What price should I offer in a multiple offer situation?

One of the biggest challenges faced by home buyers in today’s market is trying to figure out what to offer when there are multiple offers being presented on a property.  This is a tough question to answer but here are several things to consider. 

Asking price and market value

The asking price really only determines how many buyers will be attracted to the property.  Market value is really hard to determine in a strong seller’s market.  Buyers must consider a price that they are able to pay based on their financial situation, and what they are prepared to pay.

What You Can Afford

You should come to the offer table pre-approved. When figuring the total cost of the property, be sure to include closing costs into your budget. Closing costs are typically 2%-5% of the final purchase price.

 
Wants vs Needs

Buyers cannot pay more than they can afford so the offer price must fall between what they can afford and what they want based upon how badly they want the property, how much they need a property, and whether or not they believe prices will continue to rise, thus limiting the risk when paying more than the asking price. (Read more about wants and needs here).

Buyers must establish a reserve price- meaning, what price at which they are indifferent between a deal and no deal.

If a buyer is faced with a multiple offer situation, they will most likely choose to offer their reserve price. If not, they risk losing the property. They must be willing to take the risk.

In other words, buyers have to ask themselves, at what price do I not want the property? If the offer is successful and you own the property, will you feel great about the decision?

Terms and Conditions of the Offer

Other things to consider are terms and conditions of the offers.  You do want to make the terms as advantageous as possible for the seller to increase the chances of your offer price being accepted. Considering the seller’s needs is the best way to achieve an advantage in the competition. Your ability to close the deal quickly is often an advantage. For example: buying with all cash or having your loan pre-approved tells the seller that you are a serious buyer. Your flexibility and accommodation of seller time frames can also be beneficial. For example: extending the closing time frame for a party that cannot move for several months; or making your offer for the property “as is”, meaning you will pay for any needed repairs. In  some instances this means the offer must be unconditional and if not, then your offer will not stand a chance. This is extremely risky. First off you must be absolutely certain that your financing is in place and second you must be prepared to accept the condition of the property at any cost. 

If you are not prepared to take that kind of risk, then accommodating the sellers' closing date as much as possible will sometime off set the need for the seller allowing the buyers to conduct a building inspection and time to arrange financing. Again, we are not suggesting that you not have conditions in the offer, just understand that they do affect the chance of the offer being accepted by the seller.

Submit a deposit with the offer!

It seems a trend today not to bother with a deposit until all condition dates are passed and the property is firm. This is a huge mistake, especially in competing offer situations.  Deliver a deposit within 24 hours of acceptance of the offer.  Remember, the deposit is a gesture of good faith. By submitting a deposit, you are telling the seller that you are serious.  Furthermore, the larger the deposit the more serious your offer!

Make a human connection

Often times, if a buyer writes a letter to the seller, the seller will take into consideration the people behind the offer and not just price, terms and conditions.  Never tell the seller you want to completely tear down the home and renovate! Instead tell them how much the property means to you, and how you see yourself or your family living there and taking care of the home.  This works best if the sellers have lived in their home for many years and have a tremendous pride of ownership.