Since launching our Wise Buyer Strategies planning earlier in the year for our select buying clients, we have been pleased to discover that the strategies planning worked so well, and our clients were so thrilled with it, we have decided to publish the entire strategy series on line. If you’d like to start at the beginning, please start with our Wise Buyer Strategies home page.
In this first part of our new series on how to strategize your offer on an Arizona foreclosure, short sale, or owner-occupied home, we’ll deal with the basis of all purchases, the price. In later articles, we’ll cover the remaining offer strategies (terms, concessions, inspections, repairs, costs, and closings). Our hope is that once the series is complete, you’ll have a clearer picture of how to write a strong offer on the Arizona home you want, and actually get it. In regards to your offer pricing, you have a few considerations: How much should you offer? Do you have to pay full price, or even over full price to get a home right now?
How do I determine what a home is worth?
Home prices are always approximate, and are based on what similar buyers are paying for similar homes, in similar neighborhoods, in the last few months. This will be the case for all homes in neighborhood tracts, condo complexes, etc. Custom homes in custom locations will differ slightly, but not much. For example, when your real estate agent runs a market analysis on the home you would like to make an offer on, they’ll give you a list of homes that are similar to the one you are considering, that have sold most recently. In this example, the prices people paid for those homes will range in price from say, $125,000 to $137,500. This means that if the “Market Climate” is good for sellers, the seller will be expecting to get near, or over $137,500. Why would a seller expect to get over what the market says a home is worth?
How Market Climate affects home values.
Market Climate is an expression that means, “Who is in control of the real estate market?” There are two controlling sides here, the buyers and the sellers. Therefore, we have “Buyer’s Markets,” and “Seller’s Markets.” (There is actually a “transition period” between these two that is very short and usually imperceptible called “Stability”.)
When you’re a buyer looking for a home in a market where there are many more buyers than there are homes for sale, and competition is fierce, this is called a Seller’s Market. The seller is on control. When the market is flooded with homes for sale, and buyers are few, a buyer is in home-buying-heaven: the Buyer’s Market. Market climate at the time of this writing is definitely a strong Seller’s Market. In a Seller’s Market, there are likely to be multiple buyers bidding on a single home, and someone is going to offer more than what the seller is asking. This places pressure on prices, causing them to rise.
Wise Buyer Pricing Strategy
The first thing that you must remember when the buyer market is competitive is that you probably will not be able to buy a home at the top of your price range. If you have $150,000 cash, or a bank says they’ll lend you the $150,000 to buy a home, should you go look at and bid on homes that are priced at $150,000? Why would you? Chances are, there are at least 5 other people just like you that are interested in that same home, and at least one of them is likely to bid more than the asking price, and then you’re stuck. You’ve got nowhere to go. The first part of the strategy involves looking at homes that are priced below your spending limit. This will get you into negotiations, and some wiggle room for when you get there.
The second part of the strategy is to carefully balance the negotiations from this point. Remember the golden rule of pricing: a house is worth what someone is willing to pay the owner in cash. If you’re paying cash, you can pay whatever you want. But, if you’re getting a loan, a problem can come up: you may be willing to pay the owner X, but the bank you’re borrowing the money from may not be. This is where the appraiser comes in. The appraiser’s job is to tell the bank if the house is worth the price you are offering. Remember those homes that sold from our previous example for between $125,000 and $137,000? The appraiser will look at that data, and make a determination. Can he tell the bank that the home is worth more than the current sold comparables indicate? Yes, he can, but only by a little. What is a safe range in this example? I personally would not advise a client to offer more than $140,000, and would advise them of the dangers of doing so.
What is the danger? The danger is that the appraiser comes back with a figure of $138,500. Does the seller want the $140,000 you offered? Absolutely, but they can’t get it. You are under no obligation to pay what you offered, but unless the seller agrees to lower the price to the appraised value, the deal falls apart.
So, when pricing your offer, look carefully with your agent at the comparable sales, and determine a safe range for your offer, keeping in mind the appraisal issue. If you’re paying cash, your strategy will be slightly different. If you are a cash buyer seeking guidance on your offers on investments, give us a call for alternate strategies.
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