What Is Fair Market Value?
You will have to determine the fair price of the home you want before you make an offer for it. This is defined as the highest price a ready, willing, and able buyer will pay and the lowest a ready, willing, and able seller will accept. To be completely accurate, fair market value cannot be established until a property is actually sold. But the trick of an estimate is to come as close as possible to the figure for which you could turn around after the closing and quickly sell the house again (within three months or so).
You can make your market evaluation by comparing the property you want to buy with similar properties that have sold in the area recently. You will already have a feel for the price from all the house hunting you have been doing.
When you are ready to start negotiating, ask your agent to show you comparables — a listing of properties that have recently sold in the area of the home you are interested in. The comparables will contain all the pertinent information on each property, including the original asking price, all price reductions, the actual selling price, the date of the closing, and the date of the original listing contract. You can use the date of the original listing to determine how long the house was on the market before it sold. Almost every real-estate office that belongs to a multiple-listing organization will have access to comparables.
After you have seen comparables, make a list of selling prices and addresses of the properties that you consider similar to yours. Take home copies of those listing sheets. Compare and rate each property against the house you want to make an offer on.
When you finish that homework, you will know exactly what other people in the area have paid in the same or a similar neighborhood. From here, stepping along to an evaluation of what your house is worth is relatively easy.
Once you have determined what you think is a fair selling price for the property, compare it with what the sellers are asking. If your evaluation price is higher than the asking price (that rarely occurs), do not get out your pen to sign an offer. Look again at the property, the neighborhood, the location, the lot, the time on the market, local conditions — everything. You may have missed something very important. However, if everything checks out, then act quickly. The sellers may just have underpriced their property, so buy before word gets out and another buyer appears and starts a bidding war.
It is much more likely that the asking price will be more than your estimate of fair market value. That is what negotiating is all about. Put yourself in the sellers' shoes for a moment. Why do you think they set the price so high? To allow room for negotiating? Because they have installed new carpeting? They want to be repaid for their newly remodeled $14,000 kitchen? Take the position that the amenities or upgrades do not always add to the resale value of a home.
Buy a small notebook and make it your negotiating journal. Record the addresses and prices of your comparables. Then record your ideal price for the home you want, your estimate of its fair market value, and the top price you're willing to pay. Keep the journal on hand as you go through the negotiating process to help determine how much you want to raise your offer.
You should figure out your ideal price for the home (likely to be a “steal” price), your estimate of fair market value, and your absolute top-dollar price. Gee, you ask, why would I want to pay a top-dollar price higher than the fair market value of the property? Because until the contract is signed, the fair market value is still an estimate, and even professional real-estate appraisers can differ in their fair market value estimates. Therefore, you must leave yourself a margin of error, a realistic dollar space that will keep you from becoming too rigid during the negotiations.
What if I'm no good at negotiating?
Relax; it's not as scary as it may sound. If you are using a real-estate agent, she will be your go-between. You won't be talking directly to the seller in most cases.
Most important of all during this negotiating stage is that you do not tell your real-estate agent your top-dollar figure — or your steal figure either. And don't ever tell the agent representing the seller. If you tell the agent you are willing to go up to as high as $123,000 for a house listed at $125,000, then $123,000 is probably what you will end up paying. You have to play your hand close to the vest during the negotiating process, even with your agent.
