6 Common Mistakes When Making an Offer On a House
In Making an Offer, by Anthony Bayardelle
Mistake #1: Not Consulting Comparables
A house isn’t bought or sold in a vacuum.
“Comparables” are other houses of similar size, location, and features in the same neighborhood or geographic area as your target house. When you find a house you love, take a look at other similar houses in the area to see what the “typical” price for that type of house is.
The relationship between a house’s listing price and those of other similar houses in the area is going to determine how fast it sells and, relatedly, how much buying power your offer will have.
For example, if you’re looking to place an offer on a house whose listing price is $375,000, look at other houses currently for sale in that neighborhood (if there are any) or general area (if there aren’t any in that specific neighborhood). Look specifically at the listing prices for homes with relatively similar square footage, number of bedrooms, level of upkeep, lot size, and other significant features (great view, backyard pool, etc.). If other similar homes are selling for $325,000 then you would have a bit of room for negotiating. On the other hand, if other similar homes are generally listed for $400,000 or above, putting in a bid lower than the asking price could cost you the house.
Mistake #2: Not Considering Market Conditions
Another major consideration is whether you are currently in a “buyer’s market” or a “seller’s market”. In the simplest of terms, a buyer’s market means that, at the moment, there are more houses for sale than there are people looking to buy houses, giving the potential homebuyer the advantage. A seller’s market is just the opposite, where potential buyers outnumber homes for sale, giving sellers the advantage.
In a buyer’s market, some experts recommend submitting offers around 10% under the asking price, whereas in a seller’s market it might not be a good idea to go under the listing price at all.
In order to figure out the state of your current market, you can do some good, old-fashioned Googling, but it’s a much safer bet to talk to an experienced realtor who works in the geographic area you’re looking in. Yes, market trends are usually pretty widespread, but they do occasionally vary by individual city or even neighborhood. Talking to someone who spends all day working in your target market is your quickest road to a good answer.
Mistake #3: Not Investigating Specifics for the Individual Property
While market conditions and comparables are broad factors, there are going to be factors specific just to the house you’re looking for. Keep a careful eye out for individual factors that might affect your leverage or buying power.
Days on the Market (DOM)
Did the house just go on the market last weekend or has it been sitting there for a few months? This could have a serious impact on your negotiating power. Check the average number of days on the market for a house in that area (your realtor should know this) and compare how long the house has been up for sale.
Competition for the House
It’s common logic that a buyer’s power is much higher when they’re the only one interested than when the seller is picking between a handful of different offers. This isn’t always something you can know for sure (it depends on the transparency of the selling agent), but it’s always good to check to see how much interest there is in the house you’re considering.
A slightly higher offer might be wise if you’re competing against other buyers, while you have a little more freedom to negotiate if you’re the only one at the metaphorical table.
Why Is the House for Sale?
This might seem like a silly question, but it actually makes a huge difference. If someone is moving because their spouse got an out of state job that starts in 15 days, they’re going to be pretty motivated to make a quick sale. Similarly, if someone has already purchased another home, every month their old home doesn’t sell is another month of paying two mortgages. On the other hand, if someone is putting their house on the market to see if there are any good offers but isn’t really sure they need to move, they will be much less likely to accept an unfavorable offer.
Before you make your first offer, consider the situation, motivations, and priorities of the people selling the house.
Specifics of the House
Each house has individual pros and cons. If a house has a view that’s far better than anything else in that neighborhood, it’s going to have a lot more competition and (probably) end up selling for higher. This might not be represented on a market conditions or comparative market analysis (sometimes these reports are very number-based and stick to things like square footage or number of bedrooms), but it’s definitely a huge factor.
On the other side of the spectrum, check to make sure there aren’t any maintenance issues or other problems with the house that could cost you later on. If you notice a termite infestation, plumbing issues, or something that will need to be replaced, it could be an excellent justification for a slightly lower offer. Look at things like plumbing, electricity, air conditioning units, the HVAC system, appliances, flooring, roofing, etc. The more vigilantly you inspect the house, the more leverage you’ll have when it comes to negotiating.
Mistake #4: Incorrectly Weighing Intangibles
“Intangibles” is the fancy word for things you can’t count, things that don’t rely on reason.
The relationship of a house’s listing price in comparison to the house that just sold up the street is tangible. You can calculate it and put it down on a spreadsheet. The fact that your wife started crying tears of joy when she saw the view from the kitchen or the fact that your husband has started having recurring dreams about organizing his potential new garage is intangible.
However, just because something isn’t measurable or rational doesn’t mean it’s not important. The difference between smart buyers and impulse buyers is that they identify their intangibles and strategically weigh them against the more concrete factors in their decision.
For example, say you fell head over heels in love with a house. An impulse buyer might be tempted to put in a high offer just to make sure they don’t lose the house, completely neglecting things like comparables or market conditions.
It’s a great thing that you found a house you love, but try to keep perspective and weigh that as one of many factors. If you’re currently in a buyer’s market and the house is listed higher than other similar houses, and it’s been on the market for a few months, it is objectively more logical to put in a low bid at first.
But what if you really love it? If you are want to put more weight on your gut feeling that this is the “right” house, talk to your realtor about what a rational, logical offer would be, and then tack on an extra $10,000 (or whatever amount feels right to you) to represent your emotional stake in the deal.
You can’t (and shouldn’t) remove emotions completely from the home buying process. This is, after all, where you’ll be living for the foreseeable future. Just make sure you keep a leash on your emotions so they don’t end up costing you money or the deal as a whole.
Mistake #5: Not Evaluating Your Own Leverage
Another factor which often comes to play when making an offer on a house is the individual things you bring to the table. For instance, if you’re an all-cash buyer, you have a serious leg up on anyone with a less secure financial situation. (Sellers feel much more confident when they don’t have to worry the deal is going to fall apart due to lack of funds.)
One really important thing you can do is get prequalified for a loan. If you come to the negotiating table with a bank letter saying you already have a loan for X amount, your offer will be taken that much more seriously than someone whose financial buying power has yet to be proven.
Mistake #6: Not Utilizing Contingencies
The final factor to consider when making an offer on a house is whether you want to include contingencies in your offer.
A contingency is a condition that needs to be met for your offer to apply. For example, some people who try to buy a new house before they sell their old house include a “home-close contingency”, saying that their offer isn’t valid if they don’t end up selling their old house.
However, contingencies can be made on a variety of reasons, from financial events to maintenance concerns with the new house. A common contingency is that the new house has to pass a maintenance inspection for the offer to be valid.
In general, sellers aren’t too fond of contingencies. This makes sense. The more things that could cause them to lose the deal, the less secure the sale is. However, the correct use of contingencies can be a very useful tool to safeguard you as a buyer.
Talk to your realtor about types of contingencies and whether or not it’s a “smart” move to include them in your offer.
There are a mind-boggling number of things to consider when making an offer on a house, but if you stay organized and logical it shouldn’t be too scary of a process. Once you find a house you want to put an offer on, sit with your realtor and discuss these six points. Try starting with the listing price and going through the list to see if each point indicates you should put a higher or lower offer down.
Overall, just try to keep a “long game” perspective. Acknowledge that, if for some reason the deal falls through, there are other houses on the market that will make you just as happy. Keep your emotions in check (as much as possible) and rely on market research, but don’t neglect the intangibles.
Finally, don’t be afraid to ask your realtor questions or solicit advice. That’s literally what they’re there for.