List price and sale price are two different things – and that’s due in part to your initial offer on a home.
Making an offer on a home is an important part of the homebuying process, but many homebuyers are in the dark as to how to determine this important number.
And nailing this number can help move a sale forward. When the market was at its peak, 80% of homebuyers were making 2+ offers – in more typical market conditions, about 40% did.
If you’re wondering how much to offer on a house, here’s what you need to know.
Market Conditions Matter
If it’s a buyer’s market – meaning that the market favors buyers – coming in low is easier. Sellers are often on a timeline for selling their home, and they don’t necessarily want to wait another month for a better offer.
When it’s a seller’s market, inventory is low enough or demand is high enough that multiple buyers are often competing and submitting offers on a single home when it comes to market. In this situation, sellers get to choose from multiple offers – and the buyer offering the most money often wins.
Is it a buyer or a sellers market? Although some conditions today favor buyers, by the numbers, it’s still a seller’s market. Experts say that 5-6 months’ of inventory is a balanced market, and the U.S. currently has around 3 months’ worth (up from 1.7 a year ago).
The Property’s Condition (and the estimated cost of repairs)
A move-in ready home – also known as a turn-key property – typically commands more money than a home that needs multiple repairs or renovations. If you’re putting in an offer on a home like this, you may want to offer the asking price or over-asking since it will likely be in higher demand (and it’ll be less work for you to move in, if that matters).
If you know from reading the disclosure document that the house has a leaking roof – or is likely going to need a new HVAC system soon since the old one is 30 years old – then you may want to consider offering less, on the premise that you’ll need to pay to resolve these issues soon.
The Home’s Market Value
How much should a home be worth? If you’re not intimately familiar with an area, it can be hard to estimate – especially if your potential home is a two bedroom, but all the recently sold homes are three or four bedrooms. This is one reason that homes are listed with their price per square footage – it will help you discern whether a property is in a reasonable price range or way above it.
“The first thing I look at is the price per square foot. I know a general average of what the price per square foot should be in each neighborhood based on how badly people live there, what the neighborhood offers, and what the taxes are in that specific county. It really comes down to knowing the area,” explains buyer specialist Kalem Jones.
“Let’s say we’re looking at Sanford, VA – Sanford should be probably around $228 a square foot. So if I see something that’s $274 per foot then I start to question – what’s going on? Why is the price so high? Maybe the buyer should look at something else.”
Of course, some updates can increase the price of a home – a home with a new roof, HVAC, and finished basement should be worth more per square foot than a home that hasn’t received any updates since 1990. That’s why it helps to have a Realtor on hand who can help you break down the holistic value of each potential home.
Want to get in touch with a Realtor who can help you figure out a home’s market value?
Why market value matters
What if you fall in love with a home and don’t care what you have to pay for it?
One big roadblock is the home appraisal. Regardless of what you want to pay for a house, the lender has to approve the loan. Your Realtor can do comps and assess the local market conditions to figure out what the house is likely to appraise for.
If the home is priced at $300,000 and your Realtor believes it’s worth $290,000, what happens if you offer $295,000 because you really want the home?
If the home appraises for $290,000, then you need to pay an additional $5,000 out of pocket – because your lender is not going to give you a loan for more than the appraised value. They want to make sure they can make their money back if you can’t pay (and have to sell or foreclose).
Not all buyers will have extra cash on hand when they already need to fund the down payment and closing costs. For this reason, you want to be wary of coming in too high. Sometimes the seller will meet you halfway in order to close the sale, but it’s not guaranteed.
Knowing the home’s market value is also important because in order to be competitive against other sellers, some sellers right now may be undervaluing their homes. If it’s a good deal already for the area, it may not be worth coming in low (and potentially losing out to other buyers also eager for a deal).
Time on Market
The longer a property sits on the market, the more wiggle room you have to ask for more. If a house has just come onto the market in the past week, for example, a seller is less likely to give you 10% off – buyer interest in the property is likely still high, and they have a reasonable chance of getting their asking price.
However, just because a property has been on the market 50 days, doesn’t mean you should feel comfortable about offering 20% under asking. It might just be the case that the property was far overpriced to begin with and now is much more in line with market value. The seller may be more incentivized to work with you than a seller who just listed, but you don’t want to offend them by offering far below what the home is worth.
How Much Do You Want the House?
Sometimes it doesn’t pay to play hardball if you come across the house of your dreams. A seller may choose to counteroffer, or they may simply so no, or they may have another offer on the table and opt to go with that.
For a dream home, it may be worth coming in 1-3% high – or at least pay the asking price.
Lowballing: is it worth it?
A lowball offer is generally understood to be 20% less than the asking price or so. So: can you offer 20% less on a house?
If you really want the home, lowballing is a bad idea. If you hope to pay $290,000 for a $300,000 home, for example, don’t offer $250,000 just to test the waters – this isn’t like bartering at a street market. Sometimes sellers will be so offended by a lowball offer that they will reject your offer completely, rather than bothering to counteroffer.
“I ask my clients, how badly do you want the house? That’s really the end question. If the house is $300,000 and it should be $280,000, but you really want to live here and you plan on staying here for the next 20, 30 years – does the extra $80 a month on the mortgage matter? Sometimes it doesn’t,” explains Kalem.
If you simply can’t pay what the seller is asking for – and you really want the house – is it worth it?
“It’s an outlier when it works. When a person feels insulted they will immediately stick to the initial asking price. Always put yourself in the seller’s shoes. I represent you (the buyer) and do what you want, but if this was your home, would you accept that?” Asks Kalem.
“If not, then let’s not waste time – because you could still lose this house. That’s how the universe works – no one looks at the house for three months, then you submit an offer and there’s three on the table. We don’t have to offer full price, absolutely not – but let’s offer a price that’s within reason. You have to seem like you’re serious.
There’s a difference between a deal and a steal – and sellers are willing to work with people who are looking for a deal, but they’re not going to accept a steal.”
When to Pay Over, Asking, Under, or Lowball
When deciding what to offer on a home, you should always go with your Realtor’s advice. Each home is unique. However, here is a general outline you can follow to understand how much above or below asking price you should offer on a house.
Over asking (+1-3% or more)
- It’s a seller’s market and you expect to compete against multiple offers
- Your agent has done the comps and you know the property is a great deal (which may be why it’s getting a lot of attention)
- You have extra contingencies you need to request
- You really want this house and are willing to pay a little extra to get it
Asking price
- There aren’t many repairs you’d have to make on the property and it’s in good condition
- It’s a fair price for the area and you expect it to sell fairly quickly
- The house is new to the market
Slightly under asking (-1-3% or more)
- You’re paying cash, which can make your offer more compelling than financed offers
- You believe the home is slightly overpriced based on comps your Realtor has pulled up
- You’re willing to offer or give up other contingencies to make things easier for the seller
- The house has been on the market for a little while but no price reductions have happened yet
- You’re not in love with the house and are willing to take the risk of the seller selecting another offer
Discounted (5-10% under)
- The home seems overpriced and has been sitting on the market for longer than average
- The seller has already made price reductions to get it closer to market value
- Some repairs or renovations are necessary, and the cost of these repairs doesn’t seem to be reflected in the current price when compared to local comps
Lowball (15-20% under or more)
- There are serious issues with the property (like structural problems) that need to be addressed before occupancy – and you need the extra money to cover repairs
- It’s an extreme buyer’s market and your agent agrees that it’s possible this is the best offer the homeseller will get
- The home has been on market for months and hasn’t moved even after price reductions
What does this look like in practice? Here’s how much to offer on a $500k house:
- Over asking: $505,000 – $515,000+
- Asking price: $500,000
- Just under: $495,000 – $485,000
- Discounted: $450,000 – $475,000
- Lowball (not recommended): $400,000 – $425,000
How Can You Make a Stronger Offer Without Paying More?
If you love a house and don’t want your offer to be rejected – but you can’t come in with more cash – there are a few ways you can make a stronger overall offer.
A strong offer is about more than just money, it’s also about how you submit the overall offer. The more assurance you can offer the seller that you’ll come through on the sale, the better.
Limit Concessions
It’s becoming more common for sellers to give buyers concessions – in fact, almost 42% of home sellers agreed to buyer concessions during the last three months of 2022.
If you’re worried about losing the house, though, limit your requests for home warranties and mortgage point buy downs and other niceties if the seller isn’t already offering them.
Putting More Money Into Escrow
When you put in an offer in on a house, you need to put some of your cash into escrow – which is where a third party holds onto the money until the conditions of the sale have been met.
Putting more money toward the “good faith deposit” party of escrow shows that you truly want to move forward with the sale. This is because if the contract falls through due to your own fault, the seller gets to keep the money. If the sale goes through, it simply goes toward your down payment.
“Put it into escrow to show them: ‘Hey, listen. We’re willing to put $8,000 in. We only have to put $2,000,’” explains Kalem. “’We’re willing to risk it.’ Show you that we’re serious.”
Work with an Experienced Agent
Making an offer on a house isn’t as simple as sending over some papers. The seller’s agent is looking to act in their best interest – so if multiple, similar offers come in, they’re going to look for the one that seems the most secure/least likely to go off the rails.
Kalem explains that having all your ducks in a row is essential at this point in the homebuying process, and having an experienced agent will definitely help. He notes that he calls the listing agent before submitting the offer in order to explain it; he then emails it with the bullet points of the offer in the email; then he texts them the entire thing again.
CC’ing all parties involved on the offer email, having proof of funds, and attaching the lender’s info to the offer so that your ability to buy can be verified helps. Kalem explains that showing the listing agent and their client that this is a coordinated event by everyone involved is important, because agents are looking to follow the path of least resistance.
“What the listing agent is saying to the client is: ‘I don’t think there will be any surprises. I think this is what we should go with, these guys are gonna close – even if they don’t close, they have the best chance of closing.’ And sellers will say ‘Okay, you know the house has been on the market for three months, I don’t want any problems. Let’s just go with them.’”
Of course, the highest price offer might still win over the seller – it often does. But at least this way you’ve put your best foot forward in the deal!
