When making an offer to purchase a home, you already know the seller's asking price. But how do you decide what price are you going to offer? And how do you come up with that figure?
Determining how much your offer price should be is a three-step process. Firstly, "forget" the seller's asking price for now. Determine a fair price range, consider the seller's needs, and lastly, consider your own needs to come up with your offer price.
Comparable Sales
Look at a list of recent sales of similar properties in the area. These are called "comparable sales". Comparable sales are recent sales of homes that compare closely to the one you are looking to purchase. Be sure to compare apples with apples here! The market price for a two-bedroom house, and that of a four-bedroom house, will normally not be in the same ballpark. Your list of recent sales usually has the correct addresses for the properties you are using to compare, so go knock on a few doors and go see why they were sold for that price. The new homeowners will most probably be happy and proud to show you what a "bargain" they purchased! (Be careful about your comments! Remember, these people are your future neighbours!)
All the comparable homes in the neighbourhood, which were sold in the normal real estate market of willing seller - willing buyer can be considered. But if there is a considerable difference between the average house price in the beginning of that one-year period and the end of the year, you will have to give more weight to the end of the year's comparable house sales.
The first step in determining the price you are willing to offer is to look at the recent sales of similar homes. Specifically, you want to compare prices of homes that are similar in square footage, number of bedrooms and bathrooms, garage space, lot size, and type of construction.
If the home you are interested in is part of a tract of homes, then you will most likely find some exact model matches to compare against one another.
There are three main sources of information on comparable sales, all of which are easily accessed by a real estate agent. It is somewhat more difficult for the general public to access this data, and in some cases impossible. Two of the most obvious information sources are the public record and the Multiple Listing Service.
You should be trying to come up with a price range at this time, not an exact offer price. Write down the lowest valid sales price as well as the highest. This would be your initial offer price range.
Okay, hold on a bit! Remember, I said, "willing seller - willing buyer", so you should have really looked at the list of recent sales and disregarded the super low and super high prices on the list, unless you could find out the reasons for the price difference. Also be suspicious of transfers between two parties with the same surname. Yes, some surnames are more common than others, but a "sale" of a property between a husband and wife, or a father and son, usually don't exactly reflect the true value of the property in the open real estate market of supply and demand. So, don't allow those figures to skew your price range.
Offering Super Low
Many homebuyers make their first offer to purchase a property a very low one. This is a very natural instinct. The reasoning is, "We can always decide to offer more later, but we won't be able to offer less!" But this is not always the way to go. A little offer price - sale price research will show that very often, a too-low offer price makes the seller totally disregard an offer to purchase.
If the seller's asking price is a reasonable price, it means that they have taken the time to do some selling price research of their own. The sellers may see your super low offer as an insult, and they might feel that you are not serious about buying their property.
Remember that in the usual private treaty negotiating process that involves a real estate agent, you will not have the benefit of "sweet-talking" your offer to purchase. You will also not be able to see the seller's reaction to your super low offer price. The sellers may decide that they are not interested in negotiating a sale with someone who is "clearly" unreasonable! And no matter what you do at that stage, the sellers will be very unreasonable towards you too.
The current real estate market conditions should lead you in deciding on an initial offer price. If the market demand for that kind of property is especially high, you have to consider that your offer to purchase is likely to have to compete with other offers to purchase. Obviously, you don't want to pay too much for the property, but you also don't want to end negotiations before they started! Usually, sellers will be willing to make a counter offer if the initial offer price is within 10% to 15% of their actual price expectation.
Seller Needs
Now that you have to analysed some additional data, except the sellers' asking price, such as the condition of the home compared to the homes you have considered for your offer price range, improvements made to the property and current market conditions, it is time to have a look at the circumstances of the seller. This additional information will help you settle on a fair offer price for the home.
Remember that a private treaty negotiation for the sale of a property does not only depend on the price. The seller's needs will dictate which terms of the sale are more important.
For example, a seller, who has been transferred to another area of South Africa for work reasons, may be very concerned about leaving the rest of the family behind, to handle a stretched out house sale. So, for this seller, a quick sale, which fits nicely into the crucial dates for the transfer, is more important than necessarily achieving the highest possible price. So, an offer with the "right" time frame may be considered much more favourably than an offer for a few thousand Rands more.
So, question the real estate agent about the seller's needs before deciding on an offer price, and make the transaction "sweet" in some other way. Remember that a concession in one area may be worth a few bucks in the offer price.
Price Expectation
Before we can come up with a fair price for your offer to purchase, we need to take a look at how some property sellers come up with their asking prices.
Yes, here we touch a rather sensitive point! Some home sellers initially come to the market with very reasonable, and even low price expectations for the sale of their property. But then they phone a few real estate agents, and things change very rapidly.
The real estate agents compete for this new property listing. Everyone dresses nicely, glossy brochures pile up on the sellers' coffee table, and some agents may even bring hoards of other real estate agents to traipse through the home, to display their "marketing power". And if they can't seem to impress the pants off of the seller and get them to sign an exclusive mandate, they appeal to that ancient of human weaknesses: their greed.
Yes, the South African real estate agents' "ten commandments" forbids any real estate agent to blatantly lie about the probable market value of a home, or even to express any opinion about the price of any property that is not supported by actual sales figures, or similar evidence. But it does happen. And it probably happens more often than most real estate agents want to admit.
Come on! You've seen the lists of recent sales for a rather small geographic area. Even in that small sample, prices are all over the show! The "current market condition" is a subjective opinion. I can give a very good argument for either a "seller's market" or "buyers market" at any time. This means that real estate agents can also decide what end of the price range they want to use in their consultation with the seller.
And many real estate agents do compete against their competitors on the basis of the price quoted for the property. Because it works!
Often, ethical real estate agents, who don't try and stroke the seller's ego, or appeal to their greed, simply cannot get the listings. To me, this is silly. I mean, do you really want someone you cannot trust to represent your interests in one of the biggest transactions you are likely to be involved in?!
But some sellers do. And this influences their price expectations. And when making an offer, buyers should keep this in mind. And often, the same real estate agent that quoted that high price for the home, will "sell" your reasonable offer to the seller, by giving compelling reasons why their price expectations are to high.
Negotiating Margin
We're still on the topic of real estate agency influence on the asking price for some properties.
Some real estate agents figure along the same lines as buyers that make super low offers: "You can always accept a lower offer, but you can't ask for more later." But also, some sellers come up with this strategy all by their lonesome.
So, many real estate agents advise their clients (and it is important to realise that the seller is usually the real estate agent's client) to add a "negotiating margin" on top of their true price expectation. This negotiating margin is not based on anything concrete. The agent and the sellers "thumb-suck" a number that sounds good.
Buyers may feel more content to pay R700 000 for a property if they feel that they "saved" R70 000 in the process. This is why I told you earlier to "forget" the seller's asking price for a while.
Buyer's Needs
Now is the time to consider the seller's asking price. You have calculated a fair price range. And you've looked at how the seller's needs may allow you to negotiate on terms other than the price.
In the same token, you have to now consider your own situation. If you find a seller whose needs fits yours like a glove, and the property is what you are looking for, you have to decide if you want to risk losing this opportunity to solve your real estate and other problems by making a too low offer.
Determining Your Offer Price
If a seller has a reasonable asking price, which falls in your fair price range, calculated earlier, the asking price might just be the correct selling price! So, if all the lights are green, go for it!
But if the asking price falls way outside the fair price range, remember that this might not be their true price expectation. So, make the offer to purchase for a price that you feel is fair. Remember that this may just be the start of your sales negotiations, so keep your eyes and ears open for ways to negotiate on aspects other than price.
Also remember that, although the real estate agent might be working for the seller, real estate agents are only human. If you can give convincing arguments for deciding on your terms for an offer to purchase, the real state agent will most probably resonate those arguments in submitting a fair offer to the seller.
The sellers have three courses of action open to them, whatever you decide to offer. They can only accept, reject or make a counter offer. And if they do make a counter offer, those three choices are once again open to you as the buyer.
So, the reasoning behind making a deliberately low offer to purchase would be a sound one, if you could be sure that the sellers would be enticed to enter into negotiations. But "fair" is the magic word, when determining your offer price and making an offer to purchase.
