Are you getting a housing bargain or bad advice?

Have you heard the so-called "financial gurus" that suggest making offers on homes that are 60% or 75% or whatever figure they choose relative to the asking price? And then tell you to just keep shopping for a home until someone accepts your lowball offer? Sounds like a good way to get a bargain, right?

Well - maybe. One of the biggest reality checks I received after working real estate full time is how pricing really works and the true meaning of market value. I admit that before I became an agent, I thought that 75% rule was a good one for investing in property even though that might not work for a house that you really liked and wanted to live in.

Here's the problem: if all houses were priced according to their true market value, then that 75% rule would work fine. But if you offer 75% of the asking price for a home that's way overpriced, then what have you got? Probably about what the house was really worth anyway. Secondly, even for investment property, can you make that lowball offer for a foreclosure that's priced to sell and expect to get it? Not likely. Even in today's market, foreclosures that are priced correctly can get multiple offers within days of being listed and often go over the asking price. Many banks and investors have learned how to move 'em quickly.

The makings of an offer

Price is ultimately what most people think about on a house, but that's far from the only component of an offer. I'll sideline other issues for the moment and focus on market value. One very telling statistic that I get as an agent using the MLS is what a house sold for relative to the asking price. In the Cincinnati market, the average sales price to list price is around 94%, with the expected bell curve around that figure.

Here's the kicker though - that's relative to the LAST listing price, after all those price reductions a seller goes through to reach the asking price where they should have started to begin with. Market value really boils down to what homes have been selling for in a particular area relative to their condition - asking price is what gets buyers in the door.

This is one area where an agent should really be earning their money for you. When you decide to make an offer on a house, your agent should provide you with information about comparable sales in the area so that you can get a feel for the price range you want to offer and whether that particular area is trending up or down. Other factors such as condition of the property, whether the seller will pay closing costs, even the seller's motivation (if it can be determined) may be part of your calculation.

Does this mean that you can sometimes offer full asking price and still get a bargain? Absolutely! But knowing whether it is requires good, solid analysis of the local market as opposed to basing decisions on some arbitrary percentage. Frankly, I won't work long with someone who just wants to throw out lowball offers until they strike gold. It's simply a waste of my time and theirs.

All that said, part of negotiation is still an art form. Other components of an offer like home warranties, owners title policy insurance, inspections and other contingencies can be critical in reaching an agreement. Especially in today's market where buyers feel they have leverage to ask for a low price and then beat the seller up on everything found during a home inspection. If the seller isn't in financial position to make corrections on the house, or you lost all goodwill while driving hard to get the lowest price possible, the deal you thought you had could come apart when an issue comes up. If it's truly a house that you want, then be prepared to let your agent work for you in helping reach an agreement that works for all parties.

Next month I'll discuss pricing your house correctly and what makes a comparable property, along with some common mistakes sellers make that ends up costing them.