How to Decide How Much to Pay

Finding the perfect home is the first hurdle in the home purchasing process. Usually, finding a home that is big enough and in the right location is no small task. Once you decide you want to own the home, it is time to prepare a written agreement about the sale of the property. A written agreement can take any number of variations and terms of the sale. There are documents that can be downloaded and copied and reproduced if you do it yourself. There are a number of terms that are important in negotiating an offer. Inspections, personal property , financing, seller contribution towards closing cost...the list goes on.

The key to making an offer on a property is, foremost, how much money you are willing to pay. How much you offer to pay is a function of a number of factors:

Comparable Properties
The first factor you will consider are the homes in the complex and/or neighborhood that have recently sold or are currently available. You will want to look at homes most similar to the subject property first, then look at homes that vary is size, condition, and location. You may decide to make value adjustments to the comparables to come to a reasonable estimate of the value of the home. Your best indicators to the value of the property are sold homes within the last 6-9 months. These homes give you the best estimate of what the market is willing to pay for properties. Once you have analyzed the properties and made value adjustments based on condition and size, you can have a pretty good idea to what a home is worth.

Owner's Investment
The second step in making an offer is to consider the owner's investment into a home. While 99.9% of people have a high aversion to losing money, it is important to remember that an owners investment into the home is does not determine it's value per se. Understanding a person's investment into the home will help in deciding how much to offer. An owner with substantially less money invested into a home is more likely to take a lower offer than someone over-invested. Taking a look at the tax records and checking the purchase price and purchase date are great first steps in estimating their investment. It is important to remember that the tax records don't record mortgages. Therefore you will not have any idea if they have refinanced or taken a home equity line out. So remember that you best guess as to what an owner has into the home is an estimate.

Days on Market/Motivation
The last step to take is to compare the days on market of the subject home to the average for the area. If the days on market is substantially higher, it is either over priced or not in a condition that is average for the area. You may have already established that the price is too high in analyzing sold properties, but this last step may tell you how motivated a person may be. A person that has had their home on the market for a year will, generally, be more motivated than a person that has had their home one the market for 1 month. Vacant homes mean that the owner is paying double mortgages or double rent. Vacant properties typically have owners that are slightly more motivated than occupied properties. Properties priced well but on the market longer than the average will typically be indicators that work may be needed on a home. Sometimes cosmetic...sometimes structural.

Put It Together
Once you've looked at all the factors, you can sit down and put your offer together. Depending on your situation and your finding from your research, you may decide that home is over-priced...or under-priced. You will never know what you can get unless you try. Remember, though, that a good deal isn't always found by getting someone to negotiate a much lower price. Sometimes, it is just getting in the right place at the right time so that the prices are much higher when you go to sell.