What Should I Offer on My Next Home?

I don't know where I heard it, so I can't attribute this quote to anyone in particular but it has stuck with me for a while. It goes something like this

The best deals aren't found, they are made.

If you have been shopping for a home lately I bet you haven't seen many prices that look like a real bargain to you. It's true. There aren't many. There isn't much low hanging fruit any more like there was 6 or 7 years ago when just about everything was a bargain. Prices have come up considerable from the bottom and it's no longer a buyers market here in early 2016. Perhaps you feel like you missed the boat. But the longer you wait the more you will be missing. Real estate is long term investment. Ten to twenty years from now you will be happy you didn't wait any longer. In the Miami - Fort Lauderdale metro area rose 7.9% from the 4th quarter 2014 to the forth quarter 2015. This according to Bankrate.com

I wouldn't go as far as calling it a sellers market right now either. It's actually the closest to a normal market as I have seen in the 10 years that I have been in the business. Right now we are seeing a gentle appreciation of prices that I hope continues for a while. I have been noticing that buyers are becoming more bashful about making offers. At the same time sellers are setting more optimistic prices. Yes, many of them are too optimistic. Deals are still being made everyday though. The market is healthy for those that are ready to jump into it and make those offers.

Don't worry about stepping on toes or hurting feelings, that's why you hire an agent to do it for you. But how much should my offer be you ask?

Determining a Homes Market Value

The first place to begin is determining the homes fair market value. You do that by looking at comparable home sales in the neighborhood. Yet they aren't all created equal. I am trained and certified to perform Broker Price Opinions for the countries biggest banks, more commonly known as BPOs. A BPO is less detailed and less expensive than a BPO. They use similar standards to an appraisal and provide a fairly accurate value. Banks use them to keep track of the collateral on the mortgages they have issued. I have probably done about 1000, or so since 2008.

A proper comparable home should have these characteristics:

Located within a mile of the subject. A half a mile is better.
Built within five years of the subject and no more than ten years.
The square footage should be within 20% of the subject, 10% is even better.
Sold within the past six months and in a changing market then 3 months if possible.

The sales must be what are known as "arms-length transactions". That means they are not between parties that are related by blood or marriage. Some buyers like to do there own investigating of tax records online. Beware that a lot of what you see are not arms length transactions.

The best comps are in the same sub-division and even better if they have the same floor plan. The same is true for condominiums. From there you want to use homes that match the bedroom count as close as possible, and condition as well. If the subject has significant updates, the comps should also. If the subject has a pool, it is best if the comps do too.

When we can't find at least three homes that match these characteristics, we make adjustments on the closest matches. If the subject has 3 bedrooms and we use a 4 bedroom home, we must subtract what the value of a bedroom is worth in that neighborhood. Same goes for size. We figure out the average price per square foot homes are going for. Then adjust by subtracting if the comparable is larger that subject. Views can throw things off because that will be a very subject value. We want to avoid using a comparable with a water view if the subject does not if at all possible.

Once we have found the three best comps, and made any necessary adjustments, we should have a narrow range of values to estimate the homes value. There are some other things to consider before we decide what number to start with.

How strong are you as a buyer?

A cash buyer that can close quick will always be in a strong position to make an aggressive offer. A seller may give a larger price concession to someone they know will actually close. A buyer that is financing the purchase is suspect because it can take weeks for a loan application to be approved. If they aren't approved then precious time has been lost.

If you are financing and need some help from the seller with closing costs, that weakens your offer. In your situation you may be asking for closing cost credits instead of price concessions. It is not uncommon to end up making a deal above asking price but with those closing cost credits to even things out.

Do you need to sell your current home before you are able to close on your next one? This is one of the weaker positions a buyer can be in. Because you likely will want a contingency that your current home successfully closes first. If you run into trouble you can be released from your sale agreement.

Eliminating contingencies will strengthen your position as a buyer. If you are positive you will get financing approved, you can forego the financing contingency. Your deposit will be at risk if you this and your loan is denied, but now your offer is almost as strong as a cash offer. If you have another home to sell, you can try to get a cross collateralized loan. This a loan that uses the equity you have in your current home to buy your new one. You risk owning two homes for an extended period of time, but your offer isn't weakened with another sale contingency.

And the Formula For Making Offers Is...

Unfortunately, there is no exact formula for determining what you should offer. It would certainly make my job a bit easier, but it is purely a judgement call. You have to measure the homes price position in the marketplace and your strength as a buyer. Then try to make a reasoned offer. This is where an experienced Realtor can be invaluable. Rely on the judgement of someone who has been in the business for a long time. Someone that understands seller behavior and how to negotiate a good deal for their clients. You don't want to leave money on the table with an offer that is higher than needed and you don't want to turn the seller into an adversary with a offer that is way too low either.