How much discount should you offer on a home purchase?

This is a question that we are asked several times each month. It varies in form a little each time from submarket to submarket, but I am surprised how often it’s asked in today’s tight housing market.

If you have not been reading this newsletter, than you may not be aware that the supply of lots and homes is very tight. Economics 101 – supply and demand. With greater demand and less supply, prices rise. That is what is happening in Austin, Houston, San Antonio or any market that has a better than average unemployment. We’re blessed. So whenever I hear someone ask, “How much discount should I offer on a house?” my first thought is that there is not a magic formula anytime. Educate yourself before you start down this path. This question can really only be answered on a case by case basis. Before we discuss how that works, let’s give the best possible general answer that we can.

According to the Austin Multiple Listing Service (MLS) records, the average discount off list price for all homes sold in the Austin area during the last 12 months is around 2%, According to San Antonio MLS 3% to 4%. Average days on market in Austin around 30 days. Average days on market in San Antonio is 122 days. Exceptions occur on either side and I don’t know that all foreclosure and short sales are included in MLS data. In the last six months, resale, foreclosure, and new home inventory have decreased dramatically. This seems to be true in most commercial and investment real estate in the four Texas metros.

So, should you just offer 96 or 98% off list price by default? Absolutely not! The right way to determine how much to offer on a house is to research the neighborhood for recent sales and then compare the house you are considering to those recent sales. Certain areas of town are doing better than others. If you are looking at foreclosures, they typically happen in clusters, and very seldom in desirable areas.

Keep your expectations real

Establish a realistic price range if you are whether you are selling a home or buying. Realtors can serve as buyer’s agents by doing a Comparative Market Analysis on the home you are looking to buy. Most consumers probably are not an expert on real estate, and two months spent online researching real estate is not a replacement for a good realtor who knows the business, the local market, and the transaction process. If you are buying, start with a mortgage professional. Meeting with an experienced loan officer will help you determine the price range for your search.

Use a real estate professional

Buying or selling a home or investment property is a large proposition and you can bet sellers and buyers want to get the best deal they can as quickly as possible. Even someone like myself that is considered an expert will use a Realtor because they are bringing an objective perspective to the process. Most quality Realtors will have the best information available with respect to market research so they can recommend the best price for your home to sell or buy in the most expedient manner possible. They’ll be able to offer tips on making your real estate more attractive to potential buyers. They’ll show your home for you, field all inquiries as well as handle objections professionally. Most consumers want an expert to present offers to you as they come in with sage advice and data. In essence they remove the burden from you. They’ll often highlight your home to agents in their office and schedule previews with groups of agents from other offices. In short, they’ll be able to provide a lot of qualified leads or opportunities that you might not know how to find.

With the internet and all those real estate sites, do you really need a Realtor?

Yes. Those sites have disclaimers for inaccuracies in their data. I would not want to base a major financial decision off of faulty data. If asked why I insist on a Realtor, it’s because to get the property sold in a timely and judicious manner to a larger market than I could ever hope to reach. The Realtor may have access to additional information in the market that is not available to the public. My doctor tells me not to self diagnose of self treat. I would consider most good brokers in the same light.

Peers and family are not the best source for real estate advice. To get the best, you need to pay for it, and they need to have access to the latest education, technology, information and training. Buying a home is no different. You get what you pay for. I have used a real estate broker or lawyer on every transaction I have been involved in.

When a buyer has formed a list of potential purchases, the homes will fall in to three categories:

Category #1: The home is overpriced

Every prospective buyer thinks this is true, but it’s not. Unfortunately we run into this often enough to discuss. The seller paid a certain price, financed 100% of the purchase, got a home equity loan for another 10%, and has only paid on a thirty year loan for about three years. This is a problem, especially if the buyers don’t have or aren’t willing to bring any cash to the closing table. If you bought a house in the last three years, there is a good chance you need to keep it a while longer before you sell, even with as strong a market as we currently see in the Texas region.

If the seller needs more than market value for their house just to break even, there’s a problem. Their listing real estate agent has not been honest with them regarding the market and that’s where the homework of a great real estate professional helps. I know you’re probably thinking that could never happen. Trust me, it does happen. The only thing to do here is to make an offer, based on recent sales in the neighborhood, let your real estate professional educate the listing agent, and hope you are not the first ones to introduce the seller to the reality that their property is significantly overpriced. The success rate is about 50-50. Don’t fall in love with the real estate and try to stay emotionally detached. Sometimes you run into a seller who either cannot, or will not, sell their home for the current market value. In this category we will need to offer what you can offer and be willing to walk away if the seller is unrealistic.

In the current market in Texas and other ‘supply starved’ markets, there is a chance of having to pay over list price due to the lack of inventory in a desired community. How much? Again, this is where the advice of a seasoned veteran real estate professional is needed. It eventually becomes a desirability competition – the buyer who is willing and able to pay the most will win.

As the market continues to get tighter and tighter (less inventory, continued demand), educate yourself and be willing to honestly assess supply and demand and not worry about ‘getting a deal’, like you thought you could or heard you would. Education is the best negotiating tool.

So should you offer $250,000 for that $350,000 dollar house? How bad is the condition or location of that house? Only on TV and ‘over drinks’ does this ever happen in the Austin market. We seldom see those types of discounts. If we look at historic numbers, those never show up in this market, if at all.

Category #2: The home is priced at market value

This occurs most of the time. Now it becomes a matter of how much you want the home and how much the seller wants it sold at this moment. This is where education, a great Realtor, and negotiating skills play an important role. Without those it is hard to gauge the seller and agent’s motivation. They want the best return for their investment. If the home is in great condition, with a great school district and a great location, we will have to be aware that competition may show up at any time. As well be aware of multiple bids in today’s current market. Speed is important. The proper course of action in this category is to offer what you have ascertained to be market value and negotiate from there based on the seller’s reaction. Sometimes you will pay retail (the seller’s price).

Category #3: The home is priced below market value

This is a best case scenario. This seller wants a quick sale and is making that clear. But be very careful. Many times we end up with multiple bids on homes priced in this category. Multiple bids means the price goes up. Speed really matters here. Now you have a decision to make as a buyer. If this is the home of your dreams and you have been looking for a long time and nothing else comes close, you have to decide if you are willing to risk losing the home by making a low ball offer. If the home is in above average condition and in a great neighborhood, other buyers will recognize this too. In today’s tight market, we can’t tell you how many unfortunate stories we’ve heard like this. After weeks of looking, a buyer finds “the one” they have been seeking. The sellers did their homework and priced it right. But, the buyer insists on a low ball offer that loses them the home. Then the search begins all over again and they have to settle for their second, third or fourth choice.

With this type of opportunity, buyers should make a reasonable offer, perhaps a little less or more than full price in the regional markets based on the advice of your real estate and lending professionals, and keep the negotiations moving along to a contract. It is not about the best deal, but what is best for you and your family.

So how much should you offer on a house in your submarket? It depends. But now is the time to buy with rates, values, and supply as low as they are in Austin, San Antonio, Houston and other Texas cities. If not now, when?

What type of annual return should I be expecting?

First, you are buying a home, shelter, a place to live. The decision needs to be based on your family’s needs – size, features, location, school district, etc. In today’s local markets, most should expect a smooth, consistent 3-5% annual growth rate in housing. There be submarkets that have higher appreciation rates. The national, regional and local markets are still volatile, but in an upward direction. Each local market and submarket has its own dynamics affecting values.

I hope spelling out your options makes more sense now. There are some great opportunities out there these days. And interest rates are low! These conditions will not last forever. If you can’t get the discount you want, you need to understand not only where the market is, but where it is going. After over five years of stability and negotiable prices, it is now a stronger seller’s market. So educate yourself, get qualified, and good luck! Now is the time to buy!