The ABC’s of making an offer

Listing price strategy

#1: Ridiculously overpriced!

These sellers may have listened to a real estate agent over-inflate the value of their home in an effort to obtain a listing. They may even have ridiculously overpriced it themselves. There is a natural tendency on the part of sellers to list with the real estate agent who gives them the highest price. There is a tendency by some real estate agents to tell the seller whatever they want to hear in an effort to obtain the listing. These homes can be 10-25% overpriced, sometimes more. It may take a few months for reality to check in before they realize themselves that their home is significantly overpriced. The longer an overpriced home is for sale, the more likely you can get the seller to negotiate.

#2: Slightly overpriced!

These sellers fall into 2 main categories:

  • Those that genuinely feel their home is worth every penny of their asking price.
  • Those that want to leave some room to negotiate.

These homes can be 5-10% overpriced. The majority of homes listed for sale are priced using this marketing strategy.

#3: Priced at fair market value

These sellers have carefully and realistically studied other homes for sale. They have priced their homes very competitively. This strategy usually results in a quick sale near, at, or above asking price.

#4: Priced below fair market value

These homes are priced below value. Perhaps the seller wants a very fast sale. Perhaps the real estate agent recommended too low a price. These homes often instigate a bidding war and sell over asking price.

Factors Affecting the Price You Should Offer

Offering price factor

#1: Comparable sales – know the market

What did similar properties recently sell for in the neighbourhood? No very recent sales? Go further back but only seriously consider sales that have occurred in the same market that you are currently experiencing. The more the market has gone up or down since the comparable sold, the less relevant it is. Generally the further back you go the less relevant that sale is too. No sales within this current market? Go further afield. Are there recent sales of similar properties in nearby neighbourhoods which generally relate? Use these comparables making allowances for neighbourhood value differences. Be sure to compare apples with apples. Do the property conditions of these houses compare to “your” house? Use a reasoned analysis of these comparable sales as the greatest indicator of the true market value of the property you want.

#2 : Property condition – does a bundle need to be spent on it?

Is the property condition average, above average, or is it a dog? Check it out! How much you have to spend on repairs will affect your offering price. A home inspection should be done, ideally now, before you offer. If you are not going to do a pre-inspection then objectively analyze necessary repairs and improvements that must be made and consider these expenses before you decide on your offering price.

#3: Major improvements – did the addition cost the owner a fortune?

You should take into consideration that amount of money which the owner has spent on major improvements. How much did the main floor family room cost? When was it done? Extra bathrooms? New kitchen? Pool? Your salesperson can give you some guidance as to the current market value of any major improvements the seller may have made.

#4 – What did the owner pay for the house?

What the owners paid for the property may not have any bearing on its current market value but it may have a bearing on your offering price.

#5 – What is the seller’s motivation for selling?

Frankly, if an owner is in the situation that they really must sell a good property then the price it sells for is not dramatically affected because of their increased need to sell. A seller’s motivation however may well affect their willingness to undertake serious negotiations for the sale of the property. On the other hand if an owner really doesn’t have to sell, that motivation can significantly affect the final price. Buyers have to pay a premium to secure a property from an owner whose motivation for selling is strictly money. Almost any home can be bought for a price.

#6 – How long has it been on the market?

The longer a property has been listed for sale on the market generally the greater the likelihood the seller will be willing to negotiate.

#7 – Conditions cost you dollars

What contingencies are you putting in your offer? If you are making your offer conditional upon this, and conditional upon that you will have to use a premium dollar in the offering price to entice the seller.

#8 – What are the prevailing market conditions?

Is it a hot “seller’s market”? Your price has to be very attractive to even be considered. Not going high enough would leave the door open for another more reasonable buyer to scoop the property. Is it a slower “buyer’s market”? Sellers welcome the sight of any offer and will likely be more flexible in their negotiations.

Is it a “balanced market”? There is no clear cut rule as to whether your offering price should be at the higher or at the lower end of your bidding range. In a balanced market you might be able to undertake aggressive negotiation strategies, or you might find yourself in a bidding war. Let other offering price factors apply.

Is the market “in transition”? The very wisest of the wise can’t predict upcoming market changes with certainty. Even in extended periods of balanced market there are blips of incredible activity followed by periods of stability or inactivity. The market’s current activity level is as good a predictor as any of a market in transition. Ask your salesperson for their insight.

#9 – Multiple offer bidding war

A bidding war should not change the fair price you are willing to pay for a property but it will change your offering and bidding strategy. Read the “Insider Secrets on Bidding Wars” section.

Final determination of your offering price

Use Offering Price Factor #1 – Comparable Sales to establish a base price range for the house. Analyze each of the other Pricing Factors as they apply to this specific property and make adjustments to your base price range either up or down to establish your estimation of a fair price for the property. This is the price at which you should hopefully be able to attain the property at the end of negotiations. The price at which you begin depends upon your negotiation style and strategy. Review the ‘Hints in the Fine Art of Negotiating’ section. If your agent is a buyer agent then share your fair price determination and your negotiation strategies with them. If your salesperson is a sub-agent or a dual-agent then keep this information confidential as anything you tell the salesperson must be conveyed to the other side.

Deposit

How much deposit do I need?

The short answer is enough to reassure the seller that you are serious. The normal deposit in a Toronto market would be approximately five percent of the purchase price. Larger deposits do have the tendency to impress sellers and might be a key ingredient in getting a seller to accept a slightly lower price.

Are my deposit funds safe?

The Province of Ontario requires that all deposit funds be placed into the broker’s trust account within two days. There are strict laws tightly regulating trust account funds. Be certain that your cheque is made payable to the Real Estate Company’s name, “In Trust”. Real estate deposit funds placed into trust accounts are also insured to a maximum of $100,000 per transaction. Ostensibly it is the salesperson who pay for this insurance protection for the Buyer.

Who gets the interest?

If provided for in the Agreement of Purchase and Sale, the deposit will be placed in an interest bearing instrument within the trust account and any interest will accrue to the buyer’s benefit. The buyer will receive a separate cheque for the interest after completion of the transaction. Expect to be required to release your social insurance number to the broker holding the deposit as T5’s will have to be processed as well. Each Brokerage sets its own policy for interest payments in its trust account so carefully read the provisions typically detailed in a ‘schedule B’ provided by the Listing Brokerage and requested to be attached to all offers on its Brokerages’s Listings.

When do I need the deposit money to actually be in my account?

The Agreement of Purchase and Sale will indicate that the deposit is to be submitted either “herewith” the offer, or “upon acceptance”. Your funds should be in your account when you present your deposit cheque. Some real estate companies require that the deposit cheques be certified prior to submission to the listing broker’s office.

NOTE: DEPOSIT FUNDS ARE A LEGAL BUYER OBLIGATION. Please be certain that you have ready access to any deposit monies you propose in your offer. If the funds are not available the seller is granted legal opportunity to terminate the transaction. If you cannot immediately access proposed deposit funds consider a two stage deposit wherein a lesser amount is presented with the offer to be followed by a further deposit sometime later before completion.