Buying our first home this past February was a stressful process because there were a lot of new challenges and questions we’ve never faced before. They are simply things you deal with only when buying a home, and this was our first shot at the experience.
One of the hardest things to do was deciding how much to offer. There were so many variables pulling in all directions–some wanted to push the price higher and some wanted to go the other way. It was also a decision that needed to be made quickly. Most offers need to go in with days or even hours often separating a winning offer from one that just missed the boat.
As we sat down to think about and write down everything, it ultimately came down to balancing all the inputs and going with our gut feeling–what were we willing to pay and what were the sellers likely to accept?
Here’s what we considered:
1. List Price
We started with the list price of the home, and by comparing past list-to-sale prices determined that most homes were selling about 5-10% below list price. This gave us a good indication of what the sellers wanted to get for the home in an ideal market.
As we looked for homes, it was easy to pick out the fixer-uppers because their list prices were unusually low, and the homes that were recently upgraded, because their prices were somewhat higher.
2. Money In
The second thing we considered is how much money the sellers had put into the property. This included the original purchase price and our estimate of all the work which had been done over the last few years. We knew that we had to make the sale “worth it” for the sellers, but also that they may be willing to cut their losses if they were motivated to sell.
Our sellers had picked up the property at a discount, but made significant upgrades, including adding a bedroom, refinishing the exterior and upgrading the finishes and kitchen inside. They had invested a great deal of cash in making this house look its best.
3. Comparable Sales
Local, similar, and recent sales are the best source for a baseline of what a house is worth. What made our comparison difficult is that nearby sales were often larger homes in worse condition, so we had to account for both condition and size when starting to compare.
Our Realtor was the best source of recent sales data, but sites like Zillow also helped to filter down sales by size, location, and type. We were able to look at pictures of the properties and find the ones that were in the most similar condition and style to what we were buying.
4. Seller Profile & Motivation
Our sellers were a couple from Texas who had bought a second home in Florida, put some serious money into the house (we estimated about 50% of the original value of the home), and failed to use it as much as they thought they would.
They purchased the home for cash, and their Texas property was worth about twice as much as their house in Florida, so it was evident they had some degree of wealth and didn’t have any ongoing mortgage payments to motivate them to sell quickly.
Through the process, we also found out that the home had been on the market for about one month, and that they had already received and refused some offers on the house. Everything pointed to someone unwilling to move quickly. That gave the seller a lot of negotiating leverage, though in the end they didn’t use it to their advantage as much as I thought they would.
5. Room for Negotiation
Whatever “fair price” we determined we were willing to pay for the home, we had to back off from it to leave room for negotiation. In some markets, this can be a poor tactic if a house is getting multiple offers, but that wasn’t the case here.
While prices were generally rising in our market, the demand for smaller, well-equipped homes was actually low as most investors/flippers were hunting for rock-bottom properties. We knew we had some room to play with, and went in about $25,000 lower than our ceiling price.
6. Sale Type & Commission Structure
This house happened to be a “straight sale,” unencumbered by mortgages, foreclosures, a short sale process or anything else, which is a rarity in our market at this price level. This worked to the seller’s benefit, since we were actually very interested in purchasing a property without having to deal with banks and waiting.
Through our Realtor, we found out that the seller’s Realtor was a relative, so we safely (and correctly) assumed that he wasn’t getting a commission out of the sale. We kept this in mind when making an offer, both in terms of price and in terms of how we would approach the negotiations since there was more of an emotional element involved now.
7. Market Direction
If the market is moving down (or plummeting!), buyers are going to be wary and offer conservatively to hedge their losses in case the market continues to tank after they buy. No one wants to pay $200,000 for a home that will be worth $150,000 in a year, so you have to feel like you’re getting a deal to pull the trigger.
On the other hand, when the market is moving generally up like it is in our area, the sellers have the advantage of not losing out if they wait, but the buyer also has the advantage of being able to offer more with some peace of mind that they will not be upside down after closing.
Land value is typically something a commercial real estate developer might consider, not someone looking for a home. But since we plan to buy and hold for 10-20 years, and were looking to buy 2-3 acres of land, the ability to expand or build new was important and raised the value of homes that fit the criteria.
Another part of the potential of a home is the extent to which you can remodel or modify what’s already there. The more flexible a home, the more appealing it was to us because it could accommodate future changes.
Last but not least is the affordability of the home, which was different for every property we looked at. A well-maintained, move-in-ready home you buy for $200,000 will probably cost you a smaller amount than a fixer-upper you buy for $180,000.
Similarly, taxes and insurance vary widely based on the condition and construction of the home and its location.
While your loan might be approved for some arbitrary amount, say $300,000, you have to first consider your finances for the true “maximum” you can buy, and then adjust for each house you make an offer on for additional expenses.
How Did We Do?
Based on all those things and a lot of brain sweat, we came up with an initial number that was fair and eventually got us the house.
The final sales price for our house came in about 10% higher than our initial offer, about 4% less than the most we were willing to pay, and about 11% under the list price.
All things considered, I think we did fairly well. If Zillow is to be believed, the house has already appreciated about 5-10% as the local property values rebound from the bottom.
Making an offer on a house is a big decision, but if you stay conservative and don’t let emotions get the better of you, it’s hard to see why you’d regret any reasonable number you come up with. Good luck!