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Determine Offer Price on a Home w/ Comparable Property Sales
Understanding how to determine offer price for a home is often the most difficult part of the transaction. For the majority of home buyers, the biggest mental hurdle they have to overcome is the fear of overpaying for a property. With that line of thought it’s important to discuss how the list price is actually decided.
This discussion is going to walk you through how to determine offer price for a home with comparable properties and data to back it up.
More specifically, we’ll touch on:
- The Strategy Behind Pricing Homes
- Determining if price per square foot actually matters
- Gaining value and meeting your real estate goals
- Examples of property values based on strategy
- How to determine comparable properties
The Strategy Behind Pricing Homes
To the dismay of many, you will find that the price of homes is more of an art rather than a science. More specifically, the list price a seller chooses is more in line with a marketing strategy than anything else.
Diving deeper into that statement, we always want to ensure that our buyers understand that the list price is truly a marketing strategy for that property. When our team serves as the listing agent for homes we advise the seller on three possible outcomes when deciding what price to list the home:
- Over comparable market value
- Under comparable market value
- At comparable market value
The Kree Team developed the below definition of Comparable Market Value to use as best practice.
Comparable Market Value
A similar property that has listed and sold within 5% of the property sales price within the last 90 days.
For more definitions, check out our mortgage terms to know guide.
Busting the Price Per Square Foot Myth
The most frequent question that we get from home buyers is “should we go off of price per square foot?”.
For commercial real estate and non-urban environments specifically cul-de-sac communities and new developments, price per square foot can be a great indicator.
When in urban environments where factors such as views, natural light, floor positioning, and traffic patterns all can have a dynamic impact on the value of a property. Those factors do not show up in the price per square foot argument.
The question we like to ask to our clients is “would you pay more for the fifth floor in a downtown condo building with monument views or living in an identical unit on the first floor that overlooks the dumpster?”
The clear answer is that the one with monument views will have a higher value. If you were using the price per square foot argument, both prices should be exactly the same.
Gaining Value and Meeting Your Real Estate Goals
Our team has spent substantial time reviewing research on consumer spending and tendencies to help you better understand how to determine offer price for a home.
One of the most insightful pieces of research was created by a collection of researchers led by Dr. Orga Sahin, from The John Hopkins Carey School of Business. The research touches on the psychology behind consumers’ obsession with getting “value” even if the value created is artificial.
This research translates to the real estate market with home buyers and their desire to get homes under the list price. You can read more about the research in this short article. If you would like to dive deeper into the topic you can find the full study from the researches here.
When our team represents sellers, the overall goal is to get the best deal possible for our clients. Generally that means getting the highest price possible with the most stable offer; Meaning limited contingencies.
In order to facilitate that we have found the best method is to drive substantial traffic to the listing. In turn creating the greatest level of excitement around the listing as possible.
The best way to do this in general is with the list price. In particular pricing the property below the fair comparable market value or other comparable properties. This creates a frenzy because buyers believe that they are getting a deal on that particular home. The additional competition and rush to the listing, typically translates to a stronger offer package for the seller.
Examples of Property Values Based on Strategy
The examples below break down scenarios where we show that just because you pay less than the list price doesn’t necessarily mean that you’re getting a great deal.
*Keep in mind that paying over asking price doesn’t necessarily mean you’re getting a bad deal.
Let’s Break Down Some Examples
Example 1: At Comparable Market Value
At Comparable Market Value
List price: 500K
Fair Market Value for Comparable: 500K
Sale Price: 500K
Overall, the seller and buyer came to terms on a purchase that was at the comparable market value. The seller more than likely experienced a steady number of showings and interest for the home
Example 2: Above Market Value
List Price: 550K
Fair Market For Comparable: 500K
Sale Price 525K
For the buyers that believe that the list price is a science they might feel that they received a great deal on this property by getting it for $25,000 below the list price. Based on other comparable property sales though would say otherwise as this property would go for less than what they paid.
Example 3: Below market value
List price: 450k
Fair market for comparable:500k
Sale price 475k
In this situation the listing agent priced this property way below the fair market value for a comparable property. The result was that they probably received a great level of interest and the buyer went up in asking price by $25,000. More than likely that buyer had to waive contingencies to get the offer accepted. In the end they paid $25,000 over the asking price but still were able to find value in this purchase.
Ultimately, the value of a property is decided by the demand of the market and what people are willing to pay. The key thing to keep in mind is finding a home that is affordable to you. The best way to verify this is by reviewing the estimates the mortgage lender provides.
How to Determine Comparable Properties
Comparable property sales, often referred to as ‘comps’, are a great way to gauge where the property might end up from a pricing perspective.
Our team uses a methodology when researching comparable properties with an emphasis on:
- Recency of the comparable sale
- Distance from subject property
- Similarities in size, finishes and aesthetics
Ideally, the best comparable property would be an identical property next door to the subject property that sold within the last 30-90 days. Unfortunately, that dream scenario doesn’t happen often, so we have to improvise and try to weigh the properties against each other.
Within the comparable property sales that we send we start by trying to set a floor and ceiling for the property where it might go in terms of pricing.
We do this by finding a property that we feel is a step down from the subject property and then finding a property where it is an obvious step up from the subject property. For example it has a larger kitchen, a larger lot, updated systems to name a few areas that show a value difference.
From there we try to fill in the rest of the market analysis with properties that are similar, ideally a total of 3 to 6 properties.
In the end, comparable property sales can help lead us in the right direction when it comes to offer price but the market demand will ultimately determine the final price.
Mortgage Lender Estimates
A statement our team always echoes is that your home will not make or break your happiness unless you violate two key rules.
- You have to be able to afford the house from a payment and a maintenance standpoint.
- You have to have a reasonable commute.
Thankfully for the affordability side we have multiple tools and resources available to us to ensure that you will be able to verify if you can afford a home from a payment standpoint and maintenance standpoint. The key is to find the appropriate Mortgage lender that will provide detailed estimates on possible scenarios for the purchase.
Developing Your Offer Price
Even though it can be slightly uncomfortable, at some point you will just have to decide how much you’re going to offer on a home.
The common factors that influence how much a person offers on the home are listed below. Each one of these has its own unique impact on the decision making of the buyer and how and what they can do in terms of an offer.
- Factors that influence how much you offer:
- Desire- How badly you want the home
- Competition and Market Conditions
- Qualifying ability
- Contingencies you include in your offer
Breaking Down Factors That Influence Decision Making
Desire
Your desire to get the home will be one of the biggest factors on how much you offer. Quite simply it comes down to how much you like the home and how willing you are to operate within your budget. Some homes you might be willing to go all the way to the top wall for while others you might only consider it at a specific price.
Market Conditions
General market conditions beyond just direct competition will have an influence on what you offer. For example, rising interest rates might encourage you to submit an offer at a higher price to get a home under contract before rates continue to rise.
While at the same time direct competition from other homebuyers will also have an impact on what you are willing to offer for a home. As much as we are trying to devise an offer strategy for you, it is your agent’s job to try and figure out what others might be willing to offer.
Qualifying Ability
Your ability to qualify for a higher amount will dictate if you can even offer a greater amount for the property. You can’t offer more than what you’re qualified for so in the end this is a simple pricing barrier for you. Remember you can always go below your top and call findability as well.
Pro Tip: In a highly competitive market where homes are going over the ask price. We recommend only looking at homes 10-15% below your top end budget.
Contingencies within your offer
This is one factor that is part of a holistic discussion on how we’re building your offer to be competitive. There will be situations where you are unwilling to waive specific contingencies i.e. the home inspection, appraisal contingency, inspection contingency.
In a competitive situation, you’ll have to be more willing to waive contingencies to increase the potential of your offer getting accepted. Another strategy you may take is to compensate for not waiving contingencies by offering more for them to remain in place. For example, making your offer price at least $10,000 higher than any offer but keeping your inspection contingency in the offer.
Escalation clause: The escalation clause is one of the best tools that real estate agents have to benefit their clients. It allows real estate agents to put our buyers in the best position to get a property under contract in a transparent manner, while reducing the possibility of substantially paying more than other offers.
The escalation clause is an addendum that we are able to add to the offer package that is submitted on your behalf. The escalation clause has two primary decision points the escalation cap and then the escalation factor
1) The cap: The escalation cap is the maximum amount of money that you are willing to offer on the property. For example the list and initial offer price is $500,000. While your total cap with the escalation might be 550K.
2) The factor: The escalation factor is the monetary amount that you are willing to go over the next highest offer not to exceed your cap. For example $7000 over the next highest offer.
Escalation clause example:
When we are submitting an offer with an escalation clause included we will still submit with an initial offer price. In this example, let’s use $500,000 as the offer price. Our escalation clause will include an escalation cap of $550,000 with an escalation factor of $7,000.
If the seller received multiple offers that were higher than $500,000 then the escalation clause would be activated. If the seller received an offer at say $520,000, then our offer would be pushed up to $527,000. If another offer came in at say 540,000 then our offer would be pushed up to $547,000. If another offer came in at 545,000 then our offer would be pushed up to 550,000 because we cannot exceed that $550,000 limit because that is your cap.
Note: If the seller is using your escalation clause then they are required to submit a bona fide offer from another client that they have to send to us as proof.
The biggest highlight for an escalation clause for the buying side is that the offer then will be returned to you in the form of a counter offer with you getting the final say on whether you want to accept it or not.
In a highly competitive market the escalation clause is truly a powerful tool for a home buyer.
Your Offer Price
If you were looking for a quick formula understand how to determine offer price for a home, then you may leave disappointed as there are a number of factors that go into the decision.
Buying a home means navigating real numbers with comparable data, understanding marketing strategy that the seller is leveraging, the psychology of buying, and navigating market conditions.
Fortunately your real estate team will be the foundation that guides you through this process, and helps you achieve your goal; Including how to determine offer price for a home.
Book your consultation today to get started.
