What's the best way to decide how much to offer for a house?
Once you've found a house you like and have the financial resources to buy it, you must decide how much to offer. In putting together your actual offer, consider the following factors:
The advertised price of the house. Treat this as only a rough estimate of what the seller would like to receive, and recognize that different sellers price houses very differently. Some sellers deliberately overprice, others ask for pretty close to what they hope to get and a few (often the cleverest) underprice their houses in the hope that potential buyers will compete and overbid.
What you can afford. See "How much house can you afford?" in Qualifying For a Home Loan for advice on this one. When figuring this out, be sure to factor in your share of the closing costs, which will be about 2%-5% of the purchase price.
Prices for comparable houses. Before making an offer to purchase, you should know the selling prices of nearby houses similar to the one you're interested in buying. For reliable comparable prices (called "comps" in the real estate trade), keep the following guidelines in mind:
- A comparable sale should have occurred within six months (the more recent, however, the better). In a market where prices fluctuate fairly fast, comps should be on sale within the last month or so.
- A comparable sale should be for a house quite similar to the one you're interested in -- in terms of age, size, and type and number of rooms.
- A comparable sale should be within six to ten blocks of the house you want to buy.
Local real estate brokers will have good comparable sales data, and you can also find useful information online. See Comparing Sales Prices Online, below.
Whether the local real estate market is hot (prices are going up) or cold (prices are dropping). In competitive areas, homes sell quickly -- often for 10%, 20% or more above the asking price -- as bidding wars erupt among frenzied buyers. In a cold market, however, you'll have more room to negotiate with the seller and may get a bargain.
The seller's needs. Remember that price alone is not the only consideration for sellers. Your ability to close the deal quickly -- for example, by getting loan approval or lining up inspections in advance of presenting your offer -- is often crucial, especially in hot markets. Finally, your flexibility and sensitivity to the seller's needs -- whether it's extending the closing date for a seller who can't move for a few months or paying for repairs -- may make or break your offer.
Whether the house is uniquely valuable to you. A modest house listed at a reasonable price may be a bargain if you have three kids, the house is in an excellent school district and the lot is large enough to add on a few rooms. The same house may be overpriced, however, for a couple not planning to have children. Don't get so carried away with judging objective market considerations that you forget your personal needs.
How much you're willing to pay. While tactical considerations -- the temperature of the market, the seller's needs -- are important, nothing should overweigh your own honest assessment of how much you are willing to fork over.
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When making an offer to buy a house, what's the best way to protect myself from a deal that might not work out?
Real estate offers almost always contain contingencies -- events that must happen within a certain amount of time (such as 30 days) or else the deal won't become final. For example, you may want to make your offer contingent on your qualifying for financing, the house passing certain physical inspections (see House Inspections) or even your ability to sell your existing house first. Be aware, however, that the more contingencies you place in an offer, the less likely the seller is to accept it.
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When making an offer to buy a house, what are useful strategies for making an offer in a competitive market?
In real estate markets where demand is high, homes sell quickly -- often for 10%, 20% or more above the asking price -- as bidding wars erupt among frenzied buyers. If you're buying in a competitive area, such as San Francisco, it's crucial to develop a bidding strategy.
For example, you might bid on several houses at once. Legally, this isn't a problem as long as you don't find yourself with two offers outstanding simultaneously and neither hedged with significant contingencies. If you have two offers accepted at once, you'll need to formally revoke the one you don't want.
Another option is to prepare several bids at different prices. If you're lucky, you'll know beforehand how many people will be bidding on a particular house. If so, prepare your bid accordingly. Present the lowest bid if you're the only one making an offer, the next highest if there are only one or two other people making an offer, and your highest price if there are three or more bidders.
Think twice before you get caught in a bidding war. If you decide that a house is so attractively priced that you want to try to preempt other bidders by making the highest offer, it's crucial that you set a limit -- for example, $50,000 over the asking price and not a penny more. This way, you won't exceed your budget and might actually save money if the house was underpriced in the first place. To force a quick decision, you should give the seller only a day or two to accept, reject or counter your offer.
Finally, remember that price alone is not the only consideration for sellers. Your ability to close the deal quickly or extend the closing date for a seller who can't move for a few months may make or break your offer.
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Does a house seller need to take the first offer that comes in?
Whether it's the only offer, or the first of many, a seller does not need to accept any particular offer. If a bid is way out of line pricewise, the seller is likely to reject the offer on the spot. But even very attractive offers are rarely accepted as written. More typically, the seller will respond with a written counteroffer accepting some, even possibly most, of the offer terms, but proposing certain changes. Most counteroffers correspond to these provisions of an offer:
- price -- the seller wants more money
- occupancy -- the seller needs more time to move out
- buyer's sale of current house -- the seller doesn't want to wait for this to occur
- inspections -- the seller wants the buyer to schedule them more quickly.
The buyer may accept the counteroffer, reject it or present a counter counteroffer. Then, the negotiations will continue until either a deal or an impasse is reached.
A contract is formed when either the seller or the buyer accepts all of the terms of the other's offer or counteroffer in writing within the time allowed.
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What is a house closing?
The final transfer of the house to the buyer. It occurs after both the seller and the buyer have met all the terms of the contract and the deed is recorded. (See Deeds.) Closing also refers to the time when the transfer will occur, such as "the closing on my house will happen on January 27 at 10:00 a.m."
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Do I need an attorney for a house closing?
This varies depending on state law and local custom. In some states, such as California, attorneys are not typically involved in residential property sales, and an escrow or title company handles the entire closing process. In many other states, particularly in the eastern part of the country, attorneys (for both buyer and seller) have a more active role in all parts of the house transaction, and handle all the details of offer contracts and house closings. Check with your state department of real estate or your real estate broker for advice. See State Real Estate Departments and Commissions.
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