The Sales Price

TLDR: Researching what local properties are actually selling for (not listed for) will prevent you from overpaying since sellers tend to overprice their homes. 

It’s all Relative... 

Let's say you're looking at houses online and you see a three bedroom, two bathroom single family house for sale at $250,000. That's great, because you're pre-approved for $300,000! However, what you won't know unless you're familiar with the market is that three bedroom, two bathroom houses in that area are actually selling closer to $215,000. Unless the one listed for $250,000 is extraordinarily nice, the seller has likely set the asking price too high. Don't look at houses in a vacuum–know your market. 

Know Your Market

There are two reasons all homebuyers should educate themselves on their local market before making an offer. 

To do this, you should research similar properties that have sold in your area, or comparables–"comps", as they're known in the industry. Try to find properties in the immediate vicinity (the same neighborhood, if possible) that closely resemble the property you're interested in. 

The biggest factors in finding accurate comps are:

If the home you're considering purchasing is a 3 bedroom, 2 bathroom (3B2B) single family home, you should look for closed sales of other single family 3B2B properties. 

Other Research Considerations

Here are some helpful questions to ask when researching your market:

Occasionally you may experience some difficulty locating exact replicas of the number of beds/baths that you're seeking in the immediate vicinity, or maybe the property you're interested in has an unusual number of baths–like 3.5 (that means three full bathrooms and a half bathroom). If that is the case, you have a few options: widen the search criteria both by increasing the location search and by finding similar, but not exact matches, of property qualifications.

If you live in a location where houses are metaphorically flying off the shelves (as in, they go under contract within a few days), it's likely that you'll end up paying at or above the asking price. If, on the other hand, you live in an area where it takes 30-90 days to sell a house and the house you're interested in has been on the market for 6 months, it's likely that the seller has overpriced the house and may be willing to accept a lower offer.

Beware of Seller Bias

While we try to set expectations for sellers about how to set the price, most sellers are unable to see past the rusty faucets and (sometimes atrocious) wallpaper that exists in their homes. To you, this state of disrepair means you’ll be spending precious time and money on things that should have been fixed long ago, but to the sellers, this was the home in which they made their memories. The faucets are reminiscent of their young children growing old enough to reach, use, and abuse that sink. That flowery wallpaper in the master bedroom could have been the owners’ first home renovation project together right after they got married fifty years ago. They’re not pricing it this way with the intention of gouging you (well, maybe they are, but we’ll assume the best), but because they genuinely see their home as precious and that valuable.

How do I know what a house is worth?

A house is worth what someone is willing to pay for it! (How's that for an unsatisfying answer?) However, the bank is only willing to lend what an appraiser deems it worth. Comparing the property you're interested in to other properties in the area is how the professionals determine value, and you can gauge value this way as well.

Check out the Appraisal Contingency section for more information on how to determine the value of a property. 

How much should I offer on a house?

After you've researched what houses are going for in an area and what the likely value of the house is, you need to decide how much you actually want to offer on the house, which will depend mainly on how badly you want the house. If your market is competitive, you'll likely have to offer a price at or above asking right after the house hits the market, sometimes foregoing contingencies and any seller assistance. If you're in a less competitive market and the property has been on the market for a little while, you will likely get away with starting your negotiations below the asking price, or offering the seller's asking price but with a large seller subsidy and all of the contingencies you'd prefer to have.

Imagine This

You're looking for a used dresser. You pull up Facebook Marketplace and see a few options. Would you feel comfortable offering $75 on a used dresser advertised at $100? Maybe you’d even dare to ask if they'd accept $50! Conversely, we struggle to offer significantly less than the asking price on a house, but what if the seller says yes? When a seller lists their house, they tend to list at a higher price than what they'll actually accept since they’re forecasting that buyers will offer less. Offering $220,000 on a house listed for $250,000 is reasonable if other similar properties are selling for $230,000. Researching your market will aid in crafting a reasonable offer.

What happens if I put in an offer that is too high?

Assuming you're getting a mortgage, your safety net will be an appraisal contingency, conducted by an appraiser who is hired by the lender to evaluate the value of the property. Because the property is a bank's collateral, the bank sends out a neutral third party to ensure the property is worth the price that you (and they) are paying for it. Even if you've signed a contract, your financing contingency will ensure that you're refunded your earnest money deposit if you decide to terminate the contract because the appraisal came back lower than the agreed upon price.

If you're not getting financing because you're buying in cash, it's still a good idea to get both an inspection and an appraisal done for your own protection (and including contingencies for each in the contract). Inspections and appraisals are typically $500 each, and if that can prevent you from paying $10,000 (or $50,000!) too much, we think it’s worth the cost.

Factoring in Maintenance and Repairs

If you plan to make an offer on a home that needs some repairs, you should not only think about how much money it will cost you to make those repairs, but also factor in your time to either do them yourself or find a contractor and schedule them. There are pros and cons to buying a turn-key property as well as to buying a fixer upper. If you’re considering a $300,000 house in pristine condition or a $270,000 house that needs $30,000 in repairs, with the latter you’ll have to put forth the time and effort in assembling a crew (or researching the project and getting the materials yourself) to complete the work. On the upside, you’ll have the ability to construct your personal dream home.

Does anyone get excited about an advertised “Two year old roof,” or a “Recently replaced HVAC system!”? No, typically not (we certainly don’t). We think of them as things that are simply expected to be functional, or else a credit/discount should be provided for the remedy. The roof shouldn’t be leaking and the heating, venting, and air conditioning (HVAC) system should be in working order. While having a new HVAC system and roof should be seen as a plus–these are costly things to repair–they are not the features that wow potential buyers; the expectation is that they work, or else you'll need to factor in a steep discount when making your offer to the seller to account for the inevitable replacement of these items. When in doubt, ask your inspector for their opinion on the longevity.

What does the seller mean when they ask for “Highest and Best”? 

A seller will usually ask for “Highest and Best” in a competitive market when they’ve got multiple offers on the table. It’s their way of asking, “Is that the best you’ve got?” After receiving the final offers from all buyers, the seller will often accept the best offer outright without negotiating with other offerors. When they ask for “Highest and Best,” it’s time to put your best foot forward since you likely won’t get a chance to negotiate any further.