How much should you offer for that home?

You've found a home you want to buy, but how much should you offer to pay for it?

One of the most perplexing points in the home-buying process is the decision of how much to offer for the home you want to buy. If you offer "too much," you might experience buyer’s remorse or feel the house was "overpriced." Yet if you offer "too little," you might infuriate the seller and lose your opportunity to purchase the property.

So, what’s the right amount?

To answer that question, you’ll need to do some homework and give some serious thought to how sincerely you want to buy that particular home.  

Your agent can make offer recommendations

Don’t rely on the listing agent who represents the seller to help you decide how much to offer for the home you want to buy. Rather, ask your own real estate agent about the asking and selling prices of other homes in the area and market conditions that might indicate whether you should offer more or less than the seller’s asking price.

If the market is characterized by multiple offers and strong demand relative to the supply of for-sale homes, you might want to offer more than you would if the market were characterized by price reductions and weak demand relative to supply.

You also might want to offer more if the home has certain features that are must-haves for you, but aren’t widely available on other comparable homes in the area.

Time pressure could be another reason to offer a higher price if your current home is already on the market or you need to move by a certain date due to school schedules, employment or other reasons.

Some buyers try to anticipate the direction of home prices and build that expectation into their offer. Future prices may be important if you intend to sell the home within a few years, but market cycles may be less relevant if you plan to stay put for a while. Moreover, sellers may be loath to discount their asking price simply because you think prices might be lower in the future.

Offers that are contingent upon an appraisal, financing, the sale of your current home or other conditions are less attractive to the seller than are offers that don’t include such requirements. If your offer contains contingencies, you may wish to offer a higher price as an inducement to the seller to accept those conditions on the sale.  

Be cautious about online estimates

Automated valuation services on real estate Web sites are a popular resource for home price estimates. These estimates are not appraisals; rather, they rely heavily on historical home-sales data. Consequently, they might not be a reliable indicator of a home’s current value, especially if the market is on a turning point.

A similar resource is local multiple-listing services data about homes that are currently on the market. This data may be available on local MLS or brokerage company Web sites.

Don’t exceed your budget

Never offer more for a home than you actually can afford to pay. Get a pre-approval letter from your lender that states how much you can borrow and an estimate of your closing costs. Be honest with your agent about how much you’re willing and able to spend and what features you must have in your home.