Finally, after reviewing listings and going on showings, you have found the place you want to call your own and are prepared to submit an offer.
How to Determine Your Opening Offer
The goal for an opening offer is one of two results: an accepted offer or a counter offer (sign-back) from the seller.
First, we conduct a comparative market analysis (CMA) in order to see what comparable properties have sold for in the past six months.
In a recreational or rural area with many variables, this can be much tougher than in an urban environment where properties have similar characteristics and there is a higher volume of recent sales, but the exercise has value—you want to determine if the property’s listing price is fair.
We will review the market’s average sale price to listing price percentage. i.e. Properties in our market generally have an average of 95%.
For a property with a properly reasonable price (based on CMA above) of $500,000, this translates to $475,000.
The closer you get to this magic 95%, the better chance you have of completing the transaction.
Note: 95% is an average. This could fluctuate depending on market conditions and property type. For example, properties in the $200,00 range are currently in high demand and well-priced properties are selling quickly at, or slightly over, list price.
Know Your Budget
Have you been pre-approved by a lender? If, in the $500,000 example above, your lender will only pre-approve you for $400,000, and you can go no higher, perhaps you should re-consider your search criteria to find properties within your budget.
Think about how much you will be comfortable spending without regret. Be confident with a number that you are not willing to go beyond and can walk away from the transaction. Do not let your emotions run away with you. If you are buying a property for the long term (5-10+ years) what is the true cost of carrying an additional $10,000?
Keep The Negotiating Power in Your Court
We are all working toward a common goal. Successful negotiations are not adversarial, they work toward a win-win for both you and the seller.
The best way to achieve this is to submit a strong opening offer.
“But shouldn’t I open with a lowball offer and start the bargaining process?”
No. Real estate negotiations are not yard sales.
It may make sense to offer $3 for a table lamp you see priced at $10 and haggle until you come to an agreement for $5. But we are not at a yard sale.
Selling property is another matter. The seller has a great deal more invested financially and in most cases does not need to jump at any offer. By submitting a strong opening offer (90% range), you indicate your seriousness in wanting to negotiate and complete the transaction.
Furthermore, a strong opening offer places the negotiation power in your court.
The seller may feel pressure to accept or give you a reasonable counter offer or risk losing the sale altogether.
Also, a strong opening offer means subsequent counter offers do not need to be huge jumps in price to come to an agreement.
Sellers may consider a lowball offers as an insult and may not even trigger a counter offer. In which case, if you are serious, you will be forced to re-submit a better second offer. The seller now holds the negotiating power and may dig in their heels on price given the earlier bad experience.
Structural Deficiencies vs. Cosmetic Updating
Many buyers see the potential in a property, but look for deficiencies in an effort to justify submitting a lower opening offer. Fair practice but not if the property is priced accordingly and the updates are within reason.
As an example, a new roof for a house with worn shingles could cost approximately $5,000 and it would be reasonable to deduct that amount from the purchase price in this case of a structural deficiency. However, if the kitchen is functional but outdated, the seller is not obligated to accept a reduced price simply to finance your wish list of cosmetic updates. As a seller, would you be willing to pay for the buyers expensive tastes by accepting their low offer?
Everything is Negotiable
Purchase price is not the only factor in the negotiation. If your offer price is a bit lacklustre, look for variables such as closing dates, inclusions and conditions to make the offer more appealing. While price is usually the determining factor in most transactions, your ability to meet a seller’s closing date has value.
What are your conditions? Do you need to sell your property, or require financing? A home inspection or insurance? These are all valid conditions and you should include them if needed but keep in mind a cleaner offer —that is, one with less conditions, is more appealing to sellers—especially in a multiple offer situation.
However, generally speaking successful transactions are those where the seller and buyer can agree on price and both emerge from the negotiation in a win-win scenario.