A purchase offer will include many different terms, but by far the most important is the purchase price! In this blog post, we'll delve into the significance of the offer price and why it's essential to strike the right balance to ensure a successful transaction.
How To Determine Offer Price
The most common mistake we at HouseHack Seattle see buyers and sellers make is assuming that a property's list price is equal to the property's market value, and that buying a property for less than its list price means you got a good deal, while buying a property for more than its list price means you got a bad deal.
The reality is that list price has nothing to do with market value, and is simply a number made up by the seller and the listing agent. In some listings the list price is far below market value, either because the seller and listing agent don't actually know what their property is worth, or they are intentionally pricing it lower to attract multiple offers and a bidding war. The irony of a low priced listing is that if the seller is waiting for an offer review date to look at all offers, the low priced listings will often sell for MORE than a listing that is "correctly priced" because of the added interest and excitement the low "teaser price" creates.
In other listings the property is listed far above market value, usually because the seller thinks their property is worth more than it is and the listing agent agrees as a strategy to try to win the listing. If you're a stubborn seller and you want $900k for your property, which listing agent are you going to pick, the agent that correctly tells you that your property isn't worth $900k, or the agent that (incorrectly!) agrees with you that the property is worth $900k and is willing to list it there?
So, if the list price doesn't equal the market value, how do we determine market value? Most agents use 1 approach to determine market value, but here at HouseHack Seattle we use two - comparative market analysis (comps) and rental approach to value (ROI). Through a combination of looking at what the property would rent for and looking at what similar properties in that neighborhood have sold for in the past we can give you a good idea of what the value of this property would be. So, what happens if you offer to much for a property, or too little?
The Dangers of Bidding Too High:
In a hot market it is always tempting to offer more than your competition to win a property, but there are some major downsides to doing so. You may:
- Overextend your budget: Committing to an offer price beyond your financial comfort zone can put unnecessary strain on your finances in the long run.
- Risk a low appraisal: If you're using a mortgage to purchase the property, the bank has to agree that the property is worth what you're offering on it. This is called the "appraisal", and a low appraisal can cause problems for the buyer and a seller in the transaction. If your appraisal comes in low either the buyer will need to come up with additional cash to close the transaction, or the seller will need to offer to lower the purchase price. If neither party budges the transaction will be canceled, and earnest money may be refunded to the buyer if the buyer offered with a contingency protecting them from a lower appraisal.
The Risks of Bidding Too Low:
On the other hand, submitting an offer that is too low can alienate the seller and potentially lead to your offer being dismissed outright. Bidding too low may:
- Offend the seller: An unreasonably low offer could be perceived as disrespectful or lacking genuine interest in the property.
- Miss out on the opportunity: If another buyer submits a more competitive offer, you might lose the chance to purchase the property altogether.
The Escalation Clause: A Middle Ground
To address the concerns of both bidding too high and too low, we offer our clients the option to include an escalation clause in their offer to purchase. An escalation clause allows you to submit a lower initial offer while indicating your willingness to increase your offer up to a predetermined maximum amount if the seller receives competing offers. Including an escalation clause shows the seller that you are serious about acquiring the property and willing to be flexible in your negotiations. It can give you a competitive edge while still ensuring that you don't overpay for the property. Because an escalation clause shows the seller what you are willing to pay for the property, we typically only use it during offer reviews where we expect the seller to receive multiple offers.
Partner with HouseHack Seattle for Informed Offers
At HouseHack Seattle, we believe in empowering our clients with the knowledge and tools necessary to make well-informed decisions throughout the home buying process. Our experienced real estate agents will work closely with you to assess market trends, property values, and the seller's circumstances, helping you craft an offer that strikes the right balance between a competitive price and a prudent investment.
Remember, offering the right price is about finding a fair compromise between your budget and the property's worth. If you're ready to embark on your home buying journey, reach out to our team of experts today.
Happy house hunting!
