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How to put in a starting bid on a house
April 5, 2005 6:45 AM   Subscribe

How does one go about figuring out what to bid on a house? The problem that I am faced with is the house I am interested in is listed by my realtor and thus we are in a dual agency. He cannot instruct me on what to bid nor can he instruct the seller that my bid sucks or is great. Please help me with this.
posted by thebwit to Home & Garden (31 answers total)
 
He should be able to give you a list of comparable houses in the area that have sold recently. Use that as a guideline and bid accordingly.
posted by jeremias at 6:48 AM on April 5, 2005


hire an independent appraiser.
posted by HuronBob at 6:48 AM on April 5, 2005


They appraise a house by comparing similar houses in the local market, then adding/subtracting according to differences. Therefore, you simply must compare prices.

Alternatively, you could hire another agent to act as your agent (ie, buyer's agent) in that transaction. I've no idea what kind of fees that would cost, might be prohibitive.

The conflict you describe is interesting. I never thought of such a possibility.
posted by Goofyy at 6:49 AM on April 5, 2005


It depends greatly on where you are and what the market looks like. Where are you? What is the price range of the house?

That said -- you really should bid at or below what you think a fair price would be for the house. The list price may or may not bear a relationship to a fair value. You need to figure out what comparable homes are selling for, and use that a basis for your bid. You can often find recent home sales data in your local newspaper. Or ask your realtor to show you a few "comparable" and the sale prices on his/her computer--they can do this easily. You'll be able to tell if the comparables are actually similar to the listed house or are bogus (i.e., they are mansions).

If that gets you nowhere, you should at least take 10% off the list price for your first bid. Some would say 15%-20%. Realtors often build in at least a 15% "reach" in the list price, so don't worry about making anyone mad.
posted by Mid at 6:53 AM on April 5, 2005


Depending on how hot the market is where you're buying, of course. Occasionally (but rarely) when a market really heats up, good houses sell above asking price. How long has the house been on the market? Have they previously reduced the price? If the house has been on the market long without a price reduction, it might be easier to get response from a lower offer vs if it's a new listing.
posted by raedyn at 6:57 AM on April 5, 2005


Also -- I would disagree on the appraiser suggestion. In my experience, appraisers just ballpark it and can't really give you detail like whether your bid should be $10k higher or lower.

Also also -- consider how long you plan to stay in the house. There is a saying in real estate that inflation and time cures all mistakes. If you stick in the house for 10 years, overpaying by 5-10% now will mean very little way down the road. (This doesn't mean that you should overpay now, but the risk posed by overpaying is diminished if your time horizon is long). If you think you will be selling in a sort period (less than 5 years), then getting the price right is much more important.
posted by Mid at 6:58 AM on April 5, 2005


"If that gets you nowhere, you should at least take 10% off the list price for your first bid. "

I don't suggest doing this, as it depends heavily on the local market. Obviously you live somewhere without frequent overbidding. Around here, if you lowball by 10% and follow up later, you'll discover your bid was as much as 30% below the final sale price. That may not apply to thebwit, but it's the kind of thing he needs to know before applying some random rule of thumb.

In any case, this just points out that you need to gain an understanding of your local real estate market before you bid. Your real estate agent, for reasons of avoidance of conflict of interest, seems to be unable to provide this knowledge. Get a new agent! Helping you understand the market is one of the tasks you're paying (indirectly) an agent for!
posted by majick at 7:04 AM on April 5, 2005


I can tell you how it works in Michigan. Realtors use a couple of tools to approximate fair value. 1. SEV - State Equalized Value. This is based on the State assessor's opinion of the market value and on the millage of the home. Therefore, SEV is considered the 'true cash' value of the property. However, SEV is not the market value. It is common practice to double SEV to obtain the fair market value. My wife who is a realtor has compared the price at which houses were sold in the last two years and the average falls right around twice the SEV. A house may get sold above the fair value if there are other buyers interested in it for example. Or sold under fair value if the seller is in a hurry to sell it.

The second tool that realtors use is the CMA - comparative market analysis. They create a report of all comparable houses sold within half a mile radius in the last six months. This gives a clue to how hot or cold the market is and how desirable the neighborhood is.

Since you do not have a realtor to represent you, you can definitely ask the listing agent to give you the SEV of the house if it is available or to prepare a CMA report for you.

But the bottom line is, the primary responsibility of the listing agent is to the seller and you are on your own when you sign up for a dual agency. Actually, it doesn't cost a dime to hire a buyer's agent because the commission for the buyer's agent comes from the listing agent. At closing, both agents split the total commission that the seller has agreed to pay. As a buyer you don't pay anything. So why not get a buyer agent to represent your interests - for free?
posted by gazoo at 7:11 AM on April 5, 2005


I'm amazed that folks don't agree with the "independent appraiser" concept. A good appraiser won't "ball park" the answer, he/she will give you the documentation to back up the estimate, his/her methods of determining the value should be disclosed before you enter into an agreement. In an era when home values are SO high, why play amateur appraiser yourself?? And, the concept of "if you're 5-10% off it won't matter in the long run"...crip, why give away money?

Second choice would be another agent, but, again, they have a vested interest in what happens, and, for that reason may steer you in the wrong direction.

And the SEV isn't the "true cash value" of the house, it is the amount that is taxed, and is typically set at 50% of the actual value. I think gazoo sort of has it backwards.

And...last... there are SO many variables in this that any advice you get here based on the little information we have should be taken with a grain of salt.
You are making a huge investment, spend a few bucks to actually find out what the house is worth before you make an offer.
posted by HuronBob at 7:23 AM on April 5, 2005


Look at houses in the area comparable in size and amenities. Call another real estate agent and ask what the general price is for a house in the area of the given size and amenities. Call the seller directly and find out what they are asking (this could mean the house will be sold directly to you and the seller would not have to pay agency fees, increasing the value of your bid). If possible, deal directly with the seller and cut out the apparently useless realtor who isn't helping you in any way, and therefore does not deserve the $10,000.00 or so he or she would collect if the sale goes through.

Most importantly, (I know I've already said this) find a comparable house and see the price of that. Deal directly with the seller and bid about $10,000.00 under (your realtor's fee). Try and gauge the seller's reaction.

Before you buy, keep in mind you will have the house evaluated by the bank. They will tell you what the house is worth (though they generally estimate a bit lower) At this time, you can pull out of the sale. Your only possible loss at this point is a thousand dollars or so you put towards your good faith bid.
posted by xammerboy at 7:39 AM on April 5, 2005


The challenge for us in figuring out how much to bid had little to do with the appraised value or even the comps, but in trying to figure out what would win the bidding process. Or at least take us to the next round where there would be counteroffers, etc. and fewer interested parties under consideration by the seller.

It's a psychological guessing game, and it's not like there's any real answer. You can add $500 to your price to put you slightly over someone else (if there is) who hasn't done that. Etc. etc.

The other components of your bid seem to have an important psychological component as well - or who knows if they do because we don't know what works when we win, so...

Our realtor wrote a letter about us and why we liked the house and wanted to move there.

The information from your lender - of course this depends on the market - can make a difference. We lost one house because of some confusion over preapproval and prequalification and the seller just got nervous.

The other terms that you choose in your bid (down payment, days of escrow) can also be influencing factors.

Our realtor was enormously reassuring - I wrote effective but she was very clear that we really don't know what works or not so you take your best shot - in this process. It's really what we were paying her for; helping us put together a "clean" offer. Since the realtor stands to make double the commission in this sale, they should offering twice the service; sounds like you are getting a bit of the shaft.

Would you consider asking another realtor to help you put the bid together? Given how easy the sale could be for them, you might get a quick and eager response...
posted by stevil at 7:40 AM on April 5, 2005


Would you consider asking another realtor to help you put the bid together? Given how easy the sale could be for them, you might get a quick and eager response...

That might not work out. In my area (am a Realtor), this theoretical second realtor would very easily lose his commission if the first realtor took a (deserved) challenge to his board that HE (or she) is the one that introduced you to the property.

And, knowing that, I doubt many Realtors would take you up on it.

I would expect that your current person could give you, without comment, several MLS listings of what he considers comparable closings in the area in the last, say, six months. You could ten see for yourself what the average sale price was, and also compare it to the average asking price.
posted by John Kenneth Fisher at 8:02 AM on April 5, 2005


Ah! I can't believe this slipped my mind. No, you should not try to go out and get another Realtor yourself, as that puts everyone in a difficult and unfair position as I said, HOWEVER, your current Realtor can likely set you up with someone else in their office, or perhaps their manager, to be sort of an acting-agent for you for the purpose of negotiations.

As a side note,

If that gets you nowhere, you should at least take 10% off the list price for your first bid. Some would say 15%-20%. Realtors often build in at least a 15% "reach" in the list price, so don't worry about making anyone mad.

Also wanted to add that this absolutely would not apply where I am a Realtor (Monmouth County, NJ if you need to compare).

Offering 320,000-360,000 for a 400,000 house would likely anger the seller to the point where it would poison any further attempts to negotiate.
posted by John Kenneth Fisher at 8:09 AM on April 5, 2005


IMHO (and there are plenty who disagree on this thread, obviously), you should not worry about making sellers mad when you bid. Trying to make everyone feel good is not part of buying a gigantic asset, and worrying about the seller's feelings or emotional state is a loser's

If a seller gets mad or clams up--so be it. There are plenty of houses and plenty of sellers. If you can't stand the thought of "losing" the bidding process, you are certain to overpay. And, if you are in a market you "have to" bid higher than the list price, good luck when the real estate market cools.

Also -- regarding the bank's appraisal. In my experience, the banks don't want to tank deals and will almost always appraise the house for just above the purchase price. I've never heard of a bank refusing a mortgage on the basis of an appraisal. (I'm sure it has happened, just saying not often).

Also also, I bought my house in Chicago (a fairly hot but not super hot market) for nearly 10% lower than list.
posted by Mid at 8:48 AM on April 5, 2005


a loser's game.
posted by Mid at 8:48 AM on April 5, 2005


That might not work out. In my area (am a Realtor), this theoretical second realtor would very easily lose his commission if the first realtor took a (deserved) challenge to his board that HE (or she) is the one that introduced you to the property.

This is far from correct. The first realtor is representing the seller. He cannot also represent the buyer, and is behaving correctly - by completely failing to act in any way as the buyer's representative in this situation.

The right thing to do is ask this realtor to recommend a buyer's agent for further negotiations on the property in question. This is a common request and should be cordially accomodated. You need to have a Realtor representing YOU in a real estate transaction - not doing so is as unwise as defending yourself in a capital case.

If anyone needs to be reported to the local Board of Realtors, it's Realtor One for not already suggesting this. He's treading dangerously on some thin conflict-of-interest ice.
posted by ikkyu2 at 9:32 AM on April 5, 2005


What ikkyu2 said. I can't believe the realtor hasn't already extricated the two of you from this situation. He has no business representing both seller and buyer. Get yourself a buyer's agent pronto.

And where I live (Berkshire County, Mass.) it's normal to offer substantially less than asking price; we shaved $20,000 off one house we were looking at (before deciding it required too much work), and $14,000 off the one we wound up buying. I wouldn't try that anywhere in spitting distance of NYC, of course.
posted by languagehat at 9:43 AM on April 5, 2005


Mid - while I agree to some extent with a lot of what you say, I will put this out there. If you insult a seller you're not getting the house. At least not in a sellers market.

We put a house on the market seven months ago and the people across the street wanted to see it prior to it going on the market, made a big stink out of it being great, blah blah blah... the offer that they made was $20k less than asking price (asking price was less than $180k) and they wanted every type of inspection possible and for us to pay for them all, they wanted a 60 day closing with all kinds of contigencies. After their very aggressive tactics we were so thoroughly disgusted with them we didn't even respond to the offer.
posted by FlamingBore at 9:52 AM on April 5, 2005


Make the offer that reflects how badly you want the house, how hot the market is or is not, and your research on current values. Make the offer contingent on appraisal and inspection (this is standard around here). In a hot market, you should do the research beforehand, so you don't lose time. When people are selling their house, they might be emotional, so it can't hurt to be charming in the offer letter.

Could you suggest that there could be savings in the shared realtor? Only 1 realtor involved could mean less commission paid. I don't know if that would work.

It's a huge investment, and it's your home, so it's not easy.
posted by theora55 at 10:20 AM on April 5, 2005


Thanks to all who have replied to this thread already. The information is amazing. Here is a little more info. The house will be in Ohio and they have a law that says there can be a "dual agency" and the realtor cannot recommend to me a price to bid and cannot recommend to the seller to take it or not. Now I know this is the "honor man" system and that is where I get a little nervous.

I will ask for a buyer agent and see what happens, but in the mean time, please keep the answers coming.
posted by thebwit at 10:26 AM on April 5, 2005


This is far from correct. The first realtor is representing the seller. He cannot also represent the buyer, and is behaving correctly - by completely failing to act in any way as the buyer's representative in this situation....The right thing to do is ask this realtor to recommend a buyer's agent for further negotiations on the property in question... You need to have a Realtor representing YOU in a real estate transaction - not doing so is as unwise as defending yourself in a capital case.

Part of the reason I specified where I was from was because laws DO differ, but I emphasize that, at least here in New Jersey what I said IS ABSOLUTELY correct. It is what is known as a disclosed dual agency situation, and the Realtor represents BOTH of them. He/She IS the buyer's agent, no more or no less than they are the seller's agent.

Also, as I said above about finding another Realtor yourself, this is highly unfair to your existing buyer's agent, that you already have, that represents you, introduced you to the home, that did all the work with you to get you to where you are now. And your theoretical new realtor would be either unethical or foolish to attempt to take over and expect not to be challenged before his local Board of Realtors.

See: Procuring Cause

However, as others and I have said, if you prefer to have your current Realtor set up some one else in his office as a negotiator on your behalf (usually the manager of the office,) this is of course not putting anyone in an awkward position. It is not necessary, of course, as the current agent is doing exactly what he should to be legal, and fair, but it is understandable, and should be no problem.
posted by John Kenneth Fisher at 10:34 AM on April 5, 2005


(my apologies for the html error)
posted by John Kenneth Fisher at 10:36 AM on April 5, 2005


If you are in the Bay Area, of course, follow the opposite advice of everything in this thread. Sigh.
posted by judith at 10:52 AM on April 5, 2005 [1 favorite]


When we went into negotiations, we got the list of competitive local houses, made a good guess at what we thought the property was worth then drafted a letter that explained why we thought the bid was fair and why we wanted to make their house into our home. It worked.
posted by plinth at 11:03 AM on April 5, 2005


What Mid said about not worrying about angering a seller. Your likely to only have this one, important to you transaction with the seller. If he doesn't want to counter offer and he can't return a polite "no thanks" to what ever you offer you probably don't want to do business with him anyways. These kinds of sellers will be the ones who did all there own plumbing work with lead pipe or something.

Key to the bargaining strategy is to be prepared to walk away and or have the asset sold to somebody else. Determine how much you will pay for the property then make an offer a bit less than that.

Warning on assessments: how much do you trust your local government? They can be a good guide line but if they seem out of whack they probably are. Also you need to find a realtor you trust and realize they are working on commission. If you're the kind of person who bought a saturn because there wasn't a variable commission it's something to keep in mind.

Even if your Realtor can't tell you how much to offer he should be able to tell you how much the average house in that area has sold for and what percentage below or above list the average price was. My Realtor actually sends me an activity report for my area every couple months that gives average selling and asking price broken down into how long the house was on the market and how many square metres.

FlamingBore if those people had just took a look at the place and then made an immediate offer would you have just ignored them? Sounds more like all the conditions and added closing costs were what annoyed you.
posted by Mitheral at 11:05 AM on April 5, 2005


In an era when home values are SO high, why play amateur appraiser yourself??

I dated an appraiser for a while, and my overall impression of the profession is that there was an awful lot of paper shuffling for an assesment that most people could have made just as well by the average smart person given a bit of information.

If you need the documentation to convince the seller, great. But getting some MLS data on recently sold homes and taking into account the condition of the property really should do the job for many cases.
posted by weston at 11:29 AM on April 5, 2005


It is not necessary, of course, as the current agent is doing exactly what he should to be legal, and fair

JKF, I find it hard to understand what you're getting at. What thebwit is concerned about is not whether the situation is legal (apparently it is, as stupid as that is), but not overpaying for a house (which I presume would fall under the heading of "fair"), and the current agent is of exactly zero help with that. Do you have a constructive suggestion, or is your position that if the state has stupid laws you should just grin and bear it as you throw your money away?
posted by languagehat at 12:19 PM on April 5, 2005


[fixed jkf html error]
posted by jessamyn at 12:31 PM on April 5, 2005


Well, my entire statement that you excerpted does indeed call the concerns understandable, and suggests a reasonable action that should be taken to make everyone happy.

But I note fair also means non-biased, even-handed, etc. And what the agent is required to do under these laws, which protect both sides, is just that, non-biased and even-handed, if at times annoying to the customer(s). It is no more likely to help the buyer as to hurt the buyer. Or the seller for that matter.

When handled properly, it is, in fact, quite fair and protects EVERYONE. Like any kind of agency relationship, when mishandled by a less-than-competent (or less than caring) agent, it can protect no one.

I am in agreement that this agent should have done many of these suggestions in this thread on his own, as to giving comps, offering another agent as negotiator, etc. He may or may not be a good agent, but him not doing his best to respond to the concerns of his clients makes him stupid, not the law.

(by the way, thanks jessamyn, both for the fix, and for the note as to what was changed)
posted by John Kenneth Fisher at 1:30 PM on April 5, 2005


As others have suggested, speak with your realtor about appointing someone else from their firm as your buyer's agent. Dual agency is no way to go.

Also, check out the buying and selling homes forum at That Home Site. There is a lot of great information here; check this thread for starters.

You may also want to visit Domania for home sales in the neighborhood. Domania doesn't provide the details you can get from a realtor's comp, but you can probably get some general ideas about pricing.
posted by Sully6 at 2:49 PM on April 5, 2005


Hiring an independent appraiser should cost you on the order of $300 to $400. What you should get is a detailed comparison of the house you're interested in, versus three roughly comparable houses in the area, with dollar adjustments for various features (lot size, extra bedroom, smaller garage, whatever). No, it won't be perfect (subjective factors, such as whether the floor plan makes sense, aren't included), and yes, some appraisers do a better/worse job than others. But it's the closest thing you're likely to see to an "objective" analysis, and it will definitely give you a better sense of the market. And it may convince sellers (in a slower market, at least) that your offer is reasonable.

As for bidding strategy (over/under the asking price, don't anger the sellers, etc.), keep in mind that hot markets (San Francisco, for example) and cold markets (St. Louis, I'd guess) are very different. A real estate agent (a different one in the same office, probably) should be able to show you statistics comparing final sale prices to initial asking prices, for example, as well as tell you whether sellers typically get multiple offers, or not, and what the average time on market is for houses (perhaps by price range).

Finally, look at how long the property has been listed (that is, been for sale). For example, if the average time on the market (listing date to sales date) is 75 days in your area, and the property has already been listed for 120 days, then the price probably is too high. (And the agent should be able to tell you if the property was previously offered at another price, and taken off the market, then relisted - which starts the clock running again.)

Final bit of advice - given that buying a house is an infrequent event, and so much money is at stake, it might be worth buying a book or two.
posted by WestCoaster at 5:03 PM on April 6, 2005


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