The bidding process for a home is stressful, to say the least. Certainly, no one wants to overpay, which is balanced against potentially losing out on the home. There are a wide variety of bidding strategies, and you may deploy multiple approaches for different homes you want, depending on the market conditions and the seller’s motivation.
Image by Matt & Megan / Flickr
Your buyer’s agent will be able to provide expert advice, running comps for similar properties to estimate the fair market value before submitting your offer.
The process of making an offer
It is useful to take a step back and learn about how an offer is made, from a legal standpoint. This familiarity will help you when you are ready to go forward.
In New York, an offer may be presented in writing or verbally, but it is suggested you utilize the former method. It is further recommended you send supporting financial statements and a mortgage pre-approval letter. Alternatively, the seller’s agent may request you fill out his/her offer form.
Aside from the price, your offer should include all the terms and conditions of the purchase. Closing costs in a resale are rarely negotiable, unlike the scenes you may see on television shows appearing on HGTV and other networks. However, if you are seeking to buy a new development or from an investor, it is a good idea to ask for city and state transfer taxes to be paid, although this is dependent on market conditions.
There are many other standard items included, such as the address, and how the purchase will be financed (e.g. all cash, subject to obtaining a mortgage). In New York, unlike other states, no deposit is required when you are submitting an offer. This is due at the contract signing.
You should also include certain items that you want. If you like the furniture, ask for these items to be part of a side deal. If it is included in the sales contract, you will have to pay sales tax.
A time limit may or may not be part of the offer, depending on the situation. A target date for completing the deal will also be part of the offer.
You may also wish to include certain contingencies. Two standard ones are that you can obtain adequate financing and a home inspection.
What price to offer?
There is a multitude of approaches to take when deciding what price to offer. Your real estate agent, particularly an exclusive buyer’s agent can be an immense help. He or she knows the market, and a buyer’s agent works for you, and beyond that, owes his fiduciary duty to you. He or she must pass any information along to you that would help tilt the price in your favor.
When making an offer, it is important to know the market. If it is a buyer’s market, such as a few years ago, any bid was likely to welcome. In a seller’s market, you may be competing with other offers, some of whom may be irrational. You and your agent should decide what to do in case a bidding war breaks out. We have previously written a post on how to handle yourself if you are in this situation to come out on top.
The selling price of comparable houses, comps in real estate parlance, is extremely helpful. Your agent can provide this valuable information, with the more recent the sale, the better. The exact apartment one floor above or below the one you like is the best option. If this is not available or too stale to be relevant, a similar apartment within the building is the second-best alternative. Finally, if these do not work, a similar apartment within the same zip code can be used. The listing price is less helpful. You should compare the recent sale prices to the seller’s list price. However, if there are unique traits that add value, such as a new kitchen, these should enter into the equation. Alternatively, if the apartment needs renovations, you should obtain a quote for the work and factor that into your offer.
You can also do your homework on the Internet, which can supplement your agent’s information. In New York City, propertyshark.com and streeteasy.com are two relevant websites.
Don’t assume the seller has priced in a buffer for negotiation. There are different pricing strategies. Some do not wish to bargain and price it according. Others may underprice it in the hopes of creating a bidding war, which makes a comparable market analysis even more important since it will allow you to form your best and final offer.
Based on the estimated fair market value of the property, an offer in the ballpark, with wiggle room to negotiate, typically enables both sides to meet in the middle to reach a fair deal. After your initial offer, you will likely receive a counter. Again, this is dependent on the market, putting the ball back in your court.
There are certain factors that can give you more confidence that you can submit a lower offer than you normally would. These are instances of a divorce, an estate sale, or if the property is vacant.
It is tempting to present a low-ball bid. This may be the best strategy based on market conditions or the seller’s position. However, you should be prepared to lose out on the property, particularly given the current state of the market. If you don’t receive a counter-offer, it is essentially game over.
Negotiations can also go beyond money. In New York City, with the preponderance of co-ops, an agent will also have to present your profile to the listing agent and seller. Getting the co-op board’ approval is a very important part of the process. In fact, a lower offer may win out based on the seller’s knowledge that you will pass the board.
Obviously, there are many complex factors that go into making an offer. This means there are a wide variety of bidding strategies. An experienced buyer’s agent that has seen the different types of markets and done dozens of deals can assess the situation and guide you going forward in order for you put forth a sensible and winning bid.
Shore up your position
An all-cash buyer is in a stronger position. Alternatively, if you have been pre-approved for a mortgage, this also gives you a stronger hand. If you have flexibility moving from your current lodging that is also a feather in your cap., either because you are a first time home buyer (if you are not, you do not place a contingency that it must be sold first) or your lease is expiring
There are many complex factors at work. While you can be dispassionate with an investment, it is very difficult to do so for a home. A buyer’s agent, who is not emotionally tied to the purchase, serves as a valuable conduit to do the negotiating on your behalf.