Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to [email protected].
Question from Jessica of Abilene, TX: Hello Brian, I’m a single woman venturing into buying my first home. I just started looking two weeks ago and my agent has shown me three houses. One of them was in a neighborhood that I like but I wasn’t thrilled with the house. I’m taking my time because there is a lot about the process that I don’t really understand. My agent has been great about answering questions. However, I thought it would be a good idea to ask for an independent opinion about how much to offer when I find one that I do want to buy. I’m preapproved for a $178,000 loan. My agent suggests that I start several thousand dollars below that. Brian, what are your thoughts?
Answer: Hi Jessica. Congratulations on deciding to make your first home purchase at a time when the market in Abilene is fairly balanced. There is a healthy balance between the number of buyers looking for a home and the number of homes for sale. Having a decent number of homes for sale (about 760 in Abilene in mid-November) means you shouldn’t need to worry that when you find a house you want to buy that six other people will also be making competing offers. Chances are good that the seller will take a reasonable offer seriously.
The first thing to do is understand the seller’s asking price. It is exactly that, an “asking price”. In a balanced market, this is a beginning point. Sellers have their own reasons for setting a price. The seller has had the listing agent perform a fair market analysis based on what similar homes have recently sold for in the general location. If the general location is in a heavily populated area, the comparable houses should be in the same neighborhood. If it is in a rural area, the comparable houses could be within a radius of several miles. Just as important as the general area is how long ago the analysis was performed and how many houses have sold since the analysis. Before you make an offer, you want your agent to do a similar analysis for you. Make sure you only look at houses that have sold. What other people have for an asking price in the neighborhood in not what the house will probably sell for in the end.
There are other things to consider about the asking price. Most sellers will have an average of three listings agents provide a market analysis. The seller often considers these three prices to be the high, medium, and low ends. Different sellers have different motivations in setting the asking price. Some will set it high with the hope of getting the most money. But the agent should inform them that it might be on the market for a longer period. Most will set the price close to the medium but might fudge it just a little higher for negotiating room. The expectation will be that it sells within the average market amount of time. A few sellers will set the price low with the desire of selling it fast. If the house is in decent shape, it probably will sell fast in a balanced market.
So Jessica, along with the comparable, you also want to know how long the house has been on the market before deciding how much to offer. There are also several other factors that you’re going to need to consider. However, as a general rule, houses that have been on the market more than 60 days and priced at the high end should receive the most discounted offer. Something close to the middle range or maybe 10% below the asking price. Houses priced close to the middle should generally receive an offer 5% below the asking price. You don’t need to consider how long these have been on the market as much, as long as it’s less than 90 days. If it’s been longer, you can consider dropping your offer a little more. If it’s been on the market for only a week or three, the seller might receive some other offers so you don’t want to start too low. Still, at only 5% below the asking price, you should receive a counter offer even if there is another offer. For houses listed below market value, you can probably also make an offer 5% below asking but not much more. These are the houses that will probably receive the most and fastest offers. The seller wants a quick sale and probably doesn’t want to spend weeks negotiating. However, you can make concessions in the terms and conditions for a quick closing that can make a lower price appealing to the seller.
There are also other things you want to consider before making your first offer. Sometimes a home will have a unique feature that the comparables in the area don’t have. Maybe all of the houses in the neighborhood have about the same square footage but only the one you are interested in has a swimming pool. Naturally, the swimming pool makes that particular house more valuable than nearby houses. But you still have to ask yourself if the pool adds as much value for you as is built into the asking price? There are many other features that can add value and maybe that is exactly why you want to make an offer. Other features might be a high-end kitchen, and elaborate master bath, or a nicer view.
These are the basics that you want to know and consider before making your original offer. Your agent can probably add more based on your location and the specific house you are considering. This only applies to your first offer. It doesn’t cover contingencies that might go into the offer or an effective negotiating strategy if you receive a counteroffer. Something you should always do is have a professional home inspection contingency that can reveal problems that you aren’t aware of when you make your original offer.
Please comment with their thoughts and/or approaches when making a first offer. Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to [email protected].
Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 12 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. With the Pacific Ocean a couple of miles in the opposite direction.