Construction loans: What they are and how they work
A construction loan can help you pay to build a new house or renovate an existing one. Read more about how they work and how to get one.
Ashley Eneriz
You’ve found your dream home that checks all your must-have boxes, but it can be hard to determine how much you should offer for the home. Offer too low, and you risk losing out to other bidders. Too high, and you may end up overpaying.
To determine the right offer for your dream home, you should consider various factors, such as current market conditions; the property's location, size and condition; and the seller's motivation to sell. It's also important to stay within your budget and financial capabilities. The goal is to find a reasonable price that works for both you and the seller.
Many factors go into making a reasonable offer on a house. Your real estate agent (called a buyer’s agent) can help you determine a fair offer based on some of the following:
For example, if your agent believes the home is overpriced to begin with based on these factors, then a reasonable offer may be below the asking price. You will also need to recognize if you are in a buyer’s market or a seller’s market, since that will help you determine how flexible the home price is.
Purchase offer prices are typically negotiated after the seller receives your initial offer, so your agent may recommend a price that leaves room for those negotiations. For example, you may decide to offer 5% below the asking price so you and the seller can ultimately agree on a price in the middle.
In addition to offering a price that aligns with the value, you want to consider your preapproved loan amount (which is the maximum amount the lender will lend to you). If you are searching for homes near your price limit, you’ll want to keep in mind that the final sale price could be higher than the list price, which would put you over your preapproved loan amount.
You may want to consider homes in the middle of your price range so you have some wiggle room for negotiations if a bidding war occurs between many potential buyers.
You may decide to offer the asking price or less if the home hasn’t been listed for a long time and there aren’t many offers yet. If the seller is motivated to sell quickly, offering the asking price could up the chances of your offer being accepted.
However, it might also make sense to see if the seller will accept less than the asking price in specific cases.
If a home is vacant, there’s an assumption that the seller has already moved and is currently paying two mortgages (one for the listed home and another for the home they currently live in). In this case, the seller may be more motivated to wrap up the sale quickly with an offer below the asking price.
If the home needs significant repairs, it may not have as much buyer interest as a new build or recently renovated home. Also, if the home inspection reveals more repairs than you anticipate, you may be able to negotiate a price reduction with the seller.
If it’s a one-of-a-kind property, there may not be as much interest. For example, homes with many acres of land aren't as sought after as homes situated on just an acre. Many buyers don’t want to pay for and maintain that much land. Your agent may advise you to offer below the asking price in those cases.
Offers below the asking price may be appropriate, given the market and the available comps. For instance, if your agent advises that the home is a bit overpriced based on the comps, you may decide to offer a price that’s more in line with what similar homes are selling for in the area.
» MORE: Buy, build or fix: What’s best for first-time homebuyers?
There are times when offering more than the asking price can be a strategic move to secure your dream home. It’s not uncommon for homes to sell above asking price during a seller’s market, which is when the supply of homes listed for sale is lower than the number of homes demanded by buyers.
You may decide to offer more than the asking price if the seller is expected to receive multiple offers and has a short deadline to choose one. In addition to offering more than the asking price, you may also include more due diligence money, which is nonrefundable, to show the seller you're a serious buyer.
When you are trying to buy in a seller’s market, you need to realize that the seller has the power. They are likely going to list their home at a competitive price with the goal to start a bidding war.
If you believe the property has significant investment potential and you’re willing to pay a premium to secure it, offering over asking could make sense in the long run. For example, the property could be in a highly sought-after neighborhood or may have unique features — both of which could bring about a strong return on investment should you sell the property later on.
» MORE: 5 ways to determine house value
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