How does one set an offer price when buying a home? Go in lower than asking price? How much lower? Or maybe the market dictates one to offer over list price. There is no set calculation or method to determine how to set an offer price. The process of offering involves some research, comparisons, experience and motivation that will vary with each situation.
The following pointers help to determine and set an offer price:
Comparable Sales or CMA
When selling a home, a realtor creates a CMA, a Comparative Market Analysis. When buying a home, a realtor does, in essence, the same, with the same goal; determining the present market value of the property.
Only sold data tells the real value that a buyer is willing to pay for a home. So, sold prices of similar homes are gathered for the purpose of buying a home. Most real estate transactions are recorded in the MLS which gives all necessary data to determine a fair market value of a property.
Compare sold homes with the property
No property is the same, so comparing sold properties with the subject property is important. Is the home larger or smaller? Does it have a different number of bedrooms? What is the location in respect to the other sold properties? Is the basement developed or undeveloped when compared to the sold properties? How is the parking situation? A single, a double or no garage? Many different factors carry a certain value.
The property conditions
Some items are easy to compare; they are fairly factual: sq footage, number of bedrooms, basement development, to name a few. Other property features are valued based more on experience and perception. For example, location is more subjective. The fact that a home backs onto a green space has a different value from one buyer to another. Also, upgrades in a home can have a different value for different buyers. The kitchen in a home can be brand new, but if it is a ‘purple’ kitchen, or any disliked color, it won’t add much or any value.
Market Conditions
Knowing the current type of market is very important when a buyer wants to set an offer price. How do you know what kind of real estate market Calgary is in? Of course, a realtor knows the answer. Besides, the Calgary Real Estate Board offers monthly updates about the real estate market of Calgary and surrounding towns such as Okotoks, Cochrane and Airdrie. These updates are accompanied with statistics. Calgary has 4 quadrants, but the real estate board divided Calgary up into 8 zones. Every zone or area has its own statistics for 4 sectors; single family homes detached, semi-detached, townhouses and apartments. The real estate board also publishes the statistics for every single community in Calgary.
Don’t follow the news
The newspaper writes a lot about the real estate market. Yet, in our opinion, and that of many fellow realtors, there is one big caveat with the public news. Most newspapers write about the real estate market in general. Toronto and Vancouver are much different markets and cannot compare to Calgary’s real estate market. Yet, when newspaper articles talk about real estate, these big cities are included in a general statistic. Most often, this gives a very skewed vision of the real estate market in Calgary. Rather, rely on the knowledge of a local realtor and the updates from the Calgary Real Estate Board.
The different types of markets in real estate
- Seller’s Market
A seller’s market is considered a “hot” market. This type of market is created when demand is greater than supply. The number of buyers exceeds the number of homes on the market. As a result, these homes usually sell very quickly, and there are often multiple offers. Prices may increase in a seller’s market and homes may sell above the asking price. The Covid market is a good example of a seller’s market. Homes sold fast, often well over list price and often within days.
- Buyer’s Market
A buyer’s market is a slower market. This type of market occurs when supply is greater than demand, the number of homes exceeding the number of buyers. Properties are more likely to stay on the market for a longer period of time. Fewer offers will come in, and with less frequency. Prices may decline in a buyer’s market. Buyers will have more selection and flexibility in terms of negotiating a lower price. Even if the initial offered price is too low, sellers will be more likely to come back with a counter offer.
- Balanced Market
In a balanced market, supply equals demand, the number of homes on the market roughly equal to the number of buyers. When a market is balanced, there aren’t any concrete rules guiding whether a buyer should make an offer at the higher end of his/her range, or the lower end. Prices will be stable, and homes will sell within a reasonable period of time. Buyers will have a decent number of homes to choose from, so sellers may encounter some competition for offers on their home, or none at all.
Motivation of buyer and seller
Motivation is a considerable factor when buying. Do you offer more than asking price or submit an offer well below list price? The answer is clear. A buyer offering a higher or lower than asking price mainly depends on how much the buyer wants this property. A buyer needs to realize that the longer negotiations take, the bigger the chance that another buyer may come in.
But motivation is also a big factor for the seller. If the seller is in a dire need to sell the home, that very low offer may be entertained, with the seller trying to close the gap. If the seller is less motivated to sell, the buyer will have to come up in price. Motivation of both parties influences setting an offer price.
Type of buyer
How much to offer also depends on the type of buyer. A first time home buyer most likely will be more careful than the seasoned investor with cash. The down-sizer may also be on a different level of offering than the young family who is looking to buy a larger home.
The best offer wins
For a seller, the best offer is the offer at full list price and no conditions. That scenario usually only works in a buyer’s or maybe a balanced market. If it is a seller’s market, competing offers can come in, and perhaps an offer needs to be higher than list price.
It is not always about money
So, often money wins, but clearly not always. It is up to the buyer to take a risk and avoid a home inspection or a financing condition.
The MLS shows asking price
Homes for sale on the MLS show asking prices, also known as list prices. The asking price is nothing more than what a seller wishes to get out of the sale of the house. Every seller is allowed to put on any asking price, although most realtors are not willing to spend time on unrealistic demands of a seller. In turn, every buyer is also able to offer ‘whatever’, as well. When buying or selling a home, it is important to stay realistic.
A seller’s strategy for the asking price
Testing the waters with a low offer
If the market allows it, a buyer can start with a very low offer to test the motivation of the seller. The first response from the seller, the counter offer, may indicate any motivation of the seller. On the other hand, offering much lower than asking price can also set the stage for the entire negotiations. Sellers can easily get offended by a low-ball offer, and negotiations may become stale quickly. Sometimes the seller gives in, sometimes the buyer gives in, sometimes neither gives in. How the scenario of negotiations unfolds depends to a great degree on the market conditions and motivations of either party.
As a buyer, have your ‘ducks in a row’
Before deciding on an offer price, and actually submitting an offer, a buyer must be prepared. Having a pre-approval from a lender is the first step. A seller has the right, by law, to ask if the buyer is pre-approved. If the answer to this question is either a ‘no’, or perhaps a bit vague, the seller may stop entertaining the offer. Having a pre-approval in hand gives the seller confidence and makes the position of a buyer stronger.
All negotiations are different
How a realtor helps with buying a home
Realtors have experience in negotiations. Realtors help a buyer set an offer price taking many factors into consideration, including:
- the market value according to a CMA, based on statistics from the MLS
- the type of market, a buyer’s, seller’s or balanced market
- and the motivation of the buyer (and potentially the seller)
The value of a realtor is largely determined by his or her negotiation skills. But a realtor can also advise on types of properties, advise on the (re) sale-ability of a property, on different areas to live in, etc.
For the best results, it is important, as a buyer, to talk to a realtor. Be open about motivation. Have all finances in order, including a pre-approval. Understand the data that a realtor offers. Trust your realtor. If you, as a buyer, don’t trust the capacity or motivation of the realtor to help, look for another realtor. Trust is the most important aspect of any real estate transaction.
A realtor with a legal background
We are Tanja van de Kamp and Ariette van Pelt, working as a team, both buying and selling homes in Calgary. Calgary has been our home since 2004, and real estate our full-time profession since 2009. Tanja was a lawyer in The Netherlands for 12 years, and learned how to negotiate strategically, and to work in the best interests of her clients. Thanks to our honest and transparent approach to real estate and towards our clients, we have built our business. It’s been a privilege to work with our clients, and, over the years, many clients, through their many referrals, have shown their appreciation of us.
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All sold data, including home features, number of days on the market and the ratio list price vs selling price. Sold data is a great way to understand the real estate market in your community.
