Home Buyers & Purchase Offers
Perhaps the hardest thing for home buyers, whether this is their first home or whether they have bought many others before, is deciding what the home is worth and the price to offer the seller. Buyers are usually caught wondering if they should offer full price, or over asking price, if they should try a lowball offer or actually listen to the advice of their Realtor® and send in a reasonable offer which allows room for negotiation and ensures both parties some wiggle room on the negotiation table. Since this question comes up pretty regularly, let’s discuss the pros and cons of each.
The Full Price Offer
Drumroll, please! Of course, this is one of the offers that is the most liked by the seller, unless it’s over asking, but that comes with its own set of problems we’ll discuss in a minute. A full price offer is usually made by buyers in stable markets for a house they really love. Usually, there are no other offers on the table.
What happens? If everything goes according to plan and the buyers are not overstretched on their budget, the seller accepts and everything moves on slowly but surely. An incredibly boring escrow closes and leaves everyone happy. The sellers walk away getting what they wanted, the buyers wonder if they paid too much, but soon get caught up in decorating and enjoying their new home and forget their buyer’s remorse.
The Over Asking Price Offer
Writing an offer over the seller’s asking price shows nervousness on the buyer’s side. It is usually made in a market where prices are headed up or when the listing is priced extremely low to encourage multiple offers. The sellers in this case are aware that they have the upper hand and can command a good price. In the recent real estate boom in Sacramento, most homes appreciated by the time escrow closed and buyers came out richer just a month after making an offer, so sellers felt the need to earn some of that future appreciation by pricing the home pretty aggressively.
However, there is a problem with such a strategy. When the real estate market is headed up, there are usually few or no comps available for an appraiser to ascertain value. The difference then has to be made up with cash from the buyer or the price has to be readjusted to reflect the value of the home as determined by comparable properties. (By the way, when the market is headed down, there is a whole set of other problems with comps appraisers have to provide. Nervous lenders usually request more than the usual number to ensure some level of stability in house values.)
The Lowball Offer
Lately, these are the most commonly found offers. So you can probably guess that these offers dominate a buyer’s market, when supply is high and demand is low. Prices are usually headed down or seem to be headed down and foreclosures abound.
On the surface, the lowball offer seems like a good idea. Home buyers often make these offers to sellers in the hopes that they are in a win-win situation. They think that either the seller will accept and they will have purchased a house at a rock bottom price or the seller will come back with a price closer to what they have offered.
The reality, however, is quite different. With so many lowball offers floating around (most from unqualified buyers and other frivolous tire-kickers) the sellers lump even the most qualified home buyer into the to-be-ignored file and never get back to them. As a result, there is no negotiating, the sellers feel insulted and what could have been a reasonable purchase dissolves into nothing but a bad taste in the mouths of both parties involved.
The Right Offer
If you ask me, the right offer is always dependant on a variety of factors. Mainly, how much does a homebuyer like the home? Are there other houses like this one available? What do the comps look like in terms of price per square foot? Does the home buyer know his options when it comes to financing the home and does he really understand his mortgage? How many other offers are the sellers considering? What is the strategy behind pricing the home at the listing price? How soon and why are the sellers moving? All these questions would help determine the right offer price.
That being said however, I think serious home buyers in today’s Sacramento real estate market would do well to make every effort to come across to sellers as reasonable and ready and willing to make the home purchase with a little negotiating. I think if they are armed with a letter of preapproval, a decent good faith amount and an offer that is not too wild, chances are sellers will discount the price. Get off on the wrong foot however and none of this happens. Going in with unreasonable demands or a “my-way-or-the-highway” attitude only results in wasted time and effort by the potential home buyer, the buyer’s agent, the seller and the listing agent.
What would I do? I’d be sure to get the right Realtor®, ask the right questions and then make the right offer. I would take the advice of my Realtor®.
