Making an Offer on a New Home

How much is a new home worth? How are home values determined? How much should you offer for the home you have targeted to buy? How much dickering and how much variation from the original asking price should you expect? If you are in the market for a new home, you don’t want make too low of an offer and you certainly don’t want to overbid. Today we’ll discuss home values and how to determine home values.

Many factors can affect the sales price of a home. The actual final sales price is often a result of negotiation and compromise between the buyer and the seller. Even the prices of new homes are negotiable these days.

Determining Home Values

Two similar, existing homes on the same block or even next door to each other can command different prices. The amenities that the home offers, its overall condition, the motivation of both the buyer and seller and the perception of value by either the buyer or the seller can drive the actual price up or down:

• Amenities: Even though the home you target may have been built by the same builder and at the same time as a nearby home for sale, the asking price and negotiated sales price may differ by several thousands of dollars from its sister home nearby. Differences in amenities can be extreme. The homes may look similar from the outside, but one may have an upgraded kitchen or bathroom, a pool that was added a few years ago, or a brand new roof, while the other has remained basically unaltered since it was built. All other things being equal, the upgraded home clearly has a higher value.
• Condition: If the home you target is immaculate compared to similar nearby offerings, expect to pay more. If the home you target is in need of repairs or has other detrimental features compared with similar homes in the neighborhood, you should legitimately expect to pay less.
• Motivation: A seller who has already moved out or who is facing an upcoming moving date will often be more motivated to sell sooner than later and usually at a lower price than he could get if time was on his side. There are many other factors that could influence motivation. A good real estate agent can uncover some of these factors and thereby increase your bargaining power as a buyer. Know that some sellers are simply “testing the market” (with little, if any, motivation to sell) and won’t budge too far from their asking price.
• Perception of value: Some people have an inflated view of what their home is worth. Especially in a down market, where property values are declining temporarily instead of steadily rising, a seller may be unwilling to cut the price. How much do you really want the home? If you really love the home and plan on staying there for a while, you might consider paying more than market value. But a down market is most favorable to buyers, not sellers. Sellers who fail to embrace this concept and drop their asking price will rarely be able to unload their home at an inflated price and should wait for housing values to rise again. Smart buyers are advised to look elsewhere.
• Economics: The laws of supply and demand can influence the value of a home. Over the years, a general concept in real estate sales is that you should offer less than the asking price and negotiate a price that is somewhere between the asking price and your offer. Your individual situation may vary. In a thriving housing market, buyers sometimes offer the full asking price or even more than the asking price because there are several other buyers in competition for the same home and they don’t want to miss out on a desirable home. Conversely, a vacant fixer-upper for sale in a down market might command an offer that is only half as much as the asking price.

Making an Offer

Once an offer is made, a counter-offer is often made. For example, if the seller is asking $200,000 and you offer $175,000, the seller may counter-offer an adjusted price of $190,000. You’re closer than you were to settling on a sales price, but you are still $15,000 apart. You can then either counter the counter-offer, hold firm or walk away.

If a recent appraisal of the property is available, it can help close the gap between asking price and buyer’s offer. Appraisals take into account several factors, including recent sales data of similar homes in the immediate area.

Negotiating the Home Price

Your real estate agent can assist you in the negotiation process, as he or she does this every day and usually has more experience than you do at negotiating a home sales price. Remember that other potential buyers and their real estate agents are out there. Someone else may be interested in the same home as you and if their offer is higher than yours, you almost always lose out. So if you really want the home you are making an offer on — and you should really want something you are willing to pay hundreds of thousands of dollars for — don’t make too low of an offer or you could be shunned in favor of another buyer.

Until you make an offer and it is presented to the seller, anything can happen. Any final offer agreed to should be in writing, which ostensibly (but not always) takes the home off the market.

In our next installment of the Home Buyer’s Checklist series, we’ll discuss home inspections. In our last post, we wrote about the topic of “Selling Your Existing Home.”