How Much To Offer On A House: Finding The Sweet Spot
Carey Chesney6-Minute Read
January 22, 2021
So the home search has ended – at least for the time being – and you found a house you want to buy. Hurray!
Whether it’s a starter home, an investment project, or your forever dream home, the next thing you may be wondering is how much to offer for it. Fear not. We will take you through all the ins and outs of answering that exact question so you’ll be able to work with your real estate agent to find your offer “sweet spot.”
What You Need To Know Before You Make An Offer On A House
You start with looking at the asking price. You and your agent also need to look at recent sales in the area to determine the appropriate sale price.
Like most industries, prices are set by the market forces of supply and demand. The “sweet spot” (the price at which both parties to the sale are satisfied) is best determined by working with an experienced real estate agent. They can help by sharing what they know about the house and the seller’s motivations, and by providing a comparable sales analysis.
This is only the starting point though, as many other factors will come into play before you settle on an offer amount for the specific home you are interested in. Let’s take a look at those factors.
One of the biggest determining factors on offer price is how your local market is trending in terms of recent home sales. Any given local market can favor buyers, sellers, or neither, depending on a slew of variables. Let’s take a look at how each type of market may affect your offer price.
A buyer’s market means either home prices are low, inventory is high, or both. One example of a buyer’s market is the period immediately following the 2008 financial crisis. Home prices plummeted, meaning qualified buyers could get into a new home for pennies on the dollar. In these types of markets, buyers generally offer less and insist on more contingencies. As you have likely realized by now, this is not an ideal market for sellers.
When home prices are high, inventory is low, or both, it is considered a seller’s market. With many buyers competing for the same homes, bidding wars arise. In this market, buyers must make offers at or above asking price that are as contingency-free as is possible. Simply put, more buyer competition and fewer homes to choose from means you’re likely going to pay more than in a buyer’s or balanced market.
In a balanced market, buyers and sellers have roughly equal power. Home prices are not too high or too low and/or inventory follows the same trend. Since both sellers and buyers can walk away from any transaction, balanced markets are ruled by comparables (comps) as the basis of negotiations. This makes having your agent use their expertise to research the market value of a home even more important.
You likely had an amount you were willing to spend before you even started searching, but a quick recheck before you submit an offer on a home is a good idea. Take your time and do your research when planning your future household budget.
This is easy to overlook because it really isn't the most exciting part of home shopping. When you’ve been living in apartments or condos, it can be hard to have a realistic understanding of how much things like electric, heating and other utilities will cost when you become a homeowner. Then there’s decorating, remodeling and routine maintenance. Add it all up and make sure you can afford the offer price you are considering before taking the final step and submitting.
The Home You’re Interested In Buying
Any and all information about the specific home or the sellers is valuable when you’re entering a negotiation, and here, again, is where a good real estate agent becomes invaluable.
Understanding the seller’s pain points is critical. For example, if a seller is facing foreclosure, or is in a hurry to move for some other reason, including a closing date that is as soon as possible will be a bonus for them. Keep in mind that the fewer contingencies you add to your offer, the faster you’ll get to the closing table. In addition, the seller may be flexible on price.
If they are in no hurry at all and may need some extra time to move out, consider a longer closing period and allowing them some occupancy (this is when they close the deal and then “rent” the house back from you while they move out, usually for a week or so).
The inspection after your offer is accepted will uncover most issues but having a basic understanding of the home’s condition when deciding on an offer price is important. Some issues, like a kitchen in need of updating, are obvious before you get an expert in there to go over everything with a fine-tooth comb. This is another instance where your real estate agent is a valuable informational resource.
A Word About Negotiating Positions
There are various negotiating tools at your disposal as you begin to consider your offer. Earnest money amount (the more you put down, the more attractive the offer) and mortgage preapproval (usually a must for your offer to be considered) are just a couple examples. Here are a few more scenarios to consider:
- Sellers have priced a home at a premium so that they have room to negotiate downward
- Sellers have priced their home to sell quickly and will not entertain lowball offers
- Sellers need lots of time to purchase a new home and want a long closing date
- Sellers wish to include a kick-out clause so they can continue accepting other offers
How Low Should You Go?
Comparable sales and a general idea of the condition of the home should drive the amount you offer. Once you have a number in mind, compare it to the asking price.
They are the same? Easy peasy!
Not the same (more likely)? Here are a few scenarios to consider depending on how far apart they are.
20% Or More Below Asking
Sometimes referred to as a lowball offer, this price point is justified if a home is in need of major repairs to bring it up to code or to make it habitable. New roof, new well, new septic field, new plumbing and new electrical throughout the house are a few examples that fall into this category. Coming in this low on price will allow for some wiggle room in your down payment and monthly mortgage bill.
Between 20% And 10%
If the home is not in need of some huge repairs but is terribly dated and in need of fairly major renovations, this may be the price range to consider. For example, if you think a bathroom will need to be gutted and estimate the cost at $10,000 then bringing in the offer at $10,000 under asking price could be a good strategy.
Less Than 10%
If the home is in good shape and not in need of major renovations, but could use a little cosmetic updating, this range might make sense. This might not produce dramatic monthly savings but might offer enough savings to help with those last touches to make the house your home.
When Should You Go High?
No one likes to pay more than they want, but there are times when we have to pay a little more and in the end it’s usually worth it. Here are some of those occasions:
Ah, the challenges of bidding in a tight seller’s market! Not the most fun, but a necessary evil if the market is hot. Unfortunately, comparables might not be very helpful if an area has suddenly become very popular. If other people are circling, a high and quick offer might be the only way to get the deal done.
People often advise trying to take emotion out of home buying but, to be honest, it’s impossible. Once you’ve found your dream home and are envisioning bouncing grandchildren on your lap in that beautiful living room 40 years in the future, you aren’t going to let it slip away.
Sometimes, that means paying a bit more than you'd like. Make sure your real estate agent understands your feelings so that they know how to proceed when negotiating, but don't share this info with the sellers or their agent if you come in contact, so as not to seem too eager.
The Bottom Line: What To Offer On A House
Finding the right price for your home is part science, part art of negotiation. Do your own research about making an offer on a house, but also listen to the advice of your agent. Together, you can come up with a price that gets you comfortably into that new home.