Since you’ve already been preapproved for a home, you already know the maximum amount of money that you can spend on a home. This is based on the amount of debt that you can manage, calculated by looking at your income, your credit score, current interest rates, and your current liabilities. Unless things change in the amount of income you receive annually or interest rates fall, then you won’t be able to exceed the mortgage loan amount approved by your lender.
Home prices don’t have anything to do with how much you’re able to spend on the home. Instead, the price that the home is listed for is up to the owner to decide. The owner wants to make as much money from the sale of their home as possible, often looking at comparable homes currently on the market, and previous sales of similar properties that have sold recently in the same area. You on the other hand want to pay the least amount of money to purchase the home. Chances are that you’ll meet somewhere in the middle (depending on the current state of the housing market in your area,) at a price that you both negotiate for.
Regardless of the fact that the owner wants the most amount of money for their property, and you want to spend the least amount for it, you still have to determine how much the house is actually worth before making an offer. Although this is an obvious fact, when it’s a seller’s market, some home buyers get carried away and offer much more than a home is actually worth.
The way to figure out what a home is worth is to discuss home prices with your agent. Your agent can give you all the data that you need about homes in an area and explain how much similar homes sold for, and how long they sat on the market before being sold. Depending on if the agent is representing the buyer or the seller, you’ll have to take different courses of action to get previous sales information so that you can influence the amount of money that you pay on a home.
If you are represented by a buyer’s agent, then you’re in good hands because that agent represents you and is required to share information that helps you to make a buying decision. If you want to find out how much a home is that you’re interested in, all you have to do with a buyer’s agent is ask for a list of comparable properties (also known as “comps.”) After you have that data, you can go over how previous sales and similar properties in the neighborhood influence the cost of the home that you are interested in.
When you take a look at the list of comps that have been given to you by an agent, you’ll be able to compare the sales price of properties in the area that have similar amenities, sizes, and features. You should also look at the listing price and compare it to the sales price to discover what kind of deal the seller ended up walking away with. Most of the time the list price is higher than the sale price, on average it will be about 6% less. However, when the market has more buyers than sellers, the sale price might actually exceed the list price, as a direct result of the amount of competition or bidding on a popular home on the market. It could also be a result of the home being slightly underpriced in an attempt to move the home quickly.
In order to make sure that you don’t overpay for a property, you have to know what you’re willing to pay for a home before ever submitting an offer. It’s very easy for home buyers to get emotional about purchasing a property, and allowing their emotion to drive up how much money they offer on a home. Instead of being emotional during the home buying process, you should base decisions on logic and reasoning. Don’t go over your set price. If you lose out on a home because of competition, then continue the search until you find a property that is perfect for you at a home that you can afford.
Unless the market has a lot more buyers than sellers, or the market inventory is really tight, make sure that you never offer list price on a property. Start around 5 to 10 percent below what you want to pay for the home, and leave the actual price up to negotiations. That means on a $400,000 list price home that you want to pay $380,000 on, then you should offer anywhere from $372,000 to $342,000.
If you can’t come up with a price that you would pay for a home after looking at the comparable properties, ask your agent what he or she would pay. If you’re working with a buyer’s agent, this should be a straightforward question, and he or she should give you an honest answer about what he or she would pay in the current market. However, if you’re working with a seller’s agent, they have a fiduciary responsibility to the seller, so they’ll most likely suggest that you pay list price in order to keep their client’s best interests first.
Making an offer on new construction is a little more complicated and depends on your timing. Part of the price negotiations when it comes to new constructions depends on what kinds of materials will be used in the building of your home. Most of the time, new developers won’t lower their prices unless they’re trying to move on and are having trouble selling one of the last units in the new development. Even then, they might not be willing to negotiate the price, but rather give you upgrades and options on your home for paying the list price.
It’s often the first buyers in a new subdivision that receive the lowest prices, since developers increase their prices overtime as new residents purchase properties in the area. The risk that you face as a buyer in a new subdivision is that properties might fail to sell, potentially stopping further development and requiring that investors come in to recover any losses, usually selling the remaining properties for a price much lower than what you originally paid.
So How Do I Make An Offer?
Making an offer today has changed a little bit from how people made offers on property in the past. Generally, it includes the address of the property, consideration (the price you are willing to pay for the property,) and the date on which the closing will take place. Historically, this contract could be written on anything, but nowadays brokers commonly use electronic offer forms found on DotLoop or Docusign.
When you fill out one of these forms with a broker you will discuss any contingencies in the sale, earnest money, and any personal property requests that you have. Then, you’ll sign the electronic form. Your agent will present the seller’s agent the offer through email or in person. If the seller isn’t represented by a broker or agent, then it’s a for sale by owner property, in which case you would present the offer yourself.
Before you sign any contracts that you don’t understand, in either case, make sure that you take the contract to your real estate attorney. They will look over the contracts and will give you their insight.
Typically, as a buyer, you won’t be present when the agent is presenting the offer to the seller. This part of the home buying process can be daunting, since the seller can reject, accept, or make a counteroffer when it comes to purchasing their home. No matter what happens, don’t give in to the pressure if negotiations lead you to pay more than you originally wanted for the property. There are plenty of properties that are perfect for you out there, and if you offer more than you’re comfortable with, it can lead to a lot of potential problems in the future. Take your time and allow yourself to get the best home for the best price.