need to consider the seller’s asking price, in relation to the current market value and comparable sales in the area. There is no generic formula that can be applied across the board, because every offer and pricing scenario is different.
Offering Below Asking Price Not Always a Good Strategy
There is a widely held misconception that home buyers should offer a certain percentage of the list price, as a “starting point” for negotiations. But this is senseless, because the list price may or may not reflect current market conditions. It varies. Following some arbitrary rule or formula could result in a flat-out rejection from the seller.
It’s better to make a reasonable offer based on, and supported by, local sales data and market trends.
There are different types of sellers out there. Consider the following examples:
- Savvy: Some homeowners set very realistic asking prices by taking current market conditions into account. They do this because they are serious about selling. They are smart enough to know that a reasonably priced home will sell faster than an overpriced one.
- Silly: Some homeowners are delusion and/or in denial when it comes to pricing. They price their houses well above comparable sales, and for a variety of reasons. A common (but flawed) strategy is when the seller starts with the amount they need to pay off their mortgage, working backward from there. Or maybe they’re just greedy. Or maybe they are adding emotional value into the price.
- Rushed: Additionally, some sellers price their homes slightly below fair market value because they are in a hurry to sell.
There are all sorts of pricing strategies. These are just a few. So you really have to consider each scenario separately. There is no one-size-fits-all strategy for purchase offers.
Evaluate Homes Individually, Based on Market Trends
Some home buyers start the house hunting process with a preconceived notion of how much they’re going to offer. This is a flawed strategy that is usually based on bad advice. If you offer below the asking price for a competitively priced home in an active real estate market, you’ll probably lose out to another buyer. This kind of thing happens all the time, especially with inexperienced first-time buyers.
Takeaway: Consider each home individually based on its own merits, and with an eye toward comparable sales prices. Base your offer amount on research and market awareness — not on some arbitrary “formula,” percentage, or rule of thumb.
Granted, there are times when you should offer below the asking price. If you find a house you want to buy that is clearly priced above market value (based on recent sales of similar homes in the same areas), you should probably offer less than the list price. If the sellers cannot justify their “markup,” they will eventually have to come back down to earth — or else wait for a buyer who is willing to overpay.
On the other hand, if you find a house that is priced competitively (at or below the average of comparable sales), it might be best to offer the full list price or close to it. This is especially important in an active real estate market with lots of competing buyers. If you offer below asking for a home that is getting multiple offers, the property will probably slip right through your fingers. Put yourself in the seller’s shoes.
When touring the property in question, keep an eye out for any value-adding features. If a particular house has upgrades or enhancements that set it apart from otherwise comparable homes, the homeowners could justly setting a higher asking price.
Value-adding features and characteristics include:
- Swimming pools (in some climates)
- Deck and patio additions
- An updated kitchen and/or bathrooms
- Solar power (in some climates)
- Larger lot size
- Better location
- Energy-saving features
So, how much should you offer below the asking price when buying a home? It depends. It’s a case-by-case situation. There is no rule-of-thumb or generic formula that applies to all pricing scenarios. Look at the comps for your area. Consider the type of market you are in. Consider any features that might add or subtract value from the house you are considering. Make a reasonable offer based on comps and current market conditions. Be a savvy buyer!