How Much Should I Offer for the House?

Reader Question: "We are in the process of shopping for a home, and I have some questions about the purchase offer. When making an offer to buy a house, how do we decide how much to offer? I've heard you should start a certain percentage below the asking price. Is this true?"

Starting below the asking price could cost you the home, if you're in a situation with multiple offers. Or it could land you the house while saving you money in the process. Whether or not it's a smart strategy will depend on the asking price itself. Only you can decide how much to offer for a house. The best I can do is tell you how to come up with that number. So let's talk about the importance of pricing research when shopping for a home.

Is the Asking Price Reasonable?

This is the first question you need to ask yourself. Because the answer to this question will determine (or should determine) how you handle the offer. It's important to realize that many sellers overprice their homes when listing them for sale. This is especially true in 2011, because home prices in most areas have fallen in recent years. That's why it's called an "asking" price.

If the house is priced above comps, then you could justify offering less than the asking price. On the other hand, if it's priced below comps, undercutting the asking price would be a risky move -- and you might lose the home to another buyer. Before you can decide how much to offer when buying a house, you need to know how the property is priced by local market standards.

Using Comparable Sales to Make an Offer

So the question is, how do you go about this? How do you know when a home is priced realistically, and when it's overpriced? To do this, you'll need to find out how much other homes have sold for in the area. In particular, you want to find out what similar homes are selling for in the area. This is what real estate agents refer to as comps, which is short for comparable sales. In fact, your real estate agent should pull up a list of comparable sales before you make an offer. This will help you decide how much to offer for the house, based on current market data.

The key to using comps is to find homes that have sold recently and in the same area as where you're buying. A home that sold six months ago five miles away is not very useful as a comp. But a similar home that sold two weeks ago in the same neighborhood you're considering is an excellent comp. In fact, if you can gather data from three or more of these sales, you have everything you need to make an offer on the house.

Is the House Unique in Some Way?

Next, you need to consider anything that adds value to the house you're considering. Does it have certain features that make it more attractive than the comps? If so, you'll probably have to offer more than the average sale price from the comps. This is why it's a good idea to take notes about a certain home, when you're touring it for the first time. Write down all of the unique features of the home -- the lot, the view, kitchen upgrades, outdoor kitchen, pool, etc. This will help you decide how much to offer for a house, and whether or not you need to offer more than the average of the comps.

Example: Let's say you have three comparable sales with "builder-grade" kitchens. But the house you want to buy has a completely renovated kitchen. It has high-end cabinets and granite counters, a Wolf range with hood, a wine cooler, recessed and pendant lighting ... you name it. This will obviously add value to the home. So the homeowner could justify a higher asking price than the average of those comps (the homes with mediocre kitchens). The same goes for a nicer view, a better lot, a swimming pool, and other value-added features of the home.

So let's recap. When making an offer to buy a house, you need to understand that it's called an "asking price" for a reason. It's what the seller is asking to get. But it may not reflect the true market value of the home in the current real estate market. So you (and your real estate agent) need to do some homework. Start by viewing the property and making note of what it has to offer. Then pull up some comparable sales for the area. Consider the "target house" against the comps, factoring in the unique features it may offer. This is how you come up with a reasonable offer amount.

Putting the Offer on Paper

So you've done your research, and you decided how much to offer for the home. What's next? Now you'll need to write up a purchase offer for the property. In most cases, this means using a standard form and simply filling in the blanks. You need to include the following items in your offer:

• The amount you're offering
• The amount of deposit you're putting down
• Financing contingency (in case your mortgage falls through)
• Home inspection contingency
• Who is paying closing costs
• Proposed closing date

You might put additional items into your offer. These are just some of the most common components. Here again, you'll need to pick your agent's brain and fill in all of the appropriate fields in the paperwork.

Making an offer to buy a house can be a nerve-wracking experience, especially if you're a first-time buyer. But if you follow the steps outlined above and trust your own common sense, you'll know exactly how much to offer.