How much should you offer for a Property?
When working with Buyers and representing them during their purchases of properties, I’m always asked for suggestions about the amount that should be offered for a property purchase. Part of the conversation usually involves questions about offering a certain percentage off of list price and questions about the average List price to Purchase Price Ratio.
I always offer an in-depth explanation in response to these questions, so here’s what you need to know about the amount to Offer for purchase of a property:
- The amount that you offer for purchase of a property should be based on the most recent purchase prices of similar/comparable properties. In determining which properties are comparable, you need to very thoroughly compare ALL features of the properties.
These are a few examples of features to compare: Year Built, Square Feet, number of Bedrooms and Baths, condition (original/in need of renovation, new, renovated), location quality and types of interior Finishes, Lot/Land size, number of Garage Spaces, quality and type of exterior features, type of Waterfront location if the property is Waterfront (Oceanfront, Canal front, Intracoastal front, Riverfront, etc.), type of view from the House or Condo if the property is Waterfront, high Floor vs. low Floor if the property is a Condo, quality and type of exterior features (Swimming Pool, Landscaping, etc.)
Various features significantly impact property value and not evaluating them correctly is a recipe for failure. There are some Communities where Houses on the exact same street are currently selling for significant price differences ($800,000 for one House and $3,000,000 for another House).
- The amount that you offer for purchase of a property SHOULD NOT be based on a percentage off of the List price.
In some cases, after reviewing recent sales of similar properties, you will discover that the list price is realistically based on current Market values of comparable properties recently sold or is even below current Market value. In such cases, you shouldn’t expect significant movement from the list price. In fact, if the property is one that has very desireable features, it’s not uncommon for such properties to receive multiple offers and sell for purchase prices that are above their list prices. There’s nothing wrong with paying the list price or above list price if the purchase price is equal to Market value and/or if the property offers unique features or a great value proposition in comparison to others that are currently available. However, I’ve noticed that many Buyers tend to think that they’re over-paying if they Offer the list price or fairly close to the list price. Sellers know that even when their properties are priced at current Market value or even below current Market value, some Buyers will need to be lead to believe that they’re getting a discount, so many Sellers choose higher list prices to allow room for negotiation.
In cases where properties are listed for prices that significantly exceed current Market value, then it’s realistic to expect a large discount off of the list price (even though expecting it doesn’t necessarily mean that you’ll get it–some Sellers are unrealistic, don’t really need to Sell, and won’t accept realistic Offers for current Market value prices).
- The amount that you offer SHOULD NOT be based on modifications that you would like to make to the Property UNLESS the Property’s List Price does not accurately reflect its’ condition and current Market value.
Scenario example: We view a property that doesn’t have a Swimming Pool and lacks other features that you would like to add. The property is listed for $500,000 and you determine that it would cost approximately $75,000 to make the modifications that you would like. Based on our research of recent sales of comparable properties, we determine that properties without a Swimming Pool and without the other features that you want are currently selling for prices that are around $500,000. What this means is that your Offer should be a realistic one that’s based on current Market value, not an Offer in which you subtract $75,000 for modifications that you would like to make to the property.
- Offers that are realistically based on current Market value or fairly close to it are usually much more successful than Lowball Offers. If you place an Offer that’s $200,000 below current Market value, you shouldn’t be surprised if the Seller chooses not to even respond to you with a Counter Offer. Not only will many Sellers be angered by such an Offer, but many will also think that an extremely low Offer is indicative of you not being a serious Buyer.
- An Offer amount should not be based on a Property’s Tax Assessed Value. Tax Assessed Value IS NOT the same as current Market Value and is usually lower than current Market Value.
- An Offer amount should not be based on how much the current Owner paid for the Property. What matters is whether the Owner is willing to sell the Property at current Market value.
- An Offer amount should not be based on how much the property would have sold for in the peak of the Market when prices were at their highest. What it would have sold for in 2005 is really not relevant today, so it’s rather pointless to focus on how much the property’s current value is discounted from peak prices. Again, what matters is current Market value.
Our current Market is one in which MANY properties are being purchased and Inventory has significantly decreased, so, in most cases, there’s more than sufficient data to review when determining current Market value and Buyers can’t legitimately say that “nothing is selling” or that they’re unsure of Market activity or how much to offer. Those who do say it are several years behind on Market Stats or have chosen to reject the realities of the current Market, which are not as favorable as some would like for them to be. The “nothing is selling” Market was 2007-2008 when South Florida had the highest level of Inventory and lowest number of Sales. 2011 ended with South Florida selling more properties than were sold in 2005, which was the peak of the old Market in terms of number of properties sold and highest property values.
In certain Communities, particularly Luxury Communities and those that are East and Waterfront, property values are stable/no longer declining AND are experiencing slight appreciation as a result of increased sales, decreased Inventory, and high demand, so concerns about future value decreases in relation to Offer amount are becoming much less relevant as well.
I will also note that with a very high percentage of today’s Buyers paying Cash for properties, particularly in the Luxury Market, the concern about a repeated Market Crash because of Mortgage delinquencies is a largely unwarranted concern and should not affect decisions about Offer prices. In the Condo Market, ~80% of the sales are Cash and in the Single Famly Home Market, ~60% of the sales are Cash.
When working with Buyers, I start the search with providing full data about current property sales and property values in the areas that they’re interested in (including Property Addresses, purchase prices, purchase dates, property pictures, and other pertinent property details) so that realistic expectations are established, along with an accurate, educated perspective of the Market.
When in doubt about how much to Offer, always refer to item #1 above.