Q: How low of an offer should I make on a 4-bedroom, 3-bath house in Atlanta listed at $300,000? It’s not a short sale or an REO, but I searched the title records and found out that the owners paid only $90,000 for it about 10 years ago.

A: The answer to your question is, as with everything in real estate, "it depends." As you can probably already tell, you’re not going to get a straight dollar amount answer from me. The decision of how much to offer on any particular property is, in my opinion, the single toughest decision a home buyer has to make once he or she has selected a property — in fact, this is the single most frequently asked question I receive.

Determining your offer price is definitely an art, not a science, but there is a systematic process you can undertake and specific factors you should consider to make your offer with maximum confidence and minimum regret.

Mindset Management

I often joke with my clients that the very last time either side — buyer or seller — is truly happy with the purchase price is the moment they agree to it. As soon as the offer is accepted, the buyer is filled with remorse and thoughts that she paid too much, and the seller regrets that he accepted so little!

For so many buyers in this market, they see the ultimate goal as a bargain price or a great deal. I see that as losing sight of the forest for the trees. In fact, the true marker of successful house hunting is not just making lowball offers or reaffirming your self-image as a crack negotiator — it’s actually getting the house, and getting it at a price and on terms that work for you.

Buyers on today’s market who think every seller is desperate, or who think that every desperate seller is willing or even able to accept a lowball offer, are being unrealistic and setting themselves up for failure. Unfortunately, some buyers have to lose their dream home (or two) before they acknowledge that a buyer’s market does not mean that you can buy a home for 75 percent below market value.

Hearken back to The Golden Rule of your kindergarten days — if you bought a home 10 years ago for $90,000 that was once worth $400,000 but is now worth only $300,000 — would you take $90,000 for it because that was what you paid? Absolutely not — that would make no sense. So you cannot expect a seller to do that same, nonsensical thing.

There are a number of important considerations that should factor into your decision of what to offer — we’ll get to these momentarily. One of the least discussed is the simplest: How much do you want the home? We spend lots of time advising buyers never to "fall in love" with a property," but that is a setup for a Catch-22 unique to home buying: You really shouldn’t be buying a home that you aren’t excited about on some level — especially considering that you’ll have to drive home to it every day after a hard day’s work largely devoted to paying for the place! On the other hand, you do want to avoid getting so overexcited that a) you place yourself in inferior bargaining position vis-à-vis the seller, or b) you’ll be devastated if you don’t get the property for any reason.

Need-to-Knows & Action Plan

1. Fair Market Value: Often what an owner paid for a home and what he or she owes on it are two different things; the third separate, but critical value, is fair market value, which is best approximated by the recent sales prices of nearby, comparable properties. Early on in the exercise of formulating the price that you offer, your Realtor should conduct a comparative market analysis, or CMA. This detailed look at the similar, nearby homes that were recently listed and sold on MLS should result in an estimated fair market value range — many Realtors will take it a step further and actually recommend an offer price or price range.

My normal buyer client starts out the process of determining their offer by having a recommended price range (or one of their own devising) in mind, and then taking all the other factors into account to narrow the range until they have arrived at a precise dollar amount.

Use the following criteria to pinpoint an offer price from your Realtor’s recommended range:

2. Seller’s Position and Motivation: In reviewing your Realtor’s CMA, it may be apparent that the fair market values of properties have certainly dropped. Nevertheless, sellers cannot or will not accept offers below what they owe, below what the bank will accept (on a short sale), or below the fair value of their home on today’s market. You may think that the sellers’ mortgage position or motivation is not your problem, but it is if you want the house! Keep in mind that any closing cost or repair credits that you request will be subtracted from the gross price you offer to result in the net price to seller.

For example, if your seller has already moved on and purchased another home, that tells you she may be motivated by the fact that she’s making two mortgage payments, but she may also have a bottom line that she has to clear in order to bring her mortgage payment on the new home to a sustainable level. In fact, I’ve recently represented buyers against several sellers in this exact position, and one seller elected to rent the property out and retain the possibility of selling at a higher price in a better market, rather than to take a low offer. Similarly, you can draw inferences about the seller’s level of motivation by the number of days the home has been on the market relative to the average number of days on the market (DOM) in that area. The CMA should show what is average, and your Realtor should have the details about how long your target home has been listed.

3. How Much You Can Afford: With that said, after fair market value, your own motivation level and position are probably the next most important factors to take into consideration. How much can you afford to pay for the property? Since most of us house hunt within a range of prices and over a period of weeks or months, you might want to revisit the issue of what the current interest rate and monthly payment would be at the different ends of the price range you are considering offering. You might be willing to make the payment at the low end and not the payment at the high end of the range — if so, that helps you narrow down your offer price.

4. How Much You Want It: Similarly, you must decide how much you want the property. Said differently: How would you feel if you didn’t get the home? There is value in getting the home you want. Does that mean you should throw tens of thousands of dollars above what you think the fair value of a home is in order to make sure you get it? No — in fact, your lender’s appraiser will not let that happen, especially in these days of enhanced scrutiny of value opinions. But it may mean that you avoid making an uber-lowball offer that your Realtor thinks will be insulting to the sellers if you really, really want the place. And vice versa — if the home would work for you, but you won’t be totally distraught and dejected if you don’t get it, then you can afford to be more aggressive with your offer.

5. Multiple Offers: Finally, before you decide on an offer price, you need to know whether there are any competing offers to purchase the property. Even in a buyer’s market, some areas still see multiple offers — usually the super-hot neighborhoods in urban areas and the nicer, entry-level homes in metro areas. In today’s market, an entry-level home is very desirable to a group of folks who never believed they would have the opportunity to be homeowners, so those buyers are out in force and often make multiple offers on nicely located, low-priced properties in good condition. Obviously, where there are multiple offers, you may need to come in at the high end of the market-value range in order to be the victorious buyer — sometimes, even over the asking price. (Your Realtor’s CMA should tell you whether homes in that area are typically selling below, at or above the asking price.) Where you are the only offer, you can afford for your offer price to be aggressively low.

Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook," and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.


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