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5 Steps to Deciding How Much to Offer – or Ask – for Your Home

One of the biggest decisions homebuyers face is deciding how much to offer on the home they want to buy. The overabundance of real estate information online only seems to make it even harder for buyers. Supply, demand, foreclosure rates, mortgage rates... Many buyers feel like they need to take home buying courses and learn fancy math just to make a smart offer. The whole thing can be quite intimidating, especially for first time buyers.

The bottom line? The list of steps you need to take in order to make a smart offer is quite short. A smart offer is one that's fair for the buyer, yet appealing enough to the seller that they accept it on the spot. Making a low offer on a home you really want may not get accepted. In that case, you won't get the home you've been dreaming about.

5 Steps for Making a Smart Offer on a Home

These five steps will help you make an offer that gets you the home you want:

Step 1 – Check Out the Fair Market Value

What do the comparables tell you? When it comes to making an offer to buy a home, the first factor you need to look into is the home's fair market value. As a buyer, you should work with a real estate agent who's experienced in your local market. They can help you understand the fair market value of the property so you can make an educated decision.

Professional agents will help you by taking a look at similar properties that have recently sold in your local market. These are called comparable sales, comparables, or comps, for short. The best tactic is to look at comparables that have sold within the last three months. Some of the similarities should include:

  • Same number of bedrooms
  • Same number of bathrooms
  • Same square footage
  • Similar in style
  • Similar condition
  • Similar amenities

These are the same comparables that are used by professional appraisers. Their job is to use comparables and other factors to determine the value of a home. Looking at comparables before making an offer has two major advantages:

  1. Provides factual support when making an offer lower than the list price.
  2. Helps keep the transaction on track after the appraisal by almost ensuring that the home will not appraise for much lower than the offer price.

Step 2 – Figure Out What You Can Afford

What can you afford to pay for a home? This is a very critical decision that all buyers need to make before making an offer. The last thing you want is to buy the home you really want and lose it to foreclosure soon afterward. So, you need to make sure that your offer price is one that you can afford for the long haul.

This is one reason why it's so important to get pre-approved by a lender before you make an offer. The lender will review your paperwork, income and debts. Then, they will decide the mortgage loan amount they will approve you for when you're ready to buy a home. They will issue you a pre-approval letter which will also tell you the amount of the down payment and closing costs they will require for the loan. Your real estate agent will review your pre-approval letter to give you an estimate of how much your monthly mortgage payment will be on a particular home.

So, now you know the home price you're pre-approved for, an estimate of your mortgage loan payments and how much you will need to come up with for the down payment and closing costs. Now, factor in any HOA dues and any costly repairs you will need to make to the home. In light of all of these factors, can you afford to buy this particular home?

Step 3 – Find Out What Level of Competition are You Facing

It's very important to know the level of competition you'll be facing once you submit your offer to the seller. The more competition you have, the more you may need to tweak your offer in order to compete with other offers. In today's housing market, many sellers have been receiving multiple offers on their listings.

Your real estate agent will be able to help you understand the list price-to-sale price ratio, known as LP:SP. This ratio gives you an idea of how much under or over the list price homes are selling for in your local market. In general, the higher the LP:SP ratio, the less competition there is among buyers.

Here are two other major factors your real estate agent will brief you on:

  1. The number of offers that have already been presented on the listing, and the amount of those offers. If there are other offers, you should make sure yours is the highest in order to successfully compete against them.

  2. The number of days the property has been listed on the market. This should be compared to the amount of time the average home stays on the market before being sold. The longer the home has been listed, the more desperate a seller can become. That means they may be willing to take a lower-than-asking price just to get the home sold quickly. This also means less competition for you, the potential buyer.

Step 4 – Find Out How Motivated the Seller Is

Understanding how motivated the seller is to get the home sold will also help when submitting your offer. Has the list price been reduced since the home was put on the market? If so, by how much? Does the listing ad specify "highly motivated seller", "flexible seller" or "urgent need to sell"? Knowing this type of information let's you know just how serious the buyer is to get the home sold as quickly as possible. This could impact whether or not they may be willing to accept an offer that's lower than the list price.

Step 5 – Decide on Your Own Level of Motivation

How motivated are you to buy this particular home? How badly do you really want this property? The motivation of the seller (step 4) is an important factor. But, your motivation level is just as important considering this could be the biggest purchase of your life.

The offer you submit shows your level of motivation. However, you should never make an offer that's way above the home's fair market value, no matter how badly you want this home. The home will not appraise for the overpriced offer you submit. Therefore, you'll never get approved for a mortgage loan for that amount. The only time this makes since is if you have cash to throw around. However, taking all five of the steps here into account, you should make an offer that's competitive if you truly want to buy the home.