Second-guessing the purchase offer

Editor's note: Meet Tara-Nicholle Nelson at the upcoming Real Estate Connect conference in San Francisco, which runs from Aug. 5-7, 2009. She will be available to meet with conference attendees from 12:30 p.m. to 1:30 p.m. on Thursday, Aug. 6, in the Palace Hotel's Ralston Room. Click here to send Tara-Nicholle a message.

Q: I just made an offer on a bank-owned house. The bank's asking price was $125,000, and I offered $120,000. I keep kicking myself, wondering whether that offer was too high. Was it?

A: I'm going to do some of my law school and philosophy professors proud, and disappoint others severely, by answering your question with a question: What do you mean by "too high"?

Do you mean, "Could I have gotten it for less?" If so, that depends. Banks don't generally accept lowball offers, which your offer was not, so good on you. However, whether the bank/seller would have taken a lower offer than $120,000 depends on a couple of things, importantly among them:

(a) What was your net offer price, and

(b) What was your competition?

Many homebuyers are looking for meaty closing-cost credits. To the bank, your offer price is less meaningful than your net offer price -- the price you offered minus any closing-cost credit you requested.

In the San Francisco Bay Area where I sell real estate, it is nothing for an entry-level-priced, bank-owned home in a decent neighborhood to receive between 20 and 35 offers in today's market. At that level of competition and at your price point, you would expect the property to sell for as much as 50 percent above the asking price.

This phenomenon, while surprising to folks who aren't currently house hunting, is starting to repeat itself throughout the markets hit hardest by foreclosure, though the list-price-to-sale-price ratio might not be quite as high in other areas.

Oh -- and if your competition included even one all-cash or large-down-payment offer, and your offer's financials include a lower down payment or a pickier-guideline FHA loan, your offer might not even get to the asset manager's desk -- even if the other offer was lower than yours!

On the other hand, if your question is getting at whether your offer price was more than the place is worth, then whether your offer was too high or not depends on, well, what the place is worth!

To the consternation of buyers and appraisers everywhere, the concept of what a home is worth is bizarrely nebulous, given the importance of the subject. The industrywide accepted definition of fair market value for a property at any given time is, essentially, what a reasonable buyer on the open market would pay for the home at the time. That, in turn, is estimated by what reasonable buyers on the open market did pay for comparable homes in the very recent past, hence the phrase "pulling" or "running the comps" -- lingo for finding out what similar homes in the same area sold for recently.

When you're preparing to make an offer to buy a home, you and your agent should get familiar with the recent comparable sales in the area, to make sure that their sales prices (to be distinguished from their list prices) justify the price that you are offering. This is an informal version of the process the appraiser will eventually go through in justifying the bank's extension of mortgage funds for your purchase. ...CONTINUED

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