A buyer recently found his dream home and asked me if he should make an offer that is 5% below list price. I asked him why he would make such an offer, and his answer was “I read it was a good strategy”. My follow-up question was obvious, “Why?” “I don’t know,” he said. “That’s why I’m asking you.” I was glad he respected my opinion, but moving forward to make an offer without knowing the “why” behind the buying strategy is a big mistake. T avoid these types of mistakes, a good buyers' agent can help form a strong offer in a competitive environment.
The real question should not be about offering 5% below list or other past strategies. The real question for today’s buyers is “How and why do I structure my offer so I have a good chance of being accepted?”
This is a sellers’ market, meaning there are many more buyers than sellers, and sales have multiple offers. Buyers are competing with many other buyers, some of whom are paying cash. My strategy for buyers is simple: UNDERSTAND WHAT THE SELLER WANTS!
There are five guidelines that buyers should follow to be ahead in the game:
- WHAT IS THE FAIR MARKET VALUE? The fair market value is the value it would probably sell for in an open market. It's NOT the list price. Look up recent sales. When an appraisal is done, the appraiser uses the principle of substitution, that is, a buyer will usually not pay more for a property than an equally desirable property. That means that similar properties will sell for similar prices. If you want to buy a 3 bedroom, 2 bath home, with 1,200 sqft and a 6,000 sqft lot, look at the sales prices of similar homes situated within a mile that sold in the last 3 months. Find out the sales prices of comparable properties to get an idea of value.
- LIST PRICE IS NOT THE VALUE. A listing agent can choose any price at which to list a home; it doesn’t mean it’s close to the real value. I've seen homes listed more than $100,000 over the fair market value.
- WHAT IS MOTIVATING THE SELLER? Do they have to move by a certain date? Do they need to stay an extra period of time to find another home? Are they retiring and living off the money from the sale? What’s important, a higher price or a quick escrow? Is it in such bad shape that the bank may not approve a loan? How many offers do they have? What is the process of presenting offers? Talk all these factors over with your buyers' agent. Know exactly what the seller wants and develop your offer with your agent to give them what they want.
- IS YOUR AGENT PROACTIVE? Is he or she talking to the listing agent about the wants and needs of the sellers? This is an important part of a buyers’ agent’s job….obtaining the information to form a strategy that gets the offer accepted. If the sellers are looking to move as quickly as possible, they may accept a shorter escrow over price.
- ARE YOU WILLING TO OVERPAY? I know that sounds like an odd question. In today’s market, due to a lack of inventory, buyers are paying higher prices for homes than the current market value reflects. Some buyers look at their purchase as a long-term investment and feel OK about overpaying because they expect to recoup their investment over time. If you overpay, be prepared that the appraisal may NOT come in at the purchase price and discuss the options with your agent.
Be sure you know the HOW's and WHY's of your buying strategy, so you can make a strong offer and buy your dream home!
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