So far in our series on the 5 “P’s” of Buying a Home, we’ve looked at People and Property. Today we’ll cover Price, the 3rd “P”. Let’s start with some definitions: the term market value means what a property “should” sell for, whereas the term market price is the price a property actually sells for.
In order to determine “market value”, a Realtor examines recent sales of similar properties as close to the subject property as possible, and then makes adjustments based on the conditions of the similar properties and the condition of the subject property. For example, if the subject property has a new roof it probably will sell for more than a similar property with an old roof sold for last month. It’s important that we’re comparing the subject property to sold properties that are truly comparable (or “comps”); if possible we wouldn’t want to compare a split-level to recent sales of colonials. Likewise, even if they’re right across the street from each other, we may not want to compare Rumson real estate directly with Fair Haven real estate. In general, a house priced at market value (often called fair market value) is said to be priced “at the market”, while homes listed at prices higher than that are said to be priced “above the market”.
Realtors routinely determine market value for a homeowner who’d like to know what price to expect his house to sell for if he lists it for sale. This estimate is known as a Comparative Market Analysis (CMA), and it also considers the prices of similar homes that are currently listed for sale in the same area. The reason is obvious: if two homes are essentially identical except for the listing price, a potential buyer is going to lean towards the one that’s listed at a lower price. The CMA results in an estimate of not a specific price but a price range in which the house most likely will sell. The Seller considers the estimated range and decides what the listing price will be. Often the listing price is slightly above the estimated market value, but if a Seller wants the home to sell quickly, the listing price will be right at the market value (and occasionally below it, if the Seller wants to stimulate a bidding war). Some Rumson real estate and Fair Haven real estate is initially listed at far above fair market value, but these homes tend not to sell, or to stay on the market for a long time with multiple price reductions.
Now all of this may be interesting, but you’re probably thinking the price that really matters is the price you end up paying for a property you’d like to buy. You don’t want to pay more for a Rumson home than it’s worth, and you’re thinking that ideally you’d like to buy a house for less than it’s worth. If you find a Rumson property that you really like, how do you know what it’s really worth? A good Realtor will offer to determine current market value for you by doing a CMA even though you’re the Buyer and not the Seller. If your Realtor doesn’t automatically do a CMA for you by all means ask for one, and ask to see the “comps” that were used to determine current market value. Question any you feel are not real “apples-to-apples” comparables.
Once you have a number in mind that you’d like to use as an opening bid, ask your Realtor if you think it’s a reasonable place to begin the negotiations. If you submit a bid that’s too low, the Seller may not think that you’re serious, and may refuse the bid outright. Your Realtor can tell you what the percentage is for the mean or average selling price vs. listing price in the town you’re considering, and as long as your opening bid isn’t markedly lower than that percentage you should at least expect the Seller to come back with a counter offer.
If you’re being represented by a Buyer’s Agent (and not a Disclosed Dual Agent- see our discussion about the 1st “P”), that person will be working only for you, and will have a fiduciary (highest degree of trust) responsibility to negotiate the lowest price for you. The counter offer made by the Seller often will give you an indication of how much he’d be willing to lower the listing price. Remember, he and the Seller’s Agent want to negotiate the highest possible price. Determine a definite “walk away” price and be firm with it; sometimes a Seller will have an unrealistically high estimate of the worth of the house. If you and the Seller are able to agree on a purchase price, it may not be as low as you hoped it would be, or as high as he hoped it would be, but a reasonable compromise between a knowledgeable Buyer and a knowledgeable Seller.
If you’re not able to negotiate a mutually-acceptable price, don’t get discouraged. There’s almost never just one “perfect house” for you; just accept it as something that wasn’t meant to be. On the other hand, consider what the typical price appreciation has been in the town where the property is located. If prices historically have increased by 3% – 4% per year and you’re walk-away price is just 2% above market value, perhaps you should be more flexible- in a year the fair market value probably will be more than you paid for the house. Ask me to show you how much the median price of Rumson real estate and/or Fair Haven real estate has changed over the past few years.
The negotiated price that you and the Seller agree to at this point may not be the actual price that the property sells for. In New Jersey, the next step is for the executed contract to be reviewed by the Buyer’s attorney and the Seller’s attorney (this is a 3-day period known as “Attorney Review” that we’ll discuss in part 5, “Paperwork”). During the attorney review period, it’s possible that the Seller will be offered a higher price by some other prospective Buyer, and either decide to accept that higher price or ask you to agree to match it. A good attorney will always be able to find a way to disapprove an executed contract during the attorney review period, and there’ll be nothing you can do about it. On the other hand, once both parties have agreed that the attorney review has been completed, although it’s theoretically possible for the Seller to accept a higher price from a different Buyer, you will have legal recourse to several actions to ensure that the agreement is concluded or that there are monetary penalties against the Seller.
After attorney review has been completed, the Buyer has the right to hire a home inspector to perform a thorough inspection of the house and grounds. These inspections currently cost between $400 and $600 in our area, and I strongly recommend that every Buyer use a competent home inspector before proceeding with the purchase of a home. The home inspector will produce a detailed report, noting items that the Buyer should be aware of. Some will be comments about the age of an appliance or the roof, etc. and the expected useful life of such an item; these are items just for your information. However, the inspector may also find other items that are safety-related, code-related, etc.
You, your Realtor and your attorney should review the entire home inspection report and identify those specific items you feel the Seller should reasonably address. The Seller will review them, and normally agree to either correct the issues or offer to give you a monetary credit so you can address them yourself after the closing date. On the other hand, there may be other items that the Seller feels are not reasonable, and may decline to address them or give you any credit towards addressing them. Normally there’s language in the purchase contract that gives the Buyer the option of terminating the agreement if there are significant items that the Seller refuses to address.
This has been a long post, but I hope you’ve found this discussion of “Price” to be helpful. Tomorrow we’ll move on to the 4th “P” of buying a home, Payment.
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