Don't Overpay for a Home
by Don Petrasek
Renting to Own
Now or Never? The Right Time to Buy a House
Most homebuyers depend almost completely on a real estate agent for advice when they decide on a price to offer for a home. Homebuyers working without a real estate agent often make this decision based on limited information and with virtually no analysis. This can result in a purchase price that is thousands of dollars greater than the actual market value of the home and a big problem if there is an unexpected need to sell the home in the first three years or so.
If you are using a real estate agent, ask him or her to pretend that they are listing the home that you are considering and compile comparable sale data for you. Many agents will do this automatically.
As a supplement to your real estate agent's information (or in lieu of if you are not using an agent), gather data regarding sold properties and properties currently for sale yourself using the large number of resources that are available via the Internet today.
Why go through this extra step if your real estate agent has already provided information? Your agent may make judgement calls on which comparable sales to provide you and in turn skew your data. Of course your agent has a lot more experience in choosing good comparable sales, but let him explain why a comparable is not a good choice rather than just not showing it to you.
There may be some situations in which you have a difference of opinion with your agent which affects your offer. This is also the point in your relationship where even the most ethical agent will be tempted to eliminate a comparable sale (on the low side) so that the offer will be easier to close. Believe me, this is very easy to justify when you are staring down the barrel of a $2500 commission check, regardless of who you are or what you are about. Accessing independent data sources will help to lessen your chances of overpaying for a home.
The data you end up with should be assembled in two different directions. First do a search of the immediate area around the home you are considering (same development, 3 or 4 streets in either direction, etc). Look at all the data you have on any property that has sold in the last year. The real estate market tends to fluctuate based on economic conditions (most notably interest rates) so comparable sales that are over a year old probably won't help much.
As you are compiling this data do not eliminate colonials because the home you are considering is a ranch. The idea here is to get a good feel for the price range in the area that the home is located in. You want to make sure that the price you offer is within this range.
Next, do a search of a larger area, but limit the data you review to sales that involve properties that are similar to the home you are making the offer on. If you are buying a Ranch, search for sold Ranches - usually you want to limit the search to the same city that the house is located in. City services and reputation do have a lot of influence on market values. Compare the features that your proposed home has with homes that have sold. If you are lucky enough to come up with a good number of comparable sales, you will probably be able to determine how at least a few features affect market value. As you complete this process, you will be narrowing the price range in which to make your offer.
A number of factors will influence the actual price that you offer the seller, including the current real estate market in general (are you competing against other buyers for this home?), the seller's preferred closing date, and even your emotions. At this point in the process, you will have a pretty good idea what your offer should be. Your real estate agent can help you decide exactly what price and terms to offer the seller.
Some buyers that I worked with determined their offer price by subtracting 10%,15% or even 20% from the listing price, regardless of the property they were looking at. They wanted to see "how low the seller would go." Don't play this game, it results in a lot of wasted time and could cost you the home you really want. Many sellers will become angry when you submit a "low- ball" offer (especially when their listing price is representative of the market and reasonable). I have seen cases where the seller refuses to counteroffer in a situation like this and even goes so far as to tell the real estate agents that he doesn't want to deal with this buyer (which is his right as long as he is not breaking any discrimination law). Making this kind of offer also makes it difficult for your real estate agent to close the deal. Your agent doesn't have data to validate your offer and therefore cannot defend it. Your agent immediately becomes the enemy in the eyes of the seller. Even if he comes back the next day with a reasonable offer, he may receive a counteroffer just out of spite. Of course, if your data says that the listing price is too high, it is a completely different situation. Your agent will have something to back up your price and can reasonably explain it to the sellers. If they refuse to listen, it might be better to move on to another home anyway.
Don Petrasek was employed in the real estate industry for over ten years first as a real estate agent and later as a mortgage loan officer. He was President and owner of Lakeshore Mortgage in Rocky River, Ohio.
Take the Next Step
- If you haven't looked for a lower mortgage rate in the past year you could be wasting money each month. Use our simple tool that compares different lenders to see what your monthly mortgage payment could be. It's private, only takes a minute and could show you how to save thousands!
More Tips & Tools to Help You
Live Better...For Less
- 6 cheap, effective home security solutions
- 5 frugal ways to expand your living space
- Top 10 DIY mistakes made by home 'handymen'
- 15 mistakes to avoid when selling your home
- 9 ways to buy furniture for less
- Need a bigger home? How to maximize the space you already have
- Find the best mortgage rates in your area
- 3 ways to use a mortgage calculator
- Mortgage calculator: Calculate your payment and more
- Home equity calculator: HELOC vs. line of credit
- Should I borrow from my home equity?
- How much can additional payments save me on my mortgage?
- Who offers the most home insurance discounts?