We all want to buy our house at the lowest price possible, or at least get good value for our money. You now know that the asking price quoted by the selling agent will usually be more than the owner is willing to take for their home. It’s just the real state game – they expect to come down in price as part of the negotiation process.
So how do you know what price to offer the agent? How do you determine the price of a property?
For products that are plentiful, transacted often and largely the same as each other, determining market value is really easy. But purchasing a home is typically not like buying tomatoes at the grocer. Each property tends to have features that make them unique. Even two houses, side by side in the same street could be valuated differently because of their attributes.
To make things even trickier, property is typically not transacted frequently, so it’s hard to find a recent sale of a home similar to the one you’re interested in buying.
Property is unlike most other things that you buy – there are no set prices. Buyers and sellers must negotiate a price that is acceptable to both of them.
While the asking price is a guide of what the vendor would like to achieve or what the selling agent would like to get, for you the asking price is only a rough indication.
The definition of fair market value is usually the price that a willing purchaser is prepared to pay, and a willing seller is prepared to accept, given that neither if forced to buy or sell under pressure.
In other words, if you bought a house today at fair market value you should be able to sell it again in a month’s time at the same price.
A house is only worth what the buyer is prepared to pay for it, but value is in the eye of the beholder.
It works both ways.
Some buyers will fall in love with the home and be prepared to pay more for it than you would expect.
Similarly, many sellers have an unrealistic view of what their home is worth. They tend to remember what they paid for it and how much they spent on improving it. They may have over-capitalized their properties with expensive renovations or they may just put higher price, so they can buy a better home.
Others value their home according to what they heard neighbors got for their properties. Yet sometimes neighbors say they pay more than they actually did and sometimes agents mislead sellers as to what price can be achieved.
In reality, none of this really matters because at the end of the day it’s buyers like you who ultimately determine market value.
So, unless you use a buyer’s agent to help you negotiate, you are really going to have to rely on your own research to work out how much the property is worth.
If you’ve been house hunting for a while, by the time you end up at the negotiation table, you should have looked at many houses and gotten a pretty good idea of what similar homes in the area have sold for.
Remember it’s the sale price, not the asking price that you need to focus on when you’re doing your pre-negotiation.
In most markets (other than during boom times), houses sell for less than their asking price. There is no standard discount, everyone knows there will be some ‘argy bargy’ about the price as agents tend to ‘list the property for sale’ at an asking price about 5-10% more than the vendor will accept to sell their home. So, the asking price is just a starting point for the negotiation.
If you pay what the seller is asking you could be wasting money. The trick is to know how much less the seller will accept. Sometimes it’s only a few thousand dollars. Frequently it’s about 10% or more, but in a seller’s market – a hot market, as we are currently experiencing on the east coast of Australia, where there are many buyers making offers, vendors may not be willing to lower the asking price at all.
Should I get a valuation?
Another way to determine the market value of the home is to have a valuation done. Your lender will usually organize a valuation part of the loan process, but this will occur after the deal has been done. Some buyers choose to have a valuation done price making an offer or make their offer subject to a satisfactory valuation. Not many sellers accept this type of condition and it’s likely you will lose out to somebody else who will buy the property without this type of condition.
The trouble with engaging a valuer is that it usually 3-4 days or even up to week before you get their report and it may charge $350 to $450. If you have the time and want a professionally acquired figure, then a valuer may be the way to go. The valuation report may even provide you with ammunition to use in the negotiation process.
While your lender will require valuations on the property as part of your finance application, not all valuers are approved by lenders. Each lender only works with a small group of valuers (called their valuation panel.) This means that if you pay for a valuation for your purposes, it may not be accepted by your lender. Remember that if you ultimately don’t buy the property, you will still pay for the valuation.
5 questions to ask the agent before you make your offer
Here are some questions you ask the selling agent before you make an offer:
- How did the vendor come to the asking price for their home? Was it the agent’s suggestion or because that’s how much they need to buy their next dream home? Some sellers are unrealistic and unlikely to come down from their asking price they have to get a certain amount for a particular reason.
- Have there been any other offers made? This lets you know if you have any competition and how serious the vendor is in selling their home for a reasonable price.
- How long has the home been on the market? If it’s just been put up for sale, the seller may not be anxious to accept lower offers. If the home has been on the market for several months, it’s more likely the seller would be ready to accept your offer.
- Why is the vendor selling? Are they going through a divorce? Do they have to move interstate urgently? Have they all bough another home that would put them under pressure to sell their current home? This will let you know how motivated the seller is.
- Has the asking price been reduced during the time the property has been on the market? This will tell you whether the seller is keen to offload their home and also let you know that you might have a motivated seller on your hands and prepare for a greater bargaining power.
How long should I make my first offer?
So now the question is “how low should I make my first offer?”
The question that naturally follows this one is, how badly do you really “have” to purchase that particular house? If you have already fallen in love with this home and it’s that special home you’ve spent months searching for, it’s better to offer a price in terms the seller is likely to accept rather than trying to go for very best deal.
On the other hand, if there are plenty of similar homes on the market, start with a low offer.
Having said that, if your initial offer is too low the seller and his agent may not believe you are serious about buying the property and simply turn you down without even making a counter offer.
Now if you are buying an investment property, it is better to make cheeky low offers on ten houses and not get any of them, than pay too much. On the other hand, if you’re looking at buying a home for you and your family, you may not want to risk low deal.
The trick is to make an offer that is low enough to get the seller sufficiently interested to make a counter offer.
If the asking price for the house is $450,000 and you think it’s worth $425,000, we recommend coming in at around 400,000. What tends to happen in the negotiation process is you tend to ‘split the difference’ and hopefully you will end up at your preferred purchase price of 425,000.
But this usually won’t happen in one go. The asking price would be $450,000 – so you offer $400,000. The vendor may counter with $430,000 – so you will come back with $420,000 and you finally agree on a selling price of $425,000.
Credit: Michael Yardley (realestate.com)