How to Determine The Right Offer Price
The First Step: Using a Buyer's Agent
A good buyer's agent is very valuable in helping the buyer to determine a market correct offering price. A buyer's agent does not set a specific price, but provides advice on recent sales, market conditions, and the pluses and minuses of the property.
Criteria for selecting a buyer's agent includes:
The best buyer's agents specialize in a specific geographic area, whether it is a town or neighborhood. Deep knowledge of real estate and the myriad other local issues that affect real estate are very valuable. Some agents also specialize in specific property types such as luxury homes, short sales, vacation homes, etc.
A good buyer's agent understands the balance between helping the buyer acquire the home and paying the best price with the most favorable terms. The best negotiators are well prepared, understand the emotional component of negotiation and have a structured approach to the process.
The buyer's agent should know the inventory and market conditions. This knowledge is critical for being able to determine the market value of the property.
Myths and Misconceptions
Some buyers believe that offers should always be a fixed percentage (such as 10%) below asking price.
Some properties are over-priced, some are at market value, and a few are under-priced. Because of this a one size fits all approach to making offers does not work.
The seller will always counter-offer.
The seller has no obligation to counter-offer. We expand on this in the section about multiple offers.
The buyer and seller will meet in the middle (halfway between the asking price and the offer price).
Market conditions, terms of the offer, buyer and seller motivation and other factors will determine where the buyer and seller meet.
It is a buyer's market in Cambridge and Somerville
Inventory is low and demand is high in Cambridge and Somerville. Many properties are getting multiple offers and are selling for over asking price.
Determining the Offering Price
The offering price is established several ways:
Each buyer has a different level of motivation. Motivation can be caused by many factors including an emotional connection to the property, a lease ending, job relocation, a growing family, etc.<br><br>
Ability to Pay
The buyer's liquidity and budget will determine the top amount that he/she can pay. The lender's debt to income ratio and other underwriting criteria will determine the amount that the buyer can borrow.
Type of Buyer
Owner occupants may be willing to pay a different amount than an income investor or developer. Investors and developers have rate of return formulas that determine their offer versus the budget of an owner occupant.
Comparative Market Analysis
Since the asking price may be above, below, or at market value it is important to objectively determine the estimated market value. The best way to determine this is for the buyer's agent to prepare a Comparative Market Analysis (CMA). A CMA is prepared by finding recent sales in the same neighborhood. Adjustments should be made for factors such as parking, central air, condition and age of the property, layout, views, street noise and a wide range of other factors. Some buyers use the Zillow Zestimate tool to help them determine an offering price. However since Zillow has not visited the property and has not adjusted for the many factors that affect value the Zestimate can be highly inaccurate. According to the Zillow website: "We encourage buyers, sellers, and homeowners to supplement Zillow's information by doing other research such as getting a Comparative Market Analysis (CMA) from a real estate agent." It is up to the buyer to decide if they want to offer more or less than the estimated market value.
Multiple Offer Situations
Low inventory in Cambridge and Somerville is leading to multiple offer situations for well priced properties. Making an offer in a multiple offer situation calls for a different strategy.
- When there are multiple offers it indicates that the asking price is close to or below market value. In our experience, multiple offers often result in a sale price close to or above asking price. Making an offer below asking price will not usually result in an accepted offer.
- The terms can equally important as the offered price. A cash offer or an offer without a financing or home inspection contingency will be stronger than an offer with a contingencies.
- A letter to the seller can personalize the offer.
- If all of the offers are close in price and terms the seller may ask all of the buyers for their best and final offer. However, one offer may be significantly stronger and the seller may accept it. For this reason it is important for the buyer to make their offer as strong as possible and to not count on an opportunity for a best and final offer.