Making an Offer On a House - Video Lesson

So, you've found the right house, and now you're ready to make an offer to buy it. This can be a nerve-wracking part of the process, especially for first-time home buyers. But it doesn't have to be. The key to making an offer on a house is to study recent sales trends in the area. And that's exactly what this video will teach you.

Transcript from this video: Welcome to another video lesson from the Home Buying Institute. Today we're going to talk about how to make an offer when buying a home. Let's start with some of the key factors you need to keep in mind. The first factor is that the asking price is called an asking price for a reason. That's what the seller is asking for, but it doesn't necessarily mean that's what the house is worth.

Asking Price vs. True Value

What is the home worth? Is it worth what the seller is asking for? In many cases it's not. It's common for a seller to ask more than the house is worth. Sometimes they do their pricing based on how much they need to get out of the deal, in order to pay off their mortgage. Sometimes they price the home based on what they paid for it a few years ago.

But as you know, home values between 2008 and 2011 have plummeted in most parts of the U.S. So what they paid a few years ago may not reflect what the home is worth now, in the current market. So how do you make an offer on a house using current sales trends? You do this by using comps...

Using Comps, or Comparable Sales

The next concept is something called comps. This is short for comparable sales. When you're looking at a home, the best way to evaluate the seller's asking price is to look at comparable sales in the area. These are similar homes that have recently sold in the same area where you're buying.

You've noticed some key factors of a good comp already. First, I said they should be similar homes, as much as possible. It doesn't make sense looking at recent sales if they're totally different in size and style from the house you're considering. The more similar the homes are -- the more comparable they are -- the better they are to use as comps, because they give you an accurate reflection of what the current market is doing and what that house is worth. You're looking at recent sales, and this will help support the offer you are making.

Making an Offer to Buy the House

So what steps do you take when you make an offer on a house? You look at the comps. You look at what might be unique about this property. You've got some values from the comparable sales, but is the target house worth more because it has some unique features? Does it have a better view or a swimming pool? You're going to factor all of these things into the equation, and then you're going to make an offer to the seller. They are going to do one of the three things. They're going to accept your offer, reject it, or make a counteroffer.

What do you do if you get a counteroffer from the seller? First, you need to know how high you're willing to go when making an offer on the house. What's the most you're willing to pay for the home? Generally speaking, you don't want to offer more than the true value of the home, because then you're just paying more for the home than it's worth.

If the seller is unreasonable and keeps the asking price higher than the current value (and it does happen, some sellers are delusional), it's okay to walk away from the deal. Remember, there are other homes out there for you. You don't want to fall in love with a home to the point that you're willing to overpay for it, because then you're in a negative-equity situation from the beginning.

Does Your Purchase Offer Have Contingencies?

When making an offer on a house, you will have the opportunity to include certain contingencies. The dictionary definition of a contingency is "a conditional response plan made in preparation for various future circumstances" -- and that's applicable to this situation as well. You are planning for certain things that might happen down the road.

For example, what if the home inspector uncovers a major flaw you're unwilling to accept? You would want the option to back out of the deal, right? Of course you would. That's why you should include a home inspection contingency when you make an offer on a house. The same goes for financing. What if you can't get financing from your lender, for whatever reason? You would want an exit strategy from the purchase contract. Ask your real estate agent about these contingencies. He or she can explain them in more detail.

So let's recap some of the key concepts from this video.

The asking price is called an asking price for a reason. It's what the seller is asking for, but it's not necessarily what the house is worth. If property values in the area have dropped, and the sellers are using the price they paid years ago as a pricing model, then it's probably overpriced.

How do you determine the real value of the home, the true market value? You do this by looking at comparable sales in the area. Try to find similar homes that have sold in the last few months, in the area where you want to buy. Factor in the upgrades and unique features of the target house. This will help you evaluate the asking price before making an offer on the house.

And don't be afraid to walk away if the price is too high!