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"?

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

I might be wrong, but in your question I detect hints of the question I am most frequently asked, which I call "The Hunt for a Rule of Thumb." While this is less dramatic than "The Hunt for Red October," I’d say it’s only slightly so. I’m going to buck the conventional wisdom (the wisdom of which I debate) here and make a bold statement: There is no such thing as a nationwide, general rule of thumb for how much a buyer should offer for a home vis-à-vis the purchase price.

I’ve heard other commentators say that buyers should offer 5, 10 or even 20 percent less than asking in today’s market. But I sell real estate and would frankly not keep a client who continually made such lowball offers in my market when I can document to them that comparable homes have a 117 percent list-price-to-sale-price ratio, meaning they sell for 17 percent above asking, on average.

This might sound crazy to someone across the country, but in our area it’s common for listing agents to depress the list price way below the market value of the home in order to generate multiple offers and overbids. In our market, paying more than the asking price is not necessarily the same as paying more than the home is worth.

On the flip side, my esteemed colleagues in other areas might know by experience that a 10-percent-below-asking offer is just right in their market, at a certain price point. My point is, real estate pricing and negotiation practices are uber-local and, as such, if you work by a rule of thumb, it should be one you arrive at based on recent local sales price data with the help and experience of a trustworthy, local real estate agent.

I think the real question any buyer’s offer price should answer is: "What’s it worth to you?" This takes into account both how much you want the place and what you can afford, and puts you beyond regret, whether you get it or not.

But as you reflect on what any given place is worth to you, you must keep in mind that an offer doesn’t do its job if you don’t actually get the place, so it behooves you to reality-check the "what’s it worth to you" price against the recent sales and your real estate agent’s experience of standard negotiating practices (whether it involve over- or underbidding) in your local market.

So, to really answer your question takes not one, but three more questions:

  • Did you get the property? If not, it wasn’t enough (obviously). If so, it might still have been too much, but it might have been right on. Keep reading.
  • Did it appraise at the price you agreed to? If so, great — this is no small feat, given the conservatism of today’s appraisal professionals. If not, it was too much (at least from your lender’s perspective), but you should attempt to renegotiate the price lower on grounds of the low appraisal value, and
  • Can you afford the mortgage obligations you’ll incur at that purchase price on a long-term basis?

If you answer to all three of these questions is "yes," then I submit to you that no, your offer was not too much. No further questions, Your Honor.

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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