You take the most important step in evaluating a property before you decide to make an offer. When you make the initial decision that you like it, that it will work for you, and it seems to be reasonably priced, you are on your way. Once you’ve made the offer and it has been accepted, you will pursue evaluating other important aspects of property. Written correctly, the purchase contract gives you the right to evaluate the property as you see fit. A good contract also allows you to terminate the contract if you are not satisfied.
Before You Write the Offer
Before you feel comfortable submitting an offer, you'll want to evaluate the property, there may be specific issues you'll want to investigate. Your intended use of the property is one of those things. If you are a ham radio operator or if you want to run a business out of the home, you may want to review the subdivision covenants. You might also need to talk with the city or county planner before moving forward.
Schools may be another area of concern. You may want to verify what school district the property belongs to and learn about the specific schools your children would be attending. If the quality of the schools is an issue, is open enrollment a possibility?
Obvious property defects are another reason to hesitate. For example, let's say you notice a crack in the foundation. That could indicate a huge expense down the line so you may want to have a structural engineer look at the property. If the home is near a stream, you may need flood insurance. Or, you may not want to take that risk at all. In any case, you'll want to look into the property’s flood plain status before putting together an offer.
In most situations, it is best to go ahead and make an offer contingent on a satisfactory review of these issues. Once you have a firm purchase contract in place, you can pursue a detailed evaluation of the property. There are two arguments for this approach. First, in a hot market, you may lose the property while you are trying to get the information you need. Second, you should know whether you and the seller are going to find common ground on price, closing date, and other issues beforehand. Then you will feel more comfortable spending time and money on investigations. Make it part of the inspection you carry out after you are under contract. Remember, if this is your plan, you need to make the contract contingent on a satisfactory resolution of these issues.
How Much Should You Pay?
If you are getting a loan to purchase the property, your lender will require you to hire a professional appraiser to verify that the contract price is reasonable. This does provide some financial protection for home buyers. But you need to look at this issue on your own prior to contracting on a property. Two reasons: (1) appraisers are fallible and (2) you will have spent a lot of time and money on the deal before the appraisal is completed.
We typically look at several pieces of information before deciding on an offer price. First, we take a hard look at sales in the same neighborhood over the past 3-12 months. In neighborhoods with 5 home models built by the same builder, we will have a very clear feel for the value of the home. In these neighborhoods, sales of comparable properties may differ by only $10,000 or so.
The process can be difficult in more heterogeneous neighborhoods where home styles and sizes vary greatly. In those neighborhoods, a formal market analysis may give us a much broader range of values to work with. However, if you have seen enough homes, including a drive-by of comparable homes sold in the previous year, you can still make good judgments on value. You will have a good idea how the home compares to the others in the neighborhood. If you know that comparable homes have sold between $225,000 and $275,000, it's clear how reasonable an asking price of $250,000 might be.
The Hot Seller's Market
For buyers looking in a hot seller’s market, prices tend to be higher than comparable sales would lead you to expect. If sellers of the better properties didn’t price their properties high and get these prices fairly regularly, prices wouldn’t go up the way they do. Because sellers in a hot seller's market understand what is going on, they are unlikely to accept offers that are substantially less than their asking price. This is true for at least the first few weeks after a new listing hits the market and its why evaluating the property is so important.
It isn’t necessarily a bad idea to pay top dollar for a good property. If you are looking for a bargain in a hot market, you may find one in a property that nobody wants. But if the current owner is having a hard time selling the property in a hot market, imagine the fun you’ll have trying to sell it when things slow down.