Reader Question: When putting a bid on a home, how much below the asking price is a reasonable first bid? Christina H.
Monty’s Answer: Hello Christina, that is a good question. It is not an easy question to answer because with each property the circumstances of the seller are unique and your circumstances are also unique. While there are many examples, here is one. If the seller needs 120 days to vacate, and your plan is to move in 60 days, an offer 5% higher than the asking price may not be enough. Knowing if 120 days is a “want” or a “need” on the seller’s part is a very important consideration in deciding what to offer. Here is an article that points out the most common circumstances a seller may be concerned with when they are selling a home.
Now, add a third fact to the mix. Every home has a range of value, not a price. Read this article to get some facts on your side. If you determine the seller’s asking price is already below the lower end of the value range, a percentage off the asking price is not a particularly good approach to making an offer. I call them “uncalculated offers”. There is far better approach to learn, and it is not difficult. It will take some of your time and can potentially save you thousands of dollars.
Many homebuyers have the same question as yours and it is often answered incorrectly. Using a percentage as a guide to a starting offer is a myth but it is a widely held one. Often, your friends or parents will have an opinion. Even some real estate agents will offer up a percentage if asked. The range of those opinions will be wide. Answers like, “Up to 3% lower – you do not want to offend the seller”, or, “20% less – you can always come up” are common. Market conditions also play a role in knowing what to offer. I have included an article here that speaks to making uncalculated offers in a hot sub-market.
Here is an article about how to make adjustments between a “comparable” sale and the home being valued. An important tool in determining each home’s range of value is choosing homes that are truly comparable. Only then can calculating adjustments between differences in features be comparable. Performing this exercise with several comparable sales is the best way to determine a homes range of value. This is the method an appraiser uses and you can use it too.
The Internet has spawned a new breed of companies that use a computer to evaluate homes. The evaluations are based on MLS information and other public records. These companies have developed algorithms to compensate for the fact they have never laid eyes on the property. It is a method used by them to achieve national scale.
As an example, a number of them use neighborhood and date of sale as primary considerations, and mix styles together to average square foot costs; yet, it costs considerably more to build a one story home on a per square foot basis than it does a two story home. Is this why many of these companies have gained a reputation for unreliable value estimates? One of the side effects of this phenomenon is that some real estate agents use this type of appraisals for evaluations. They have forgotten how to make proper adjustments on their own.
Lastly, I have included an article about “How to challenge home appraisers” to frame the discussion from a sellers point of view. That is who you will be negotiating with. By reading the articles I mentioned and practicing your execution in choosing a good comparable to make adjustments, you will get good at it. Then, the desire to challenge an appraiser or your real estate agent’s opinion (BPO) in the near future will be based on knowledge. This exercise will give you the information you need to know about what to offer for a home and be successful.
I hope you found this answer helpful, Christina. When you are reading these articles please ask me if you have other questions. I want to help.